Symmetricom Inc. F4Q08 (Qtr End 06/29/08) Earnings Call Transcript

| About: Symmetricom, Inc. (SYMM)

Symmetricom Inc. (NASDAQ:SYMM)

F4Q08 (Qtr End 06/29/08) Earnings Call Transcript

August 20, 2008 4:30 pm ET

Executives

Ellen Brook - IR

Tom Steipp - President and CEO

Bill Slater - EVP Finance & Administration, CFO

Analysts

Michael Cody - B. Riley

Simon Leopold - Morgan Keegan

Ted Jackson - Cantor Fitzgerald

Sandeep Sarkar - Solstice Capital Management

Dan Mendoza - Agent Core Capital

Cris Blackman - Empirical Capital

Operator

Good afternoon and thank you for standing by. All participants will be in a listen-only mode until the question-and-answer session of the conference. This conference is being recorded at the request of Symmetricom. If you have any objections, you may disconnect at this time.

I would like to introduce the host for today’s conference. Ms. Ellen Brook. Ms. Brook, you may begin.

Ellen Brook

Good afternoon. Welcome and thank you for attending Symmetricom’s fiscal 2008 fourth quarter and year-end conference call. With me today are Tom Steipp, President and Chief Executive Officer, and Bill Slater, Chief Financial Officer. If you have not received today’s news release, you may download it at www.symmetricom.com.

During the course of this conference call, we will make forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements regarding guidance, revenue growth, gross margin improvements and R&D efficiencies. Actual results could differ materially from those projected in the forward-looking statements.

The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements are contained in the company’s Form 10-K as amended for the year ended July 1st, 2007 and subsequent filings with the SEC as well as in today’s news release.

I would like to note that we will be at the Morgan Keegan Conference presenting a Memphis on September 5th and will be happy to meet with investors at that time. I am also very pleased to announce that we will post our first annual analyst day in New York on November 13th. Please save the date. We will have a number of speakers from Symmetricom [dissecting] the company’s markets and opportunities and showcasing some of our new products. We look forward to hosting all of you then.

I will now turn the call over to Tom Steipp, CEO of Symmetricom.

Tom Steipp

Thank you, Ellen. Good afternoon everyone. Welcome to our review of Symmetricom’s fiscal 2008 fourth quarter and year-end financial results. During today’s call I will cover the highlights, strategic development and performance of each business segment and provide guidance for our fiscal year 2009. I will then turn the call over to Bill, who will provide details on our financials. Finally I will conclude the prepared remarks with a wrap up before taking questions.

Fiscal 2008 was a year of innovation, investment and assessment for Symmetricom. Our market strategy for this past year was clear. Diversify the position of our core timing business through investment and new products and new markets that will contribute to our growth over the coming year's. We expect to see the benefits of those investments starting in fiscal 2009 as our next generation products gain traction and as we further refine our cost structure and business model.

From a strategic perspective the investments we made in fiscal 2008 have made us a more diversified company. We now have solid positions within wireline, wireless, cable, enterprise and government networks around the world. Second, we started to benefit from the modernization initiatives of telecom carriers and cable operator worldwide as they transition to next generation networks.

It is evident from our initial success in the cable market, that our innovation and investment in timing products for next generation cable networks is producing strong results. We see those opportunities continuing over the next several year's. In addition, as telecom service providers rollout next generation networks to keep with rising traffic and demand, our investment in packet time products for precise timing and packet switch networks should also benefit the company and contribute to future growth. Third, our timing test and measurement business continues to perform well and to generate new technologies that we can leverage across Symmetricom’s market segments.

Operationally we made progress in driving manufacturing cost reductions. We started receiving our first subassemblies from Sanmina in the fourth quarter fiscal 2008, which will begin to positively impact our cost of goods. Further, the opening of our new R&D center in Beijing and the integration of QoE and TSD will result in a linear cost structure.

With that summary I would like to give you an overview of the quarter and fiscal 2008 highlights. Shipments of our next generation sync platform remain strong Verizon and AT&T were each 10% customers in the fourth quarter and full year. Our new cable business is ramping extremely well. We expect the cable industry to be a significant growth driver for fiscal 2009 and beyond.

Our next generation packet time products are now in 10 trials with various service providers and equipment manufacturers. Our government business delivered solid performance driven by a mix of domestic and international communications programs.

Now turning to the results of each of our business segments. Telecom Solutions division posted revenues for the fourth quarter $37.5 million up about 4% from the prior year. TSD revenues for the year were $129.1 million down 5% from fiscal ’07. Wireline revenue for the quarter was $28.1 million, a 2% increase over the prior year. Wireline revenue for the year was $90.7 million compared to $93.9 million a year ago. Revenues from the sale of next generation sync equipment to AT&T and Verizon together accounted for approximately 21% of total revenues in the quarter. Revenues were lower than the prior year due primarily to lower spending at AT&T following it's BellSouth acquisition.

New products for next-generation networks continue to be an emphasis. We are working with multiple service providers who are developing plans to deploy our new carrier-class PackeTime NTP server blades to support applications such as IPTV and billing accuracy for mobile operators.

Our PackeTime PTP 1588 products are also gaining traction. As of the fourth quarter, we have PTP trials with 10 service providers and vendors, including Nokia, Siemens. The 1588 standard enables Ethernet-based services which require carrier-class timing and sync to go further out into the network. We expect our integrated PTP 1588 solution to be available for field deployment during the second quarter of fiscal 2009.

In Cable, shipments of our new TimeCreator product which provides precise time and network sync for new broadband cable services are demonstrating solid growth. Precise timing is critical to rolling out DOCSIS 3.0 in modular CMTS solutions. We are now beyond field trials and are shipping product for network deployment on a global basis with a number of new customers.

Our investment in the Quality of Experience segment has not met our expectations and as a result we integrated QoE division into our Telecom Solutions division, transforming it from a separate business unit to a product line. As a result of the consolidation, we have substantially reduced QoE operating expenses.

Revenue in the Timing, Test and Measurement division was $19.4 million in the fourth quarter, down 8% from the prior year. Revenues for the year were $77.2 million, an increase of 6% from a year ago. The Timing, Test and Measurement Division continues to produce strong and consistent results from a broad line of products including our high-performance timing and frequency products, cesium clocks and network time servers.

In the space, defense and avionics business, we had a significant new program win in the quarter with the award of two highly sophisticated oscillators as part of the phase I for GPS III satellite program. We introduced several new capabilities for our flagship XLi GPS Time and Frequency Receiver in the fourth quarter, adding to a number of new products we released during the year that position us for continued growth across a broad range of markets.

We received a development contract award for phase IV of the DARPA Chip Scale Atomic Clock Program. This program was conceived to significantly reduce the size and power consumption of rubidium class holdover devices.

We have succeeded in building a device that is 10 cubic centimeters in volume which is one order of magnitude smaller and two orders of magnitude lower in power consumption than current rubidium technology. Applications for this technology include autonomous sensors, improvised explosive device jamming systems, GPS receivers in the military market and oil exploration.

In summary, fiscal 2008 was indeed a year of innovation investment and assessment. Fiscal 2009 will begin to show the returns from these investments. Our portfolio of new products is driving opportunities that when combined with our strong core timing business is expected to produce revenues between $230 and $240 million.

We expect our focus on gross margins and operational efficiencies to generate non-GAAP earnings for the year in a range from $0.35 to $0.41 per share. For first fiscal quarter we expect revenues to be between $55 million and $60 million with non-GAAP earnings in the range of $0.06 to $0.10 per share.

Let me turn the call over to Bill.

Bill Slater

Thanks Tom. Revenues in the quarter was $57 million seven-tenths of a percent lower than prior year revenue of $57.4 million. Full year revenue of $208.1 million was slightly below prior year revenue of $208.4 million. Telecom Solutions revenue in the quarter was $37.5 million, up $1.4 million or 3.9% from the prior year quarter of $36.1 million.

Wireline revenues for the quarter was $28.1 million. Service revenue was $2.7 million and OEM wireless revenue was $6.6 million. Wireline grew over the prior year by 2%. Services were down by 8.2%, and OEM wireless up 19.7%. TT&M revenue for the quarter was $19.4 million, down 8.4% from the prior year. QAD revenue was $92,000 for the quarter compared to $131,000 for the prior year.

For the fiscal year, Telecom Solutions revenue was $129.1 million, down 3.9% from the prior year. Wireline revenue for the year was $90.7 million. Service revenue was $15.4 million, and OEM wireless revenue was $23 million.

Wireline was below the prior year by 3.4%. Services grew by 5.3% and OEM wireless declined by 13.7%. TT&M revenue for the fiscal year of $77.2 million was up 6.3% from the prior year. QAD revenues for the year were $1.7 million compared with $501,000 in the prior year.

Gross margin in the quarter was 33.3% compared with 46% in the same period of the prior year on a GAAP basis. On a non-GAAP basis gross margin was 45.3% compared with 47.9% in the same period of the prior year. Gross margin on a GAAP basis for fiscal year 2008 was 40.7% compared with 45.6% in the prior year. On a non-GAAP basis fiscal year gross margin was 45.7% compared to 47.8% in the prior year. Gross margins in fiscal 2008 were principally impacted by higher than expected [period] cost, primarily inventory obsolescence and unfavorable wireline mix.

Operating expenses versus the prior year in both the fourth quarter – operating expenses increased versus the prior year in both the fourth quarter and full year. Full year GAAP operating expenses of a $104.2 million are up 21.6% over the prior year. Full year non-GAAP operating expenses of $88 million are up 11.9% over the prior year.

The growth in operating expenses in fiscal 2008 is principally attributable to our investment in the QoE business. Costs associated with the restatement of our financial statements for a correction of un-invoiced accruals account, severance costs, as well as higher R&D costs associated with development of R&D center in China, and acceleration of certain product development projects.

During fiscal 2008, we took restructuring and integration charges for the reduction in force at our Puerto Rico plant as well as the consolidation of our Austin, Texas facility into our San Jose and Beijing sites. In fiscal 2008 we also recognized an impairment of $3.2 million on one of the investments in our portfolio and sold another investment in approximate loss of $500,000. We also took an impairment charge of $14.3 million against goodwill and intangibles related to our QoE business.

In terms of interest income and expense, lower yields on our investments created a net interest expense in the fourth quarter as the cost of our debt was greater than the returns we recognized.

The GAAP net loss for the quarter before discontinued operations is $13.6 million or $0.31 per share, compared with net income of $1.4 million or $0.03 per share for the prior year period.

Fiscal year 2008 net loss before discontinued operations was $14.6 million or $0.33 per share compare to net income of $6.1 million or $0.13 per share for the prior year. Net earnings for fiscal 2008 included pre-tax losses on investments of $3.7 million, a gain on sale of an asset of $700, 000 restructuring an integration charge of $1.7 million and an impairment charge of $14.3 million against goodwill and intangibles related to our QoE business.

Non-GAAP net earnings for the quarter were $600,000 or $0.01 per share compared to $3.8 million or $0.08 per share in the prior year.

Impacting the quarter results were severance charges of approximately $1.2 million and cost related to the correction of prior period financial statements of approximately $800,000. On a non-GAAP basis fiscal year '08 net earnings were $6.8 million or $0.15 per share compared with prior year net earnings of $17.6 million or $0.38 per share.

The major items impacting fiscal 2008 include increased expenses related to our QoE business as well as the aforementioned cost incurred in the fourth quarter relating to severance and reinstatement costs.

Our backlog ended the year at $58.4 million, up from $51.9 million at the end of the prior year. We estimate that $47.1 million of the backlog is shippable within six months, $9 million is shippable within six to twelve months and that $2.2 million will be shippable beyond one year.

As indicated in our last conference call, we expect that there maybe fluctuation in both revenue and backlog as we are now receiving larger order spread-out over longer periods of time.

Cash and investment balances were $164.3 million at the end of the quarter. DSO was 59 days and inventory returns were 3.2.

Subsequent to the end of the fourth quarter, we offer to purchase 63.1 million of our 3.25% contingent convertible subordinated note. This offer has been fully subscribed to and will reduce both our cash and debt by $63.1 million in the first quarter of 2009.

As Tom already mentioned, our revenue guidance for fiscal 2009 is $230 million to $240 million with non-GAAP earnings of $0.35 to $0.41 per share.

Guidance for the first quarter $55 million to $60 million with non-GAAP EPS in a range of $0.06 to $0.10 per share. We expect that non-GAAP 2009 gross margins will run between 47% and 49% and that non-GAAP operating expenses will be between $86 million and $90 million for the year.

Our net interest income or expense will be immaterial as we run a low-yielding interest rate environment. Our tax rate will run between 31% and 35% depending on whether the R&D tax credit gets renewed.

I’d like to now hand the call back to Tom for his closing remarks.

Tom Steipp

Thanks, Bill. We are optimistic about our prospects for fiscal 2009 with anticipated revenue and earnings growth based on three key drivers. First, our unique position in the cable markets led by increased deployments of our DOCSIS Timing servers, still the only CableLabs certified product available. We are also very encouraged by the cable market interest in our full range of sync, PackeTime and QoE products. Second, our portfolio of new products for multiple markets including PTP 1588, NTP our [quality of] experience, the miniature atomic clock and the chip scale atomic clocks. And finally, our continued focus on operational efficiencies to maximize our profitability, while still making the appropriate investments in the technology and international opportunities that we believe will produce improved operational results.

As we mentioned we will be presenting at the Morgan Keegan conference in Memphis on September 5 and we’ll be hosting a Analyst Day in New York on November 13. So we will be happy to meet with you at the conference or see you at the Analyst Day. Feel free to let us know if you would like to attend.

I want to thank everyone for joining us today. This concludes the prepared portion of our presentation. Bill and I will now take questions Holly and open that for the audience.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Michael Cody with B. Riley. Your line is open.

Michael Cody - B. Riley

Thanks. Hi Tom, hi Bill. Good afternoon.

Tom Steipp

Hi, Michael.

Michael Cody - B. Riley

You talked about cable little bit, want a little bit could you break it out in the quarter DTI sales?

Tom Steipp

You know we’re really not breaking out. It's a product line it's part of wireline but certainly what I can say is that we see this as a good product offering for us. Recap is over the course of the last 18 months or so we have introduced several new products our V-Factor, QoE, PackeTime products, the one that has caught the earliest attention in the market is cable and is certainly one that we are going to very aggressively pursue. I think I have mentioned in the last call Michael, that we have now added very experienced and dedicated both sales and support engineer in that segment and see the opportunities for continued growth throughout the at least the course of the next couple of years.

Michael Cody - B. Riley

Okay, and thanks and then on the 1588 you mentioned that you have got I think 10 trails underway.

Tom Steipp

10 trails underway, yes.

Michael Cody - B. Riley

Okay. Could you talk about the sort of stage those are in and what are your expectations are for that product over the next few quarters?

Tom Steipp

Yeah, I think the stage is similar there to what we saw with the cable products about a year ago, you’ll have to recall that the 1588 solution comes in two pieces. There is a grand master server which we have and then there is client that sits out on the edge of the network. So, a number of both equipment manufactures who are trailing the clients as well as our grand master server as well as customers are basically checking it out to make sure that works. The one question that everybody has relative to this solution is just how many hops it will go through between the server and the client on the edge but what’s driving this is really bandwidth enhancements things like remote GPON and the deployment of gigabit Ethernet. As these broadband technologies push towards at the edge, something’s going to have to provide sync on the edge. We think 1588 is that product and it worked very well position for.

Michael Cody - B. Riley

Okay. And Bill what was CapEx in the quarter and what do you expect in fiscal ’09?

Bill Slater

CapEx in the quarter was $1.3 million, for the year it was $5 million. That’s been pretty consistent run rate for the company. Slightly under the depreciation rate for the year, which was about 6, 6 in change but I don’t see any reason that it would be significantly up or down from that level.

Michael Cody - B. Riley

Okay. Thanks and I just want to express my gratitude for providing guidance, I am glad to see the business back at the state, when you are comfortable providing. Thanks. Good luck.

Tom Steipp

Yes. We will be doing both -- we will do the annual guidance and then we give quarterly updates.

Michael Cody - B. Riley

Great. Thanks.

Operator

Simon Leopold with Morgan Keegan, your line is open.

Simon Leopold - Morgan Keegan

Great. Thank you. I wanted you to follow-up on the question about the cable vertical, understanding that you don’t want to break it out, but I want to sort of revisit some of the commentary you made in the past on that segment. If it's still trending, it's basically the same, better worse than what we are looking for and I guess, the metric I sort of hung on to with the idea that the product in terms of the cable market could represent as much as 10% of revenue by the end of the calendar year. Wondering how you feel about that mark?

Tom Steipp

Yes. I think that’s still very consistent, Simon and the only thing that I would -- the roll out of these obviously is going in conjunction with primarily Cisco’s modular CMTS deployments. So, where they get traction in the markets, we are being pulled into those, which is good for us.

The other thing that we have pointed out, might been somewhat suddenly this call is that in – we have been called into the cable operators, primarily for the DOCSIS Timing Interface, but our dedicated sales guys there are finding that cable operators are interested in our V-Factor Quality of Experience. We have got number of trials that will be going on through the second half of this calendar year. They will also be buying things like the 1588 PTP product for things like wireless backhaul and gigabit Ethernet deployments in their own networks. So, we are encouraged that the cable segment for us will be more than just DTI. But a 10% number is probably not too far off for the DTI component of our cable business.

Simon Leopold - Morgan Keegan

Great. And then this quarter, the OEM business, which I believe is primarily CDMA wireless exposure, was a good number. So, I think 6.6 million. And that sort of in contrast to what we hear in, in terms of general spending from CDMA carriers, primarily Verizon and Sprint; Sprint being very weak. And I just want to try to get an understanding of how you’re variable do better than sort of the macro trends, and where you see that going?

Bill Slater

Simon, we have seen some market share changes at a few accounts. It is a very lumpy business. It typically ranges between $4 and $6 million. I think we are probably doing a little better today than we were doing previously with Lucent. But again, it’s a business that’s been within a range for last eight quarters.

Simon Leopold - Morgan Keegan

And do you have any exposure to the CDMA in China? So when that ramps, you would benefit from that business.

Tom Steipp

We participate there two ways. We have sold into manufacturers in China in the past, and we have also sold into manufacturers who have subsequently either built in China or deployed into China. So, we view this as a global marketplace, and to some extent, Bill’s comments are true. There are some fluctuations in the market share. We are also reasonably diversified by having a lot of vendors out there who use our products.

Simon Leopold - Morgan Keegan

Yes. Just a last part of it is, is really been the big sector of the wireline and Verizon and AT&T trend. I wanted to really get a sense of your confidence and comfort in that. We all know that there was the need, but we have seen a lumpiness where they can buy big in the quarter and then go away a quarter. And I’d like to sort of get a read from you as to how confident you are over the next several quarters in terms of putting together your guidance, sense of visibility from these customers, whether or not they will be reliable?

Tom Steipp

Yes. There is two comments on that. One is our absolute best sense of the market both for the quarter and the year are summed up in the guidance numbers that we gave you. I will say that Paul Chermak, who is our new VP of Sales comes from a background both of a lot of major account, global accounts selling as well as international sales. And Paul has implemented a number of changes that are intending to, and are not quite clear that we will get there yet, but intended to work more closely with all large accounts, not just AT&T and Verizon, but to layout a more complete quarter-by-quarter assessment of want they want and need from us. That will be an ongoing challenge at both AT&T and Verizon. So, I really can’t comment much beyond that. We all know what the environment is like, Simon. We are giving you our best shot at this point.

Simon Leopold - Morgan Keegan

I appreciate the point. Thanks a lot all of you on the floor.

Tom Steipp

Thanks.

Operator

Ted Jackson with Cantor Fitzgerald. Your line is open.

Ted Jackson - Cantor Fitzgerald

Hi. I am sorry, I got on the call late and missed most of the presentation. So, if I ask you few questions that are repetitive, I apologize in advance. But could you just start out, just tell me what operating cash flow for the quarter was?

Bill Slater

It was about $3 million.

Ted Jackson - Cantor Fitzgerald

And then did you give a QoE number?

Bill Slater

Yes, revenues were $92,000 in the quarter.

Ted Jackson - Cantor Fitzgerald

Are you not giving going forward anymore, right?

Bill Slater

No, we are not. It’s now a product line going forward into fiscal ‘09.

Ted Jackson - Cantor Fitzgerald

Okay. And then with tender, can you tell me, you oppose that tender, as stands today what your debt position is?

Bill Slater

Yes, I think we had a $120 million in outstanding notes. We have bought back $63 million. So, we will have $57 million left in debt post to tender.

Ted Jackson - Cantor Fitzgerald

You might have given this in the presentation itself, but you said last quarter that you had $3 million in sales and 1588 V-Factor and DTI service sales, and I was curious what those products generated in revenue in this quarter?

Tom Steipp

We gave you an indication last quarter. We are not going to provide that on a quarter-by-quarter basis, Ted.

Ted Jackson - Cantor Fitzgerald

Okay. And then can you tell me an update on Sanmina outsourcing relationship? How it’s working? What kind of cost savings you expect to get from it?

Tom Steipp

Well, at this point in time it’s working very well. It is still somewhat early in terms of total amount that we expect to get benefits. But the guidance we gave relative to gross margins for this coming year were –

Bill Slater

It’s 47% to 49%.

Tom Steipp

Which should give you – I mean it’s not all made up in the Sanmina cost of goods but that contributes certainly new products help and mix helps. So, we got a number of things helping out, but we view Sanmina as a strategic way of us reducing our parts costs overall.

Ted Jackson - Cantor Fitzgerald

Okay. And then my last question is, I am also wondering if I could get an update on the 1588 server and your NSN relationship, and just an update in terms of where the market stands in terms of development? Do you have any deployments to that relationship? Thanks.

Tom Steipp

We don’t really have any deployments at this point in time. But as we commented in the call there are 10 trials underway. Nokia, Siemens been one of those trials. Two things been tested; one our Grandmaster servers, which is primarily very well focused as well as clients that come from a variety of suppliers. So, we would expect to see based on what we have seen in the market, over the course I think of the next 12 months we’ll start to see this be a -- start to be a more significant revenue contributor for us.

Ted Jackson - Cantor Fitzgerald

Okay. Congratulations on the quarter. Thanks.

Operator

[Sandeep Sarkar] with [Solstice Capital Management]. Your line is open.

Sandeep Sarkar - Solstice Capital Management

Hi, Tom. Can you hear me okay?

Tom Steipp

Yes, we can.

Sandeep Sarkar - Solstice Capital Management

Okay, great. I saw that the mid-point of the revenue guidance is about $5 million higher than Street consensus right now, and from Bill’s comment, I guess you are actually going to have slightly better gross margins in the coming year. Given those factors and the fact that you’re moving on your factories to China and looks like your delusion from QoE is going to be significantly less than the coming year than previously thought. I am little surprised that your earnings guidance is only in lined with existing consensus. Is that just conservative on your partners or is there some other factor at work?

Bill Slater

Well, I think we hope, it has been conservatism on our part. I think our operating expense last year in fiscal '08 did not include any incentive compensation. We didn’t hit our goals. We put that back into the next, this year. I think the other thing is our interest income which had been running probably $1 million a quarter up until about two quarters ago, has now dissolved to better breakeven because yields are little low 2 somewhere. So, I think those two things have worked against us, our tax rate in fiscal '09 that we’re projecting right now was 35%. If the R&D tax credit gets renewed, that brings it down to 31%. That has a significant impact. So, I think, until we know those things for sure, our guidance is going to stand at $0.35 to $0.41.

Sandeep Sarkar - Solstice Capital Management

Okay, and one of the question I had is, can you tell us the QoE is going to be dilutive in the coming fiscal year?

Bill Slater

QoE is down at a product line investment right now. It’s not a business unit anymore. It’s basically some R&D. As Tom mentioned, there is number of interesting things happening that will determine whether it's dilutive or not this year. But, I think we are down to a spending level, that’s more in lined what we spent on a cable product or on our PackeTime products, as opposed to a full business unit.

Sandeep Sarkar - Solstice Capital Management

Thank you.

Operator

Dan Mendoza with [Agent Core Capital]. Your line is open.

Dan Mendoza - Agent Core Capital

Thanks. Most of my questions have been answered, just a couple of points and clarification. Can you break out what the QoE expenses were in fiscal '08, I think initially in your guidance you said it would be about $0.60 diluted?

Bill Slater

Well, I think our OpEx was probably around $10 million or so, $3 million in the fourth quarter as we ramped-up and like a full impact of all the people on board. So, I think we had originally provided guidance. I think it was around $0.60 or so dilution. And I think plus or minus $0.02, it was within that round.

Dan Mendoza - Agent Core Capital

Okay, great. And what was cash flow for the full year?

Bill Slater

The operating cash flow looks to be about $12 million for the full year. Stay tuned for our 10-K that will be out in early September. It will have all the details.

Dan Mendoza - Agent Core Capital

And can you give us a feel for kind of, with the Sanmina coming on line, do you expect sort of generate some cash and bring inventories down as we move through fiscal '09?

Bill Slater

I think, just in the course of events, inventory has built up until middle of fiscal '08. You will see this takes them down by about $6 million since that point. So, we are sort of flat with beginning of the year. We expect to continue to take inventories down during fiscal '09 by probably $5 million or so, some of that Sanmina and some of that just better management. We did go through a fair amount of product manufacturing discontinue in this year and getting rid of some older products and some smaller products and that of course accounted for some heavy write-offs in the third and fourth quarter with regard to inventory which effected our overall gross margins.

Dan Mendoza - Agent Core Capital

Okay, great. And then on the gross margin, do you expect the kind of start the year in that range or do we kind of work our way through there as the cable products come online and give little more laps?

Bill Slater

We think we start at the bottom end of the range and work up towards the top end of the range as we get more and more products from Sanmina as we sell more and more of our new products which have higher than corporate average gross margins.

Dan Mendoza - Agent Core Capital

Okay, and last question, back on cash flow, you kind of look at the earnings guidance that you gave in ‘09 and the comments you just made on brining inventory down, what kind of implied cash flow from operations -- would you end up with fiscal '09?

Bill Slater

A very good one, you will probably at least double the shares operating cash flow, with inventory coming down, I would say $20 million to $30 million range is probably commensurate with that earnings guidance.

Dan Mendoza - Agent Core Capital

Right, and I comment you guys on getting QoE in a product line kind of investment and also for updating that guidance policy. Thank you.

Operator

(Operator Instructions). Cris Blackman with Empirical Capital. Your line is open.

Cris Blackman - Empirical Capital

Yeah, thank you very much. Hi, guys, congratulation.

Tom Steipp

Hi, Cris.

Cris Blackman - Empirical Capital

Looking at the telecom solutions; would you expect AT&T and Verizon to maintain their same level of percent in the guidance that you give in or what kind of expectation would you have in the fluctuation there?

Tom Steipp

I would say we’re seeing them out from the planning standpoint, we’re seeing about the same year-over-year from both AT&T and Verizon. Obviously, we consistently worked to try to get that number up, but one of the things that we have certainly understood about our market, market position, market share is that diversification away from just relying on AT&T and Verizon has been important. We have made heavy investments internationally. If you just think back over our history Cris, upgrade started with the likes of Telmax and Deutsche Telecom and then…

Cris Blackman - Empirical Capital

(inaudible).

Tom Steipp

Then kind of came to the U.S. here with [Cesium Retail], Altel, AT&T and Verizon. We really believe that the next round of those will be in Asia, NTT, BSNL and China and as I commented earlier our VP of Sales, Paul Chermak not only has a lot of global major account experience but also managed Asia-Pacific in his career and actually lived over there for four, five years. So, you will see us focusing -- continuing to focus on AT&T and Verizon, but we are recognizing that if we have more opportunities then just them along with the new products and the new markets relative to cable. It takes a little bit of the pressure off us quarter-over-quarter to just look at them and only them which I think would be good for our business.

Cris Blackman - Empirical Capital

I think international good run about maybe like 29% or so somewhere in that range.

Tom Steipp

That’s going to run a little over 30% at this point in time, 30%, 32%.

Cris Blackman - Empirical Capital

So how would you expect that running forward than are you are raising your expectations on what percent that will account for?

Tom Steipp

That’s going to be little hard to tell because the proportionate cable business coming from international and domestic is still not, it's not known in that, that could strongly influence. We actually saw some of our first cable customers come out of Europe and Asia.

I think given where we’ve been with the cable business over the course of last couple of quarters and what we see going forward. I think, we will be pretty happy if things stay relatively about the same because we have to grow the international business on our consistent basis to keep up with what we see for domestic growth in cable.

Cris Blackman - Empirical Capital

Okay. And in cable, I think you have commented in the past that you shifted to domestic MSOs. Can you comment on has that increases?

Tom Steipp

Yes. We shift to more than two, I don’t have the exact number. But I think all we are going to do is ask whether they have implemented modular CMTS, and the answer is yes. They bought some of our gear and will continue to do so moving forward.

Cris Blackman - Empirical Capital

Okay. Obviously we would love to see a breakout in DTI and would love to see it going forward but I can understand, from a competitive standpoint that maybe difficult. But in your filings you do show how much you do with HERMONIC which I guess is just for testing and then I know you have commented in the past that you follow the (inaudible) couple of accounts, create in one of them, may be one or two other accounts. Maybe you follow-up at all on any of those.

Tom Steipp

Yes. Just the comment there would be modular CMTS as the name implies gives cable operators, MSOs the opportunity to mix and match their components. So, we often find ourselves selling DTIs into cable customers where they are using Cisco as the modular CMTS and HERMONIC as the EDGE 1. So, the benefit there obviously is increased competition, cost and general go down. We feel very good about the position we have maintained, and I think it reflects the fact that the tolerances on this product are very high. It’s not an easy product to build. So we have got the only out there and our goal is to be good term, good partner for everyone, who is buying these solutions.

Cris Blackman - Empirical Capital

Cash level Bill as we stand said today, in order of cash balances?

Bill Slater

While, I mean, as we sit today after the quarter, and we are net about $100 million, I am sorry, we had a $100 million with about $57 billion in debt and we expect this to a very good year for cash generation.

Cris Blackman - Empirical Capital

Alright, was a little surprised that we didn’t have an announcement the Board increasing the share of repurchase, I know looking back at previous repurchases, it seems like we spend at the end of the fourth quarter, and you might have had 600,000 or 900,000 shares and you announced additional 2 million share repurchases previous two announcements and, certainly we got a cash flow, and the demonstration, of how we deployed cash this last year, I was hoping to see some repayment to shareholders in the (inaudible) can you comment on that, please?

Bill Slater

I don’t think you can read anything into that, we have 900,000 shares remaining in our authorization right now.

Cris Blackman - Empirical Capital

If you are buying 1 million shares a quarter, prior to the point that you were locked up for buying back.

Bill Slater

Right.

Cris Blackman - Empirical Capital

I think, I can’t comment on it.

Bill Slater

I think we will continue to look Cris at share buyback. We are obviously also looking at the convert. So, we will balance those things as the quarter goes on?

Cris Blackman - Empirical Capital

Okay, I will drop out of the queue for now, thank you.

Operator

Ted Jackson with Cantor Fitzgerald, your line is open.

Ted Jackson - Cantor Fitzgerald

Thank you. Just one follow-up question, in your pro-forma results you are including $1.2 million in terms of the severance cost and $800,000 for some of the restatements. So could you provide if your operating expenses with those stripped out or could you give some numbers around where those expenses lie in your operating expense structure?

Bill Slater

Yes, I think the $2 million in severance is mostly in SG&A and a restatement cost are in SG&A. So, just take $2 million out in the fourth quarter and you would have our basic operating expense levels.

Ted Jackson - Cantor Fitzgerald

Okay. That was it. Thanks.

Operator

And the last question I am showing is Dan Mendoza with [Agent Core Capital]. Your line is open.

Dan Mendoza - Agent Core Capital

Hi. Just wondering what you have paid within debt and if you had contemplated buying back the whole thing?

Bill Slater

We bought back the debt at 99, the actual cost of buying back was just transaction fees, that’s what you are getting at?

Dan Mendoza - Agent Core Capital

No, I just kind of what the few (inaudible).

Bill Slater

We bought it at 99, so it was 99 versus 100, that was a negotiated transaction. The market is probably around 90 or so.

Dan Mendoza - Agent Core Capital

Okay. Did you think about buying the whole thing?

Bill Slater

We do -- as Tom said earlier, we contemplate usage of cash free either stock buybacks or debt buybacks.

Dan Mendoza - Agent Core Capital

Okay. And I guess, last question and comment is, Bill, this is your last conference call, thank you for your service, and I guess my question for Tom is can you comment at all on the search for [replacement]?

Tom Steipp

We do have a search that’s underway and are at least hoping for a smooth transition between Bill and that new individual that would take place over the course of the next sixty days.

Dan Mendoza - Agent Core Capital

Okay. So that mean you are getting close to, kind of, few finalist or –

Tom Steipp

We certainly hope, that’s the case, yes. We could not right now for sure.

Dan Mendoza - Agent Core Capital

Okay, great. Thanks guys.

Tom Steipp

Okay.

Operator

We do have another question. Chris Blackman with Empirical Capital, your line is open.

Cris Blackman - Empirical Capital

Yes, thank you. And you may have had this question right after I was on, and few might made and I miss part of what, the part that I was asking. But of the in your gross margin with the right down that you’ve taken how much impact will be amortization of intangibles, the integration and restructuring and the impairment of purchase technology be taken out. How much of your gross margin improvement will be impacted by the charge that you took last week?

Tom Steipp

Well, on a non-GAAP basis the only thing that will impact us is the inventory obsolescence.

Cris Blackman - Empirical Capital

Okay.

Tom Steipp

And in the last two quarters of the year we’ve probably taken somewhere around $1.5 million in inventory obsolescence charges that would be higher than our normal inventory obsolescence expense. So that would be the only thing that would impact us on a non-GAAP basis.

Cris Blackman - Empirical Capital

Yes. And what’s your expectation – was that inventory obsolescence, was that having into at all writing it down to Sanmina’s cost, or was that truly inventory that was obsolete, or how did you –?

Bill Slater

No. This is truly inventory that was obsolete. These were again manufacturing discontinued products, and in one case in our wireless division, we had blocs inventory in advance of an order and then our customer loss their order and we ended up getting stuck with some unique inventory. So, I think those are the two items that impacted the third and fourth quarter with regard to inventory obsolescence.

Cris Blackman - Empirical Capital

Okay. We really shouldn’t expect any more that or –?

Bill Slater

I would hope not. I think we had two unusual of that. Well, I wouldn’t say manufacturing discontinuance is unusual. But we certainly had a much higher inventory obsolescence charge this year than we had in the previous four or five years.

Tom Steipp

A lot of that Chris was related to discontinuance of all of the stuff that AT&T and Verizon buys here in the U.S. We obsolete it and we could manufacturing it.

Cris Blackman - Empirical Capital

You could manufacturing, hopefully, accelerating deployment of –

Tom Steipp

Yes.

Cris Blackman - Empirical Capital

Okay. And then any material change in product warranty provisions?

Tom Steipp

No.

Cris Blackman - Empirical Capital

Okay. Any indemnification issues against thirty-party claims, anything happened there?

Tom Steipp

No, nothing on a litigation side. Nothing new, just same things that we have mentioned in the 10-K before the Austin remediation, that’s been around for about 20 years or so. But other than that, nothing.

Cris Blackman - Empirical Capital

Alright. And then finally, can you give me employee count, both regular and temporary, or total, any of those?

Tom Steipp

I think we were at about 890. Okay, it was about 950 including about 60 [saving] bank.

Cris Blackman - Empirical Capital

Okay. So, 950 total. I thought it stay about flat. Do you see that tending down any or –?

Tom Steipp

Yes. I think we are still -- I think the first quarter of fiscal ‘09 will be, there will still be some Austin employees that will be in transition, and we’ll have some duplication in the first quarter on some employees. So, I think it might trend down a little bit.

Cris Blackman - Empirical Capital

Throughout the year or just first quarter.

Tom Steipp

I think principally in the first quarter. I think after the first quarter I think we should be flat.

Cris Blackman - Empirical Capital

Okay. And Bill I appreciate your service. You’ve been delighted to deal with and I think you have been fantastic and I know it’s been difficult last year and a half. I appreciate you stick in through this, and wish you well. And Tom looks like we have turned the corner and things are looking much brighter. So, congratulations. Take care.

Bill Slater

Thank you.

Tom Steipp

Thanks Chris.

Operator

And I am showing no further question.

Tom Steipp

Okay, we look forward to talking to everybody in a quarter. Thanks.

Operator

Thank you. This does conclude today’s conference. You may disconnect at this time. Have a great day.

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