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Final
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Feb.
04. 2010 / 5:00PM ET, PWAV - Q4 2009 Powerwave Technologies Earnings
Conference Call
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Final
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Conference
Call Transcript
PWAV
- Q4 2009 Powerwave Technologies Earnings Conference Call
Event
Date/Time: Feb. 04. 2010 / 5:00PM
ET
|
CORPORATE
PARTICIPANTS
Tom
Spaeth
Powerwave
Technologies - Treasurer
Kevin
Michaels
Powerwave
Technologies - CFO
Ron
Buschur
Powerwave
Technologies - President, CEO
CONFERENCE
CALL PARTICIPANTS
Charles
John
Piper
Jaffray - Analyst
Steve
O'Brien
JPMorgan
- Analyst
Rich
Valera
Needham
& Company - Analyst
Bill
Choi
Jefferies
- Analyst
John
Evans
Edmonds
White - Analyst
Tony
Rao
East
Shore Partners - Analyst
Amir
Rozwadowski
Barclays
Capital - Analyst
Scott
Searle
Merriman
- Analyst
PRESENTATION
Operator
Good
day, ladies and gentlemen and welcome to the fourth quarter 2009 Powerwave
Technologies earnings conference call. I will be your coordinator for today. At
this time, all participants are in listen only mode. We will be facilitating a
question-and-answer session towards the end of this conference. (Operator
Instructions) As a reminder, this conference is being recorded for replay
purposes. I would now like to turn the presentation over to your host for the
call, Mr. Tom Spaeth, Treasurer, please proceed.
Tom
Spaeth - Powerwave
Technologies - Treasurer
Thanks,
Chanel. Good afternoon and welcome to Powerwave Technologies fourth quarter 2009
financial results conference call. I am Tom Spaeth, Powerwave Treasurer. Joining
us on today's call will be Ron Buschur, President and Chief Executive Officer,
and Kevin Michaels, Chief Financial Officer. Before starting, I would like to
point out that various remarks we make about the future expectations, plans and
prospects for Powerwave, including but not limited to, anticipated revenues and
revenue growth rates, operating margins, gross profit margins, earnings per
share levels, cash flow projections, revenue composition, improvements in cost
structure, cost savings related to our facility consolidations, future cost
savings related to our cost reduction activities, demand levels for the
Company's product lines, projected growth and market share, trends in the
wireless infrastructure market, the timing of product deliveries and future
orders, the Company's ability to enter and compete in vertical markets for its
products, common stock prices, debt purchases, the success of new products,
expense levels, capital expenditure rates, inventory turns, tax rate and day
sales outstanding are all forward-looking statements.
These
statements are subject to numerous risks and uncertainties that could cause
Powerwave's actual results to be materially different from those projected or
implied. Some of the risks and uncertainties include our ability to accurately
forecast and anticipate customer orders, realize anticipated cost savings and
synergies, the negative impact on demand for our products due to the
macro-economic environment and worldwide credit tightening, reduced demand due
to industry consolidation among our major customers, fluctuations in foreign
currencies, the macro-economic environment and worldwide credit tightening, the
ability to accurately forecast cash flows and credit collections, impact of
competitive products and pricing, economic and political conditions and the loss
of one or more significant customer accounts. Please refer to our press release,
Powerwave's current Form 10-K for the fiscal year ended December 28, 2008, our
Form 10-Q for the quarter ended September 27, 2009, and other filings which are
on file with the Securities and Exchange Commission for additional information
on factors which could cause our actual results to be different from those
projected or implied.
In
addition, on this call we will discuss non-GAAP financial information. A
reconciliation of the non-GAAP financial information to our financial statements
as prepared under GAAP is included in our press release dated today which can be
found at our website at Powerwave.com and on business wire. The press release
also has detailed information concerning several of the significant items
impacting our results and we urge you to review that information. Now I'm going
to turn the call over to Kevin Michaels, Powerwave's Chief Financial
Officer.
Kevin
Michaels - Powerwave
Technologies - CFO
Thank
you, Tom. With all the risk factors in mind, I would like to start by reviewing
our financial results which are also summarized in our press release. Net sales
for the fourth quarter of 2009 were $142.6 million and we reported a GAAP net
loss of $1.3 million which equates to a basic loss per share of $0.01. This loss
includes $800,000 of non-cash intangible asset amortization related to our prior
acquisitions and $800,000 of restructuring and impairment charges. These charges
and amortization totaled approximately $1.7 million for the fourth quarter. On a
pro forma basis, excluding the restructuring and impairment charges and
intangible asset amortization charges, we generated pro forma net income of $1.4
million which equates to pro forma diluted earnings per share of
$0.01.
I want to
note that included in both our GAAP and pro forma results is the impact of
approximately $1 million of pre-tax stock base compensation expense, almost all
of which is included in operating expenses. If you exclude this expense from our
reported results, it adds approximately $0.01 to EPS for both GAAP and pro forma
results. This is the same impact as in the prior year period.
On a
geographic basis, total America's revenue for the fourth quarter of 2009 was
approximately $37.9 million or 27% of revenue. Total Asian sales were
approximately $72.7 million or 51% of revenue and total European and other
international revenues were $32 million or approximately 22% of revenue. In the
fourth quarter, our antenna systems product group sales totaled $45.7 million or
32% of total revenue. Base station sub-systems sales totaled $85.7 million or
60% of revenue and coverage solutions sales total $11.2 million or 8% of
revenue. Our total 3G related sales were approximately $45.9 million or 32% of
our total revenue. Our 2 and 2-1/2G related sales were approximately $78.1
million or 55% of revenue and our 4G sales, which include LTE and WiMAX, were
approximately $18.6 million or 13% of revenue. In terms our customer profile in
the fourth quarter, total OEM sales account for approximately 62% of our total
revenue and direct and operator sales account for approximately 38% of
revenue.
Moving on
to gross margins, on a GAAP basis our total consolidated gross profit margin was
26.4% in the fourth quarter. In our press release on page 3, there is a table
with a reconciliation of the various factors impacting our gross margin for the
quarter. On a pro forma basis, excluding restructuring charges and non-cash
intangible asset amortization totaling $800,000, our total gross profit margin
was 27%, which is up slightly from the third quarter.
Next I'll
review our operating expenses for the fourth quarter. Our sales and marketing
expenses were $7.6 million, research and development expenses were $14.6 million
and G&A expenses were $11.7 million. On a pro forma basis, which excludes
restructuring charges and intangible amortization for the fourth quarter, our
total operating expenses equaled approximately $33.9 million which is
essentially flat with last quarter. As a note, I would like to highlight that
the fourth quarter had an additional week in it since we use a 52/53 week fiscal
calendar. So I do believe this demonstrates we are keeping a tight control on
our expenses.
In terms
of other income and expense, we recorded a total of other expense of
approximately $2.6 million in the fourth quarter of 2009. The main component of
this is our interest expense for the quarter. In addition, for the fourth
quarter, we did incur a net foreign currency loss of approximately $800,000,
largely due to the weakening euro at the end of the quarter.
Our
fourth quarter tax rate was impacted primarily by income generated in China that
was not offset elsewhere. This resulted in a net tax provision for the quarter
of approximately $1.7 million. While we continue to evaluate our future tax rate
based upon our diverse international operations, we currently estimate that our
effective worldwide tax rate will be between approximately 25% to 30% for 2010.
I want to stress that this estimate will fluctuate based upon our actual
results. As a note, due to our primary deferred tax assets being written off in
the US, should our net income increase in this region our effective tax rate
will decrease.
Next I'll
review our balance sheet. Total cash at January 3, 2010, was approximately $63
million of which $2.6 million is restricted cash. This represents an increase
from the third quarter of 2009 of almost $16 million. For the fourth quarter,
our cash flow from operations was approximately $20 million and for all of
fiscal 2009 we generated positive cash flow of over $31 million. For the fourth
quarter, our total capital spending was approximately $5.9 million which
includes the cost of our new Thailand manufacturing facility. For 2010, we would
expect our capital spending to return to our normal range of $2 million to $2.5
million per quarter.
For the
fourth quarter of 2009, our net inventory was $60.5 million which is reduction
of over $9 million from the third quarter of 2009. Our net inventory represents
inventory turns of approximately 6.9 times. Our total net accounts receivable
remain relatively flat at $142.9 million while our AR day sales outstanding
decreased slightly to 91 days.
Before
turning the call over to Ron, I would like to remind our investors that we
believe that they are better served by focusing on long-term trends as opposed
to the short-term volatility that is inherent in the markets we compete in. In
terms of 2010, while there continues to be significant uncertainty surrounding
the global macro-economic environment, we certainly want to caution investors
that there are inherent risks within our markets and with our ability to
accurately forecast, but we are providing guidance for 2010. With that in mind,
based upon our current forecast for this year, we are establishing our target
fiscal 2010 annual revenue range of $590 million to $620 million. This
represents an annual growth rate of between 4% to 9%, which tracks the expected
growth of wireless infrastructure spending for 2010.
While we
were establishing a target forecast for 2010, we want to stress that we remain
conservative in our outlook for overall capital spending within the wireless
infrastructure industry. We realize that we are all in a tough economic
environment and we expect to see various operators continue to control their
overall capital spending in this type of environment. In spite of this, we do
believe that there are opportunities for Powerwave to continue to do well in
this environment. With that, I would now like to turn the call over to Ron
Buschur, Powerwave's President and Chief Executive Officer.
Ron
Buschur - Powerwave
Technologies - President, CEO
Thank
you, Kevin, and good afternoon, everyone. I would like to share with you some of
my thoughts regarding our fourth quarter results and review our current outlook
for 2010. First, I would like to thank all of our employees for their strong
efforts and particularly our suppliers for their continued support in allowing
us to achieve the start up and the ramp up of our new Thailand manufacturing
location. I'm very pleased and proud of these efforts and I believe the new
location will further position Powerwave to improve our cost structure as well
as deliver significant benefits not only for Powerwave but for our direct
operator and OEM customers with our enhanced ability to support greater volumes
and production efficiencies.
In terms
of the marketplace, we do believe that conditions have stabilized and see a
slight improvement in our revenues versus the third quarter of this year. As we
look at the overall market, there is still an ongoing concern as to what the
impact of capital spending will be due to the global economic conditions as
noted by many of our customers. In spite of these concerns, we do believe that
the fundamental long-term out look for the wireless industry is strong and
provides many new opportunities. The subscriber growth rates are continuing to
increase globally as well as increased data usage and wireless networks. Based
on these facts, we do believe that this will facilitate capital spending and
generate increased demand back into the global wireless infrastructure
markets.
In
addition to bringing on our newest manufacturing facility during the fourth
quarter, we also further improved our operational metrics during the fourth
quarter. In particular, we improved our gross margins, with gross margins coming
in at 27% compared to 21.3% in the fourth quarter of 2008. This is an
improvement of over 550 basis points for the year and is the third consecutive
quarter that our gross margins have been over 26%. Clearly our manufacturing
consolidations, operating efficiency improvements and cost reduction efforts
over the last two years are paying off and we have the company well positioned
to leverage our new operating model as we see improvements in the global telecom
infrastructure market.
At the
same time, we have achieved our quarterly operating expense target of $35
million on schedule as our fourth quarter operating expense came in at $33.9
million. From a balance sheet perspective, we also demonstrated improved
inventory control with net inventories dropping by over $9 million from the
third quarter and our inventory turns improving to 6.9, up from 5.8 in the third
quarter. The combination of operating expense reductions and strong gross
margins along with prudent operating and financial management enabled us to
generate positive operating cash flow of over $20 million for the fourth
quarter. In addition to our cost reduction efforts, we continue to be focused
more than ever on expanding our customer base and utilizing our capabilities in
new vertical markets. While we continue to drive to gain market share in our
existing core business, we continue to lead the industry in 4G products and
solutions. A recent example is our LTE and WiMAX remote radio head product which
won the 4GWE product of the year. In addition, our antenna products won the 4GWE
LTE visionary award, clearly demonstrating Powerwave's technical expertise and
the breadth of our new product portfolio.
These
products and solutions will be instrumental in allowing Powerwave to increase
our current network operator business as well as penetrate the new vertical
markets. And looking at these new vertical markets, we are taking a lead with
our cabinet solutions, inground, above ground and below ground solutions as well
as our new DAS solutions. We are raising the bar to a new standard in rapid
mobile deployment units with our new RMDU, which is designed to enhance the
mobile operations of public safety groups, wireless, data center operators,
military contractors and government agencies. Our RMDU is a lightweight compact
data and mobile communications site that is easily deployable in less than 30
minutes and is designed from a single person operation.
Demonstrating
our focus and commitment to the government business, and with our goal to
provide innovative wireless solutions to a wider range of public sector clients,
we recently hired industry veteran Jake MacLeod. As vice president of government
solutions for Powerwave, Jake will lead the Company's effort to address vertical
markets in the wireless solutions and broadband stimulus efforts in the
government, public safety, military and departments of homeland security sectors
which we believe are the business segments that offer new and exciting avenues
for revenue growth for Powerwave. In addition to focusing on driving these new
revenue opportunities, we continue to remain focused on reducing our overall
cost structure and manufacturing and improving our productivities, our
efficiencies, our yields, our cycle time and better capital utilization while
maintaining our leading industry quality and performance.
Our
commodity teams are continuing to rationalize a number of suppliers, simplifying
our supplier process while shortening our lead times, cycle times and reducing
our inventory levels. We believe that all these efforts combined with our
previous actions will further leverage our operating results and will help
improve our ability to generate increased cash from our operations and improve
the shareholder value. We remain committed and determined to improve Powerwave's
profitability and performance in 2010 and beyond. I would like to turn the call
over to the operator and address any questions you may have.
QUESTION AND
ANSWER
Operator
Your
first line comes from the line of Mike Walkley of Piper Jaffray.
Charles
John - Piper Jaffray -
Analyst
Thanks.
This is Charles John sitting in for Mike Walkley. Hi, Ron, Kevin.
Ron
Buschur - Powerwave
Technologies - President, CEO
Hello.
Charles
John - Piper Jaffray -
Analyst
So
just a few from me. The guidance is obviously a good surprise. Thanks for that.
Maybe start off with what is giving you the confidence to give this revenue
guidance the 2010 and just discuss some of the factors that you baked into this
guidance?
Ron
Buschur - Powerwave
Technologies – President, CEO
Well,
we certainly are seeing some increased action and opportunities here in North
America if you look at the information that's been received within AT&T,
Verizon and some of the activities with Clearwire and others. It indicates that
we believe there is going to be an improvement in spending. We see improvements
in the European market that gives us some comfort that we will see a little bit
of a return in that marketplace. We are cautious about that. The APAC region we
believe lends itself to some opportunities and some of the previous wins that we
had in that area has been very good. Latin America seems to be a strong area of
continued growth. And then we are seeing a lot of interest and support and
desire to work with Powerwave in our government sector as well as our DAS and
inbuilding coverage. We spent a lot of money in research and development on
expanding that product line and we believe that we will benefit from that this
year.
Charles
John - Piper Jaffray -
Analyst
And
then maybe digging into two specific regions, the APAC and North America. Some
of the last couple of weeks CapEx coming out of India and China have been pretty
weak but North America has obviously been much better than some of our
expectations. Could you just discuss overall your CapEx expectations from some
of your larger OEMs for 2010 in the emerging markets, specifically India and
China, and then if you are remind us your exposure by division to the AT&T
and Verizon CapEx that we are expecting in 2010, what areas they will be
focusing on most, most of the wireless CapEx. Thank you.
Ron
Buschur - Powerwave
Technologies - President, CEO
Well,
as far as breaking out some of the information by our customer, we won't provide
that information just due to the confidentiality between the two companies. When
I look about some of the OEMs and their projections talking about the APAC
marketplace, obviously there has been a pushout of some of the license in some
of the emerging regions where they aren't going to roll out. There still is a
need based on the coverage issues and the capacity issues in these emerging
markets to provide coverage and new solutions. With that, it lends itself to our
product portfolio. We've had very good success in those regions last year. We
established ourselves as a good technology leader in that space but individual
in a company that can actually do business in that region and be somewhat
profitable doing so. We have to be careful with that and we are going to
continue to watch how we do business in parts of the India and APAC region but
there is growth as data is really driving demand and capacity issues in existing
networks.
In North
America clearly there is a lot of synergies, let's say, when you are looking at
our products and solutions to the constraints that are existent in AT&T's
network or even Verizon's network when you are looking at how they are trying to
now compete head to head for our service. And one of the issues that both are
confronted with is data and the bandwidth of handling that large block of data
and process that in an effective matter. We think with our MCPA products as well
as our broadband antennas and some of our inbuilding and DAS solutions lends
itself to that type of market condition and constraint in the network so we are
going to benefit from that. And I think when you look at guidance that the OEMs
have given, I think that's pretty consistent to what they are saying as far as
the APAC region. North America they seem to be a little more optimistic and in
Europe we are all seeing a slight improvement which is good but I don't think
anyone is putting their neck out too far in front of the cart right now to
determine if we will see a big improvement there in the European
market.
Kevin
Michaels - Powerwave
Technologies - CFO
Right.
And just add on to that I do believe that our guidance is within the bounds of
what's out there already from various people looking at overall spending levels.
I think we have been reasonably conservative and the goal is hopefully as we go
through the year we will see the growth that Ron is talking about.
Charles
John - Piper Jaffray -
Analyst
And,
Kevin, just looking at the guidance I'm thinking about it. Q4 obviously carries
a very cautious with the spending. Looks like they are feeling a lot better
right now. Can you maybe not give specific Q1 guidance but just maybe some sense
of seasonality and how we should expect the revenues to ramp throughout 2010?
Thank you.
Kevin
Michaels - Powerwave
Technologies - CFO
Sure.
As you know, we aren't giving quarterly guidance. At this stage there is still a
lot of uncertainty. At this point if we give any kind of guidance or cautionary
tone it will be a more traditional look, where normally the first quarter is a
little slower than the fourth quarter and then you build on that, kind of
through the year. I think that's the trend we were looking at right now and that
is the most information that we have that we can share.
Charles
John - Piper Jaffray -
Analyst
And
then in the guidance, Alcatel come back to a ten percent customer in the back
half or -- they haven't been a 10% customer for the last two quarters. Do you
still see them as a key customer going forward?
Ron
Buschur - Powerwave
Technologies - President, CEO
We
absolutely do see them as a key customer. I think if you listen to their results
it's not surprising that they are not necessarily winning all the new tenders
that are out there so they aren't seeing growth they anticipated either. That
has a direct impact on our business. They are very strategic to Powerwave as
well as our other OEM customers. We will continue to focus on that and we think
we are very well positioned with them.
Charles
John - Piper Jaffray -
Analyst
Thanks
a lot guys. Good luck.
Ron
Buschur - Powerwave
Technologies - President, CEO
Thank
you.
Operator
Your
next question comes from the line of Steve O'Brien of JPMorgan.
Steve
O'Brien - JPMorgan -
Analyst
Hi,
thanks for taking my question. AT&T recently outlined plans to add third and
fourth carriers in certain large markets to improve 3G call quality and also
discussed adding RNC capacity and upgrading some legacy RNC's potentially. Would
this type of upgrade drive demand for Powerwave's multi-carrier amplifiers and
what other RF or antenna products should see a pull through from this type of
upgrade?
Ron
Buschur - Powerwave
Technologies – President, CEO
Steve,
you are absolutely right. That's a very good observation. It certainly would
lend itself well for Powerwave's multi-carrier amplifier products, our TMA
products and new broadband LTE antennas. There is also a demand within that
network to possibly utilize some of the DAS solutions and repeaters, remote
radio head products as well. We believe that this lends a good opportunity for
Powerwave, looking forward and I don't think it's just AT&T that has these
types of constraints, as I said earlier. That gives us some optimistic view of
maybe the operator demand in North America.
Steve
O'Brien - JPMorgan -
Analyst
So
would this -- would the amplifiers, antennas, RF gear precede or typically
follow an RNC change or upgrade?
Ron
Buschur - Powerwave
Technologies – President, CEO
They
typically follow the upgrade and it depends. It can be a quarter or so after. As
you know, the buildouts do tend to take a period of time. There is, as you
outlined, obviously several cities that are out now in trial. We are actively
involved in that. We do see the activities picking up.
Steve
O'Brien - JPMorgan -
Analyst
Got
it. Looking, playing a little devils advocate over the CapEx budget and how you
set your guidance for 2010, it seems like many carriers around the world are
looking to offload traffic via Wi-Fi and [sempto cells] to solve sort of network
congestion problems. Could these sort of dampen the longer term business
opportunity for Powerwave? Is that factored into the budgets in your guidance
for 2010?
Ron
Buschur - Powerwave
Technologies – President, CEO
Steve,
we don't think it's going to dampen it. As I said earlier, we spent significant
amount of money on upgrading our product portfolio around our inbuilding and DAS
solutions including Pico cell-type of product. So we believe either way that
they go but we do believe that the outside in theory is still a good thesis
looking at the business going forward that everyone needs to provide coverage
indoor and the Pico will work on that. And you can't off load and get the
bandwidth that you need in a network using that type of equipment. So we feel
very confident they will continue to go down the path of upgrading. You do not
just have data issues, you also have coverage issues with that network
today.
Steve
O'Brien - JPMorgan -
Analyst
Okay.
Great. If I could ask one more just looking back on 2009, if my numbers are
right, 2G-1/2 or 2G revenue declined a bit less than 3G. And seems somewhat
counterintuitive to me, I guess maybe it's the contribution from emerging
markets. Can you help me with any factors that may have caused this and when we
look at 2010 would we expect or do you expect to move back to a more normal sort
of 4G outpacing 3G out pacing 2G within the revenues?
Ron
Buschur - Powerwave
Technologies – President, CEO
I
think part of what we are seeing and you have answered your question I think at
the beginning where you talked about is it regional. Clearly it was. If you
think about North America Europe not actually spending at the levels that we
seen in the previous year 2008, and you go back and look at the emerging markets
that are building out and that is India, the APAC region itself and even parts
of Africa, that is traditionally looking towards the 2G, 2G-1/2 type of network
.
Operator
(Operator
Instructions) Your next question comes from the line of Rich Valera of Needham
& Company.
Rich
Valera - Needham & Company
- Analyst
Thank
you. Kevin, I was just wondering if you could talk about how you see gross
margins going forward? You have been up here around the 27% level for a while
and higher revenue levels next year. Is there much level from these levels and
how mixed dependent is the margin next year?
Kevin
Michaels - Powerwave
Technologies - CFO
Sure,
Rich. I think one level it certainly has a mixed component and we fluctuate
around the last couple of quarters within 1% range. And I think the near term
that's probably variations I would say. Clearly there is a lot of leverage in
the model and clearly the big drivers for us as we go through the year,
hopefully we see some good growth in revenue. There is a lot of potential
leverage for us in the model so we think we can see some, start going up to the
higher end of our ranges and start approaching the 28%, 29% ranges. A lot of it
will be from how well demand goes. We structured, as Ron mentioned, the business
we take a lot of costs out and we have a strong structure, now especially with
our new facility in Thailand, coupled with our manufacturing in Asia already, we
think we have a lot of leverage opportunity to put more volume through the
structure. We are happy with where we have the margins at now. We are in the
middle of the target range we had for years at 25 -- mid to high 20s. So we
think we can stay in this range and hopefully improve.
Rich
Valera - Needham & Company
- Analyst
That's
helpful. With respect to OpEx, you guys have done a nice job there bringing that
down. Do you see it sustainable at these levels or will that scale somewhat with
the higher revenue you are expecting next year?
Kevin
Michaels - Powerwave
Technologies - CFO
It
will scale a little bit through the year. I think looking at next year on a
total basis, I'm kind of looking at between $140 million to $145 million as a
range for total OpEx in that kind of range. And it will fluctuate around.
Clearly, the beginning of the year it runs higher because you have taxes and
those kinds of things here in the first quarter that start off the year. We
think generally we will stay in this range.
Rich
Valera - Needham & Company
- Analyst
Okay.
That's helpful. Finally on the tax rate, what happened there? You guys were
consistently seemingly forecasting a 10% tax rate number for a while now and
what caused it to jump up I think you said 25% to 35%?
Kevin
Michaels - Powerwave
Technologies - CFO
We
really looking at we kind of backed into where we are at. Basically, we were
paying some taxes primarily in China and we were having profits over there.
Obviously, we are doing what we can to try to minimize those profits but we were
generating a small level of profit there and it results in a small amount of
tax. The thing I tried to state is that we set that target range for next year
of 25% to 30% and that's being conservative. If we do better in terms of revenue
and leading to more income, that rate drops and that's the ironic situation we
are in here because at lower income levels our rate goes up and at higher income
levels our rate drops and it drops pretty dramatically. The issue we have is our
taxes is kind of almost, fixed isn't the right word but they are fixed at a run
rate basis. As we drive more revenue in income, through the taxes don't go up
because of our large deferred tax assets. A little counterintuitive, but we are
just trying to be conservative there.
Rich
Valera - Needham & Company
- Analyst
Okay.
That's helpful. Thank you.
Operator
Your
next question comes from the line of Bill Choi of Jefferies.
Bill
Choi - Jefferies -
Analyst
Okay.
Thanks. A whole bunch of stuff but first clarification on this operating
expense. If you do your revenue targets here which is 4% to 9%, you scaled back
salary, don't you give some of that back and are you baking in perhaps bonuses
that might be tied to achieving some of these revenue levels already in that 140
to 145?
Kevin
Michaels - Powerwave
Technologies - CFO
Yes,
we are.
Bill
Choi - Jefferies -
Analyst
Okay.
Great. Now it's year end. Do you have the six month backlog which you typically
give out at the end of the year?
Kevin
Michaels - Powerwave
Technologies - CFO
I
actually don't have that number handy. We have not calculated it yet. As you
know, we don't run the business on backlog. And the number is really not
meaningful to us.
Bill
Choi - Jefferies -
Analyst
Okay.
What is -- what do you estimate to be the revenue impact of that extra week in
the current quarter?
Kevin
Michaels - Powerwave
Technologies - CFO
It
doesn't really have any. It was in the last quarter, it was in the fourth
quarter. This quarter --
Bill
Choi - Jefferies -
Analyst
That's
what I meant. In the fourth quarter, what do you think the revenue --
?
Kevin
Michaels - Powerwave
Technologies - CFO
I
don't think it had any real impact at all.
Bill
Choi - Jefferies -
Analyst
I
want to talk about the multiband antennas a little bit, particularly in relation
to the topic on AT&T. We have been hearing that some of the equipment just
aren't ready from the vendors yet. Can you talk about the preparedness of your
products and the TMAs, multiband antennas to hit the 700 megahertz band and is
there some color on when the orders might start here?
Ron
Buschur - Powerwave
Technologies - President, CEO
Bill,
I can tell you that for the most part Powerwave is prepared from an antenna
perspective. Our tower mounted amplifiers are qualified and ready to be deployed
as well as multi-carrier amplifier products. All of the high volume forecasted
products that AT&T and others, not just AT&T, Verizon has an LTE rollout
as well, both of those customers and the product lines associated with that are
prepared to meet that ramp and move forward. As I indicated, I think it lags a
little bit, maybe a quarter or so behind the buildout of the core where they are
looking at back hole and others and that's kind of what we are
seeing.
Bill
Choi - Jefferies -
Analyst
When
were the antennas and the amps qualified?
Ron
Buschur - Powerwave
Technologies - President, CEO
They
were towards the end of last quarter.
Bill
Choi - Jefferies -
Analyst
So
around December timeframe, right?
Ron
Buschur - Powerwave
Technologies - President, CEO
Yes.
End of November, first of December.
Bill
Choi - Jefferies -
Analyst
Okay.
Can you give an update on 3G license activities in Europe. They are obviously
talking about getting some spectrum from broadcasters in addition to, what is
that, 2100?
Ron
Buschur - Powerwave
Technologies - President, CEO
Exactly.
That to us is an indication even though many of the operators aren't really
talking about it openly that there is quite a constraint in that network and
they are eating up a little bit of that capacity for data. And with our
broadband antenna portfolio as well as, as you know, Bill, the multi-carrier
amplifier that is really what that product is designed to do, amplify
multi-carrier and different frequent frequency spectrum and boost that output
power that will give capacity and reach. So we were pleased with that and we
think that will allow us to leverage some of the work that we have done here in
North America into the European market, and we do have a multi-carrier amplifier
now that meets the standards in Europe and that was an output power requirement
that previously we could not meet. And now with the work of our engineering team
we have an amplifier that meets those requirements.
Bill
Choi - Jefferies -
Analyst
When
was that ready?
Ron
Buschur - Powerwave
Technologies - President, CEO
We
just finished that at the end of the year.
Bill
Choi - Jefferies -
Analyst
Okay.
Great. So then just looking at European weakness in Q4, was it more on the
antennas or amplifiers?
Ron
Buschur - Powerwave
Technologies – President, CEO
We
haven't sold a lot of amplifiers into that market at all, Bill. It was really
more around the antenna products.
Bill
Choi - Jefferies -
Analyst
Okay.
And what are your expectations for the broadcast spectrum being available for 4G
in Europe?
Ron
Buschur - Powerwave
Technologies – President, CEO
Well,
if we -- if you follow the guidance that was given it's more towards the second,
third quarter is when they are really projecting that they will start trying to
utilize that and if I really get more specific, it's really targeted at the
third quarter is what we think is realistic.
Bill
Choi - Jefferies -
Analyst
Okay.
All right. Sounds good. Good luck this year.
Ron
Buschur - Powerwave
Technologies - President, CEO
Thank
you.
Operator
Your
next question comes from the line of [John Evans] of [Edmonds
White].
John
Evans - Edmonds White -
Analyst
Can
you talk -- first of all, you did a great job in generating free cash flow in
the fourth quarter. Can you talk since, you said seasonally Q1 you should kind
of go down. Should you generate cash in Q1 or do you think you will burn cash
and then can you kind of give us a sense of your thought process of being able
to generate cash this year?
Kevin
Michaels - Powerwave
Technologies - CFO
Sure.
Let me first say we are not going to give quarterly guidance. We aren't going to
say quarterly cash flows and those types of things. I will talk about for the
next year, clearly, and I think as Ron mentioned, we mentioned previously, cash
flow generation is one of our top priorities. We are running the business to
generate cash and will continue to do that. We aren't going to give quarterly
targets there, but we do believe for next year, we do believe that we should be
able to exceed the cash flows that we generate for 2009 and that is certainly
our target and obviously want to exceed it by as much as we can. That's our
goals.
John
Evans - Edmonds White -
Analyst
And
how much did you generate in 2009?
Kevin
Michaels - Powerwave
Technologies - CFO
Total
cash flow was little bit over $30 million.
John
Evans - Edmonds White -
Analyst
So
you think if you hit your plan you will exceed that in 2010?
Kevin
Michaels - Powerwave
Technologies - CFO
Yes,
we will.
John
Evans - Edmonds White -
Analyst
Okay.
Then can you help us understand so you have I think $130 million left on the
1-7/8 that are putable to you 11/11 they will go current this year. Can you give
us insights or thought process into potentially how you guys look to pay for
that?
Kevin
Michaels - Powerwave
Technologies - CFO
Well,
I think the issue is they really don't go current until the very end of the
year. They are almost two years away. And the things that we said were
consistent there. We are looking to generate cash flow over the next two years
to put us in a position to pay off the bond. We will continue to look at
financing alternatives as they present themselves. We have done that all along,
and at the same time we will take advantage of when prices are attractive to
repurchase bonds in the open market. We have done that as well, too. That is our
stated strategy. We haven't varied from that and will continue on that
path.
John
Evans - Edmonds White -
Analyst
Okay.
So if you think about over the next two years if you could generate 35 a year or
something like that that will get you enough with what you have in cash to be
able to pay for them. Can you just tell me how much do you feel like you need
cash on the balance sheet to run the business?
Kevin
Michaels - Powerwave
Technologies - CFO
Well,
it varies on how the size of the business is going in like that. And we -- I
would say we think that it's probably in the 30s, something like that you want
to see at a minimum. Obviously our goal is to generate strong cash flow over the
next two years as well as, like I said, we will look at financing alternatives
as they present themselves and we will continue to drive it that
way.
John
Evans - Edmonds White -
Analyst
Great.
The last question if I may ask relative to that, you had assets sales in the
past. Have you done everything that you had from an asset sale standpoint or
assets?
Kevin
Michaels - Powerwave
Technologies - CFO
No,
we haven't. We have a fair amount of real estate. We did close on one real
estate transaction during the fourth quarter and that raised just a little bit
under $4 million in total. And we received that cash in the fourth quarter but
that's not part of cash flow from operations. We do have other real estate, I
think as everyone knows, the real estate market is not great. So we still have
some real estate listed. We aren't optimistic that in the very short term we
will see activity there, but we continue to pursue those and hopefully over the
next year or two we may have activity in those as well.
John
Evans - Edmonds White -
Analyst
And
I'm sorry, the $4 million that you had, was that in the balance sheet at the end
of the year or not?
Kevin
Michaels - Powerwave
Technologies - CFO
Yes,
it was.
John
Evans - Edmonds White -
Analyst
It
wasn't in the cash flow?
Kevin
Michaels - Powerwave
Technologies - CFO
Not
in the cash flow but it was in the balance sheet.
John
Evans - Edmonds White -
Analyst
Thank
you for your time.
Ron
Buschur - Powerwave
Technologies - President, CEO
You're
welcome.
Operator
Your
final questions comes from the line of Tony Rao of East Shore
Partners.
Tony
Rao - East Shore Partners -
Analyst
Good
afternoon. There has been some interesting developments from various
semiconductor companies from what would be termed only disruptive technologies
that can be used for driver amplifiers and high power amplifiers. Have you been
exploring anything with these new technologies so far as to drive the efficiency
of your amplifiers up?
Ron
Buschur - Powerwave
Technologies - President, CEO
Tony,
yes. That's a great observation. And, as you know, we spend a lot of time
looking at devices, characterizing devices and I think here looking at the
efficiencies that are noted in the industry, people are probably talking around
30% efficiency, some maybe 35% depending where you look at it whether it's a
back end or the front end of the chain. And I think you will find as we get into
some of these shows which we typically show some of our newer products, I would
certainly welcome you to come by and I think you will see that we are taking
advantage of that technology and we should be able to demonstrate very, very
high efficiencies that are leading this industry right now which will again
benefit the industry as a whole from an operating expense perspective as well as
the efficiency and be a much more greener and effective and efficient
solution.
Tony
Rao - East Shore Partners -
Analyst
When
you look at these new technologies, would you give us a frame of where you think
you can drive the efficiencies to?
Ron
Buschur - Powerwave
Technologies - President, CEO
Well,
I wouldn't be surprised to see if efficiencies going up 40% to 50%
range.
Tony
Rao - East Shore Partners -
Analyst
If
you were to offer an amplifier with 50% efficiency and let's say existing
amplifiers in the field are running 30% to 35%, you present that, I think back
to ten years ago when multi-carriers were first introduced and it generated a
lot of interest in the aftermarket direct to service provider sales. Do you
think there would be an ROI and interest from the carriers directly to do
retrofits just based on the efficiency of the amplifier?
Ron
Buschur - Powerwave
Technologies - President, CEO
We
do think that is a very compelling solution and I would agree with your
assessment there as well as allowing us to correct some of the pitfalls in the
existing 3G network.
Tony
Rao - East Shore Partners -
Analyst
So
then you're saying in short term you will have product available, is that
product available for test or will that be product available for
production?
Ron
Buschur - Powerwave
Technologies - President, CEO
It
will be a combination, Tony. We would first introduce the beta units to the
customer. Get their feedback. Do trials and then we would position it for volume
production.
Tony
Rao - East Shore Partners -
Analyst
Okay.
That's great. Thank you. And in the antenna world, what would you say is the
primary technological interest from your customers right now when they are doing
deployments? As I understand it, Verizon has been proactive and actually leading
with some antenna deployments to have their sites LTE 700 megahertz ready
because of the fact that there are so many zoning issues and so on. It makes
more sense for them to do the antenna change outs before the actual equipment is
installed because a lot of times the zoning would be negating item at the back
end. What do you see from your customer base, specifically in the US, as to what
they are looking for from an antennas from a technology standpoint?
Ron
Buschur - Powerwave
Technologies - President, CEO
They
are looking for broadband antennas obviously utilizing AWS spectrum. [PIM] and
noise is a big issue that they have as well as footprint, Tony, because you are
right, they are trying to replace the existing antennas with a single antenna
today and be able to meet the needs of the existing network as they roll out the
LTE deployment. I can tell you that Powerwave has a very good performing antenna
as far as PIM within these two operators who are deploying the next generation
of antenna technology as well as our apature patch technology I think lends
itself very well to a very quiet system that is manufacturable in scale and
allows us to ramp quickly and we have integrated the ret into that. That's
utilized in one operator. The other operator is not interested in having tilt --
electrical tilt into their network. What we've done there is we have been able
to provide a very broadband antenna without ret motors included in
there.
Tony
Rao - East Shore Partners -
Analyst
Would
you describe the antenna market now as becoming more competitive because I've
seen companies like Katherine who say five years ago had very little exposure in
the market now getting better exposure and then (inaudible) seems to be gaining
some traction and traditional competitors that you have always faced. Would you
say that that environment is getting tougher as we move forward?
Ron
Buschur - Powerwave
Technologies - President, CEO
No,
I wouldn't say it's tougher. First of all, the only thing that I would maybe
slightly correct, Tony, is your observation that Katherine wasn't in the market.
They have been in the leader in antennas now for probably ten years. They own
the European market at a very strong level and I think we have done a good job
of coming in and taking a little bit of share there and some of these European
markets and emerging market place as well. The advantage I see as more and more
of the operators are going towards active solutions and active solutions
incorporate filter RF conditioning technology with antenna technology as well as
amplification technology for MIMO two way, three way active antennas, I think
that really does narrow down the competition dramatically because there is
really only two of us that have that capability and technology
in-house.
Tony
Rao - East Shore Partners -
Analyst
Right.
I understand. I was referring to the US market specifically. One last question
if I may. It appears that there has been some interest from carriers who are
doing trials in the LTE world for very sharp skirted filter performance and it's
even driving them to do some evaluations of the cryogenic-type filters. Do you
see that your traditional filter technology could be competitive there or do you
think -- have you seen a desire from your customers to have possibly some
instances use super conducting type technologies for filters?
Ron
Buschur - Powerwave
Technologies - President, CEO
No.
I think first of all that's cost prohibitive and we all explored that for many,
many years. We do believe that we can achieve the same types of characteristics
and performance whether it's band pass, band stop or trying to create basically
a saw filter technology. We can do that very effectively with the existing
ceramics that we have in our portfolio and our intellectual property that we
have in the UK today that we acquired through the Filtronic acquisition. We
developed along with that some very sophisticated auto tunable and IP based
technology to where we can actually do that remotely. So we feel very
comfortable that we can provide that solution and it's much more cost compelling
than anything around cryogenics or any of the more futuristic-type of products.
When I say futuristic it's really more around some of the military applications
or some the requirements that are used in satellite technology, not necessarily
the wireless based today.
Tony
Rao - East Shore Partners -
Analyst
Thanks
for your time.
Ron
Buschur - Powerwave
Technologies - President, CEO
Thank
you, Tony.
Operator
Your
next question comes from the line of Amir Rozwadowski of Barclays
Capital.
Amir
Rozwadowski - Barclays Capital
- Analyst
Thank
you very much. And good afternoon, Ron and Kevin.
Ron
Buschur - Powerwave
Technologies - President, CEO
Good
afternoon.
Amir
Rozwadowski - Barclays Capital
- Analyst
Ron,
you talked about this earlier and specifically the antenna division in the last
question. I was wondering if you could talk to us a bit more about broader
market share positioning and sort of how you see your market share. Is there
increased amount of competition going on and pressuring some portions of your
business or do you feel as though right now your market share positioning has
been -- has held up okay?
Ron
Buschur - Powerwave
Technologies - President, CEO
Well,
it's hard to determine when a company like Katherine is not public, so there is
no public information that you can achieve from their results. And with Andrew
and CommScope combining, they have combined a lot of the cable and the antenna
technology and their TMAs into one broad category. So it doesn't clearly define
that. But I can tell you looking at what we have seen in the marketplace and the
acceptance of the products, I believe and I feel pretty comfortable that we have
gained some momentum in some of these more established markets and certainly we
have gained momentum in the emerging markets.
Now with
that said, I can tell you in China, for example, it's a very cut throat and
competitive market and you really are comparing apples and oranges, the quality
level of the products, the feature sets and the specifications associated with
that, and that's not just including Powerwave. That's everyone, I think if you
talk to CommScope, Katherine, you will find that everyone has a similar view.
You really comparing apples and oranges and that is very competitive in those
marketplaces. I feel pretty good about the technology and position we have so I
would say that we did very well in the antenna portion this year and we have
introduced obviously many new products in that antenna segment which allow us
now to compete in a broader base and we know for a fact that we have one of the
best performing antennas from a PIM perspective here in North America and we are
very, very pleased to have a broadband antenna that can cover 700 all the way up
to 2.5. We think we have a very, very state of the art technology that is
affordable to the operator that gives them a solution to leverage one antenna
within their network.
Amir
Rozwadowski - Barclays Capital
- Analyst
Great.
Thank you very much. I appreciate the incremental color.
Ron
Buschur - Powerwave
Technologies - President, CEO
Thank
you.
Operator
Your
next question comes from the line of Scott Searle of Merriman.
Scott
Searle - Merriman -
Analyst
Good
afternoon. Thank you.
Ron
Buschur - Powerwave
Technologies - President, CEO
Hi,
Scott.
Scott
Searle - Merriman -
Analyst
Hey,
guys. I apologize I got on the call a little late. But did you give a break down
in terms of split of WiMAX revenue and the break down between operators North
America and non-North America?
Kevin
Michaels - Powerwave
Technologies - CFO
Scott,
we didn't break down operators by region. We didn't do that. But in terms of the
total break down by grouping, 2 to 2-1/2G was about 55% of revenue, 3G was 32%
and 4G which in 4G we include WiMAX and LTE, was about 13%.
Scott
Searle - Merriman -
Analyst
Okay.
And in terms of OpEx looking out over the next couple of quarters, should we be
modeling that to be flat or do we see a little bit of a step up going into the
first quarter given the heavy conference schedule?
Kevin
Michaels - Powerwave
Technologies - CFO
You
had that right. First quarter you have a heavy conference schedule which impacts
it as well as you have taxes. New year of tax withholdings as well. We did give
a range for the whole year of about 140 to 145, but I think, as you mentioned,
the first quarter does step up a little bit.
Scott
Searle - Merriman -
Analyst
Got
it. It doesn't sound like you are providing quarterly guidance. Sounds like
directionally we should assume seasonality in the March quarter. But given the
visibility that you got right now, is there any color to put around versus
typically seasonality a little bit better, a little bit less and how you are
feel about that?
Kevin
Michaels - Powerwave
Technologies - CFO
I
think you hit it on the head. Typical seasonality is what we would say. I think
we go with that and we did give -- you're right, we are not giving quarterly
guidance but we did give an annual guidance on the revenue range is 590 and
620.
Scott
Searle - Merriman -
Analyst
Got
it. And just one or two other items. On the gross margin front, great job
despite the fact that there is really limited contribution from the higher
margin coverage solutions product line. Is there any reason to believe that
antennas and base station components wouldn't maintain this level of
profitability going forward? Are there any sort of one-time items or events or
mix issues that provided we see a ramp up in coverage solutions at some point
during the course of 2010 that we wouldn't continue to see the gross margins
creeping up over the next couple of quarters?
Kevin
Michaels - Powerwave
Technologies - CFO
I
think you will see, with revenue growth, I think you will see them creep up
some. You have about a 1% fluctuation that occurs where we are running right now
with mix. At the same run rate it can fluctuate around a little bit. Generally,
the answer to your question is yes.
Scott
Searle - Merriman -
Analyst
Okay.
And I apologize if you covered this. If you did, I can take it off-line. Remote
radio heads. Ron, did you address that in terms of opportunity for LTE right now
and what you are seeing from a customer standpoint and interest
level?
Ron
Buschur - Powerwave
Technologies - President, CEO
We
talked a little bit about the interest of the antennas around LTE as well as
multi-carrier amplifiers which we think are going to be needed in that network
and our remote radio head products and DAS solutions, we're optimistic that is
going to a perfect venue for those products. And we are obviously continuing to
leverage that radio head technology not just in WiMAX, as you know, in LTE as
well. The testing and the feedback we have been given is very good. We think
it's a cost effective way to build out a network without adding all the
additional base stations that are typically associated with a
buildout.
Scott
Searle - Merriman -
Analyst
Ron,
do you think that's via the OEM or going direct to the operator and looking at
the 590 to 610 this year, how much are you mentally circling for remote radio
heads outside of WiMAX?
Ron
Buschur - Powerwave
Technologies - President, CEO
Well,
we basically are focused on selling the products through both the OEMs as well
as the operator. The OEMs are great reach for us outselling our solutions and we
want to continue that but we have seen an interest with the operators as well as
utilizing our remote radio heads and our antennas directly into their network.
Obviously there is slight limitation with base band capability that drives the
need to work closely with the OEM to provide that.
Scott
Searle - Merriman -
Analyst
Okay.
Great. Thanks so much guys.
Ron
Buschur - Powerwave
Technologies - President, CEO
Thank
you.
Operator
That
concludes the Q&A session. I will now like to turn the call back over to
management.
Ron
Buschur - Powerwave
Technologies - President, CEO
I
want to thank everyone for joining us today and your continued interest in
Powerwave Technologies. We were very excited about the opportunities in 2010 and
we look forward to sharing our results in the first quarter. Thank
you.
Operator
Ladies
and gentlemen, that concludes the presentation. Thank you for your
participation. You may now disconnect. Have a great day.
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