Hi Rob,
Also at the Stratex website:
Wireless Infrastructure: Is the Worst Behind Us?
Dale Pfau CIBC World Markets
veracast.com
Current situation
LCC International Tom Faulders, CEO An engineering consulting services company. US flurry of activity because of Local Number Portability (LNP) by Nov 24th. Better quality is key to reduce churn. Some E911. APAC, SARS meaningful hiccup in China. Europe moving to 3G in 2004. LatAm a little more activity, esp. TIM and TEF
[9:00] Powerwave Technologies Bruce Edwards, CEO Multi-carrier power amplifiers . Third year of down spending. Current quarter is the bottom. 90% of business user complaints are quality of service, not price. CapEx was 18% of budgets first quarter this year.
[12:25] Remec, Inc Ronald Ragland, Chairman & CEO Revenue bottomed 2H02, now mostly market share gains. Are in a bottoming moment. QOS sucks everywhere. Investment will be driven by competition.
[13:55] Stratex Networks Chuck Kissner, Chairman & CEO Agree bottom seems to be here in current quarter. Lots of bidding activity. All numbers have been too optimistic, but errors in numbers are smaller. Price declines are smaller - operators are in 'dynamic equilibrium' operators don't have the CapEx, but have to purchase because they don't have the quality. They are being forced into a level of expenditure.
Biggest opportunity & threat
[16:35] Chuck - the biggest opportunity is a wireless transmission system that does not need forklift upgrades. Pretty close to fruition, allows us to ramp up. A dramatically new concept in radio capacity. Will the customer accept paying for software upgrades to the radios? We don't know if we can ramp up volume - according to plan
[19:25] Ron - Threat is price erosion - now at 'terrorism pricing' - can't continue at this level. See SP optimizing their networks. China acquisition has strategy of tieing together software optimization solutions and network optimizations with our equipment, and we warrant the solutions. Huge Supply Chain savings possible, a very significant portion of our revenue will be spent in our supply chain. Our competitors rely on EMS companies, we do not. Did 26% of business in defense community in 1Q03 - running at record rate. 15% pre-tax revenue from defense operation.
[23:37] Bruce - convince our customers (who do inside design of more than 50% of their power amplifier requirements) to outsource more. Every OEM is doing some form of outsourcing. Providing solutions to the market is a great opportunity. Verizon, AT&T, Cingular relations. Now have a line of solution-oriented products. Threat is suppliers to our customers are not healthy. Just matching price must move to 'how do we partner up'.
Have both OEM and Operator strategy - we try to create demand for our multi-carrier power amplifiers. Four of the top five base station OEMs can deliver our amplifier to their customers. We are in the demand creation business.
[27:25] Tom - Problems, we help our clients build radio access networks. The terms and conditions in the US have guaranteed we lose money on every job. Opportunities are international (65% of revenues), mostly 3G in Europe, and to upgrade GPRS overlays, which were designed poorly. The outsourcing of wireless carrier's engineering and operations department is starting to gain traction in Europe. We are participating with Ericsson in the Netherlands, actually the Benelux areas, to outsource a number of different wireless carriers. I see it as a $20B market worldwide, 99.5% is carrier in-house spend today. The US carriers are very different from overseas.
What are significant trends in the industry that are least understood by Wall Street?
[31:00] Tom - the international vs US domestic. Look at CapEx in units, it hasn't gone down that much, get to volume numbers, there hasn't been domestic reduction in units.
[32:00] Bruce - will 3G happen? You look at the slowness and think it doesn?t have momentum. Our view is later 2003, 2004 3G is a relatively large opportunity. Some key 3G suppliers will pick up later this year, 2004. Other technologies are not coming on. The other one is LNP in the US. In Hong Kong churn rate tripled with LNP. Will change where CapEx is deployed.
[34:42] Ron - China potential is mind-blowing, the global supply chain savings 30-50% range, technology cost effectiveness in China - a Chinese engineer is $25k-$30k a year. Will have a Research Institute indigenous company in China. When QOS differentiation takes place, the operators have to spend. Significance of controlling our own manufacturing destiny - EMS is too soon in our opinion. Bought Spectarian and moved manufacturing from Thailand to Philippines, Costa Rica and China. Are saving > 20% compared with EMS.
[40:00] Chuck - I'm impressed with how Wall Street follows the industry. Not much consolidation in the industry, valuations run up in hope.
US investors think they understand the International marketplace, but it is different out there. How to turn China into a sustainable opportunity?
Where is wireless going - where teledensity rates are low, and where wireless is allowed to compete. You need to understand it in some detail - where teledensity is low, an organized banking system, strong national goals that allow companies to roll this our, and some economic stability. That will be the big business going forward.
Audience questions
[44:27] How is the lower dollar impacting your overseas business?
Chuck - most of our employees are outside the US, won a large contract in Europe competing with an Asian and a European company. Driving the top line is more useful to us.
[45:49] Ron - today Remec is 45% international, next year > 55%. Most of our costs are against Philippine and Costa Rician pesos. Guess more than 50% of product will be priced in Euros next year. So have to hedge currency.
[47:18] Bruce - OEMs choose currency at beginning of year, so it doesn't affect us
[47:40] Tom - about 60% of our contracts are in pounds or euros, but we pay our employees in pounds or euros, net net not a big impact.
LNP Capex? What is different about International that is not understood?
[48:28] Tom - down this year, and flat to down next year. Sprint and Verizon are taking 50% of their CapEx and putting it in coverage and capacity solutions. Transmit receive booster solutions, repeaters, antenna enhancement products, cell-splitting to improve QOS.
[49:22] The operators are also looking at in-building more than they have in the past. A big upsurge in making sure the signal penetrates key buildings - trophy buildings or buildings where they have a high penetration of customers. Less on new switch sites.
Real issue in international is that US 3G shouldn't happen, except for the cdma guys. I can make a case for it shouldn't happen for the gsm/gprs guys in the US, but in Europe it is a different animal. Took three years for 2G to work well, and we are one year into 3G. China has a 19% penetration rate, in the cities the rates are 60% range.
[52:30] Chuck - 90% of our business is international. China has the biggest drop Y-Y, but it is so big. 3G is interesting, but the real money is being spent where there is not a competing infrastructure - where there is a low penetration rate. Clear economics, where is it easier to justify? Not LatAm because of economic stability. Always a few cylinders running. |
