|
|
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|
Not applicable.
|
|
OFFER STATISTICS AND EXPECTED TIMETABLE
|
Not applicable.
|
A.
|
SELECTED FINANCIAL DATA
|
The selected financial data, set forth in the table below, have been derived from our audited historical consolidated financial statements as of, and for each of the years ended, December 31, 2005, 2006, 2007, 2008 and 2009. The selected consolidated statement of operations data for the years ended December 31, 2007, 2008 and 2009, and the selected consolidated balance sheet data at December 31, 2008 and 2009, have been derived from our audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated statement of operations data for the years ended December 31, 2005 and 2006, and the selected consolidated balance sheet data at December 31, 2005, 2006 and 2007, have been derived from our previously published audited consolidated financial statements, which are not included in this Annual Report. Following the sale of the net assets of the former interWAVE Communications International business, referred to as our Cellular Mobile Unit ("CMU") on November 21, 2006, the results of our CMU activities for the years ended December 31, 2005, 2006 and 2007 were reclassified to one line item in the statement of operations as “Income (loss) from discontinued operations” below the results from continuing operations. We prepare our consolidated financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”). You should read the selected financial data together with the section of this Annual Report entitled, “Item 5—Operating and Financial Review and Prospects” and our consolidated financial statements and related notes included elsewhere in this Annual Report, and the selected financial data are qualified entirely by reference to such consolidated financial statements and related notes.
| |
|
|
|
| |
|
|
|
|
|
2006(*) |
|
|
|
2007(*) |
|
|
|
2008(*) |
|
|
|
2009(*) |
|
| |
|
(in thousands except per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
176,927 |
|
|
$ |
181,594 |
|
|
$ |
236,573 |
|
|
$ |
281,281 |
|
|
$ |
245,239 |
|
|
Cost of sales
|
|
|
85,817 |
|
|
|
80,410 |
|
|
|
114,099 |
|
|
|
144,326 |
|
|
|
128,461 |
|
|
Write-off of excess inventory and provision for inventory purchase commitments
|
|
|
7,338 |
|
|
|
9,472 |
|
|
|
4,762 |
|
|
|
3,457 |
|
|
|
3,993 |
|
|
Gross profit
|
|
|
83,772 |
|
|
|
91,712 |
|
|
|
117,712 |
|
|
|
133,498 |
|
|
|
112,785 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, gross
|
|
|
32,772 |
|
|
|
42,042 |
|
|
|
54,967 |
|
|
|
69,952 |
|
|
|
54,674 |
|
|
Less grants and participations
|
|
|
3,062 |
|
|
|
3,235 |
|
|
|
3,578 |
|
|
|
10,273 |
|
|
|
3,884 |
|
|
Research and development, net
|
|
|
29,710 |
|
|
|
38,807 |
|
|
|
51,389 |
|
|
|
59,679 |
|
|
|
50,790 |
|
|
Selling and marketing
|
|
|
39,900 |
|
|
|
44,929 |
|
|
|
55,943 |
|
|
|
60,521 |
|
|
|
52,022 |
|
|
General and administrative
|
|
|
9,602 |
|
|
|
13,680 |
|
|
|
15,426 |
|
|
|
18,813 |
|
|
|
15,087 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
2,685 |
|
|
|
2,676 |
|
|
|
2,544 |
|
|
|
1,327 |
|
|
|
132 |
|
|
Impairment of investment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,554 |
|
|
Restructuring and other related expenses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,914 |
|
|
|
2,787 |
|
|
Total operating costs and expenses
|
|
|
81,897 |
|
|
|
100,092 |
|
|
|
125,302 |
|
|
|
143,254 |
|
|
|
122,372 |
|
|
Operating profit (loss)
|
|
|
1,875 |
|
|
|
(8,380 |
) |
|
|
(7,590 |
) |
|
|
(9,756 |
) |
|
|
(9,587 |
) |
|
Other income
|
|
|
- |
|
|
|
- |
|
|
|
8,265 |
|
|
|
- |
|
|
|
731 |
|
|
Financial income, net
|
|
|
2,551 |
|
|
|
3,796 |
|
|
|
6,453 |
|
|
|
4,297 |
|
|
|
1,668 |
|
|
Income (loss) from continuing operations
|
|
|
4,426 |
|
|
|
(4,584 |
) |
|
|
7,128 |
|
|
|
(5,459 |
) |
|
|
(7,188 |
) |
|
Income (loss) from discontinued operations, net
|
|
|
(17,044 |
) |
|
|
(36,167 |
) |
|
|
5,413 |
|
|
|
- |
|
|
|
- |
|
|
Net income (loss)
|
|
$ |
(12,618 |
) |
|
$ |
(40,751 |
) |
|
$ |
12,541 |
|
|
$ |
(5,459 |
) |
|
$ |
(7,188 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.08 |
|
|
$ |
(0.08 |
) |
|
$ |
0.11 |
|
|
$ |
(0.09 |
) |
|
$ |
(0.12 |
) |
|
Discontinued operations
|
|
|
(0.30 |
) |
|
|
(0.59 |
) |
|
|
0.09 |
|
|
|
- |
|
|
|
- |
|
|
Total
|
|
$ |
(0.22 |
) |
|
$ |
(0.67 |
) |
|
$ |
0.20 |
|
|
$ |
(0.09 |
) |
|
$ |
(0.12 |
) |
|
Weighted average number of shares used in computing basic net earnings (loss) per share
|
|
|
58,688 |
|
|
|
60,841 |
|
|
|
62,345 |
|
|
|
62,925 |
|
|
|
62,023 |
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.07 |
|
|
$ |
(0.08 |
) |
|
$ |
0.11 |
|
|
$ |
(0.09 |
) |
|
$ |
(0.12 |
) |
|
Discontinued operations
|
|
|
(0.27 |
) |
|
|
(0.59 |
) |
|
|
0.08 |
|
|
|
- |
|
|
|
- |
|
|
Total
|
|
$ |
(0.20 |
) |
|
$ |
(0.67 |
) |
|
$ |
0.19 |
|
|
$ |
(0.09 |
) |
|
$ |
(0.12 |
) |
|
Weighted average number of shares used in computing diluted net earnings (loss) per share
|
|
|
63,561 |
|
|
|
60,841 |
|
|
|
64,626 |
|
|
|
62,925 |
|
|
|
62,023 |
|
(*) Includes charges for stock-based compensation of approximately $6.9 million, $7.4 million, $7.6 million and $4.2 million as a result of ASC 718 “Compensation - Stock Compensation” (formerly SFAS No. 123(R) "Share-Based Payment") for the years ended December 31, 2006, 2007, 2008 and 2009, respectively.
| |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
101,713 |
|
|
$ |
97,169 |
|
|
$ |
113,118 |
|
|
$ |
115,817 |
|
|
$ |
|
|
|
Total assets
|
|
$ |
318,002 |
|
|
$ |
280,063 |
|
|
$ |
313,143 |
|
|
$ |
338,110 |
|
|
$ |
301,037 |
|
|
Shareholders’ equity
|
|
$ |
224,333 |
|
|
$ |
195,301 |
|
|
$ |
220,553 |
|
|
$ |
215,906 |
|
|
$ |
216,644 |
|
|
Capital Stock
|
|
$ |
391,957 |
|
|
$ |
403,708 |
|
|
$ |
415,213 |
|
|
$ |
423,468 |
|
|
$ |
428,086 |
|
|
B.
|
CAPITALIZATION AND INDEBTEDNESS
|
Not applicable.
|
C.
|
REASONS FOR THE OFFER AND USE OF PROCEEDS
|
Not applicable.
Our business, financial condition and results of operations could be seriously harmed due to any of the following risks, among others. If we do not successfully address the risks to which we are subject, we could experience a material adverse effect on our business, results of operations and financial condition, and our share price may decline. We cannot assure you that we will successfully address any of these risks.
Risks Related to Our Business and Our Industry
We have incurred losses in the past and we may continue to incur losses in the future.
In 2009, our operating loss and net loss were approximately $(9.6) million and $(7.2) million, respectively, and in 2008, our operating loss and net loss were approximately $(9.8) million and $(5.5) million, respectively. Our losses in these two years were mainly due to the global slowdown and the limited availability of credit in the global capital markets as well as a decrease in our gross margin. In 2007, our operating loss and net income were approximately $(7.6) million and $12.5 million, respectively. We may continue to incur operating losses and net losses in the future. Continuing losses could have a material adverse effect on our business, financial condition and results of operations, and on the value and market price of our ordinary shares.
Continuing slowdown in the global economic conditions could have a material adverse effect on our business, operating results and financial condition.
The crisis in the financial and credit markets in the United States, Europe and Asia, which peaked in 2008 and 2009, has led to a global economic slowdown, with the economies of the United States and Europe weakening. If these economies weaken further, our customers may further reduce or postpone their technology spending significantly. This could result in continued reductions in sales, longer sales cycles, slower market acceptance of our products and increased price competition. Any of these events would likely harm our business, operating results and financial condition and the values and liquidity of our investments may be materially adversely affected.
Adverse conditions in the telecommunications industry and in the telecommunications equipment market may decrease demand for our products and may harm our business, financial condition and results of operations.
Our systems are used by telecom carriers and service providers. Some carriers and service providers using wireless broadband are emerging companies with unproven business models. Adverse market conditions in the last few years have caused our customers and potential customers to be conservative in their spending, and this is likely to continue in the future. In addition, some of these emerging companies may cease operations due to the global economic slowdown. Consequently, the markets in which we operate may not grow as we expect or at all, and our overall expansion plan may be affected. While our goal is to increase our sales by expanding the number of carrier customers that we address, there can be no assurance that we will be successful. The number of carriers and service providers who are our potential customers is relatively small and may not grow because of the limited number of licenses granted in each country and the substantial capital requirements involved in establishing networks. As a result, our revenues may decline and our losses may increase.
Continued delays in WiMAX license allocation in certain countries may have an adverse affect on the WiMAX industry as a whole and may negatively affect our sales and revenues. For example, WiMAX frequency allocations in India that were supposed to take place during 2009 have been delayed into 2010. In addition, governmental funding packages under the U.S. broadband stimulus program may be delayed. Should such delays occur, it may have a negative impact on our revenues.
We may fail to deliver “turn-key” solutions to our customers.
We are experiencing increased demand from existing and potential customers to provide a complete operational or “turn key” solution for their deployment needs, where we are responsible for overall project management including third-party deliverables. In addition, our OPEN WiMAX strategy is designed to enable multiple telecom vendors to build a best-of-breed telecom access network in an open standard architecture. This strategy enables communication service providers to choose the combination of vendors and partners that best fits their specific requirements in large telecom projects. These solutions require us to integrate third parties' technologies, equipment and services. Relying on these third parties increases our responsibilities towards our customers. If we or any of our third parties fail to fully comply with our customers’ requirements, or if we, as the end-to-end provider, fail to deliver projects in a timely manner and to the satisfaction of our customers, it may adversely affect our results of operations.
New markets we attempt to penetrate may not become substantial commercial markets. In addition, if we do not maintain or increase our market share of the wireless broadband equipment market, our business will suffer.
The wireless broadband market, both fixed and mobile, and other new markets we attempt to penetrate may not become substantial commercial markets or may not evolve in a manner that will enable our products to achieve market acceptance. Mobile WiMAX technology targets fourth generation ("4G") services and therefore competes with other technologies such as Long Term Evolution ("LTE"), which is currently the major technology competitor of WiMAX for wireless broadband markets. WiMAX market acceptance may be hampered by competing technologies or intellectual property rights disputes. In addition, in order to maintain or increase our market share in the markets in which we operate, we must:
|
·
|
continue to innovate and differentiate our technology position in designing, developing and manufacturing broadband wireless access products;
|
|
·
|
develop and cultivate additional sales channels in addition to our direct sales from which we generate our main revenues today, including original equipment manufacturer (“OEM”) agreements, regional local partners or other strategic arrangements with leading manufacturers of access equipment to market our wireless broadband products to prospective customers, such as local exchange carriers, cellular operators, Internet and application service providers, municipalities and local telephone companies;
|
|
·
|
effectively establish and support relationships with customers, including local exchange carriers, Internet and application service providers, public fixed or mobile telephone service providers and private network operators;
|
|
·
|
effectively develop and market our OPEN WiMAX strategy in our broadband mobile solution, together with our current and potential partners;
|
|
·
|
continue to enhance our infrastructure project management and overall turnkey capabilities;
|
|
·
|
continue to enhance our financing and credit capabilities towards our customers; and
|
|
·
|
continue to enhance our maintenance and support services.
|
Our efforts in these markets may not succeed.
Intense competition in the markets for our products may have an adverse effect on our sales and profitability.
Many companies compete with us in the wireless broadband equipment market in which we sell our products. We expect that competition from large vendors, as well as new vendors, will increase in the future, including with respect to products that we currently offer and products that we intend to introduce in the future. As the market transitions toward standardization, competition becomes increasingly more challenging for us. In addition, some of the systems integrators and other strategic partners to which we sell our wireless broadband products could develop the capability to manufacture systems similar to our wireless broadband products. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies that may supplant or provide lower cost alternatives to our products or perform better than our products.
We are also facing additional and new competition from large telecommunications equipment vendors, such as Huawei, Cisco Systems Motorola, Samsung and ZTE Corporation and we expect this competition to grow, especially with respect to the mobile WiMAX-based products. Tier One operators may prefer to purchase products from these large vendors. During recent years, there has been a trend of consolidation in the telecommunications equipment market. This trend may continue in the future, particularly in light of the global economic slowdown, and may result in larger competitors with enhanced resources, financial and otherwise. This may further intensify the competitive nature of the markets in which we operate.
We expect these competitors to continue to improve their technologies and products, which may cause us to lose some of our customers or prevent us from penetrating into new markets. Some of our existing and potential competitors, including large competitors arising from the continued consolidation in the telecommunications equipment market, have substantially greater resources, including financial, technological, manufacturing and marketing, and distribution capabilities, and enjoy greater market recognition than we do. Increased competition, direct and indirect, has resulted in, and is likely to continue to result in, reductions of average selling prices, shorter product life cycles due to our competitors' launching innovative products in the market more frequently, reduced gross margins, longer sales cycles and potential loss of market share and, consequently, could adversely affect our sales and profitability.
We may not be able to differentiate our products from those of our competitors, successfully develop or introduce new products that are less costly, offer better performance than the products of our competitors, or offer our customers payment or other commercial terms as favorable as those offered by our competitors. In addition, we may not be able to offer our products as part of integrated systems or solutions or provide extensive services to the same extent as our competitors. A failure to accomplish one or more of these objectives could materially adversely affect our sales and profitability, harming our financial condition and results of operations.
Some of our standards-compliant WiMAX products may not receive the certification that we expect, which may affect our future business.
We rely on WiMAX technology. Products based on this technology may not receive certification in the time frame we expect, or at all, and may therefore not achieve the wide acceptance that we are seeking. This may harm the sales of our standards compliant products, and consequently, our results of operations.
Rapid technological change may have an adverse effect on the market acceptance for our products and may adversely affect our results of operations.
The markets for our products and the technologies utilized in the industry in which we operate evolve rapidly. We rely on key technologies, including wireless local area network (“LAN”), wireless packet data, orthogonal frequency division multiplexing (“OFDM”), orthogonal frequency division multiple access (“OFDMA”), time division multiplexing, modem and radio technologies as well as WiMAX, multiple-input multiple-output communications (“MIMO”), Sub Channelization, beam forming, high power base station and other technologies. These technologies may be replaced with alternative technologies or may otherwise not achieve the wide acceptance that we are seeking, particularly in light of the current global economic slowdown. In particular, there is a substantial risk that the wireless broadband technologies underlying our products may not achieve market acceptance for use in access applications. As a result, our results of operations may be adversely affected.
In addition, market changes could render our products and technologies obsolete or subject them to intense competition by alternative products or technologies or by improvements in existing products or technologies. For example, the wireless broadband equipment market may stop growing as a result of the deployment of alternative technologies that are constantly improving, such as DSL, cable modem, fiber optic, coaxial cable, satellite systems, Wi-Fi technology, third or fourth generation cellular systems, or high speed packet access (“HSPA”) and LTE technologies. New or enhanced products developed by our competitors may be technologically superior to our products, may limit our target markets or may render our products obsolete, and consequently adversely affect our results of operations.
The success of our technology depends on the following factors, among others:
|
|
·
|
acceptance of new and innovative technologies;
|
|
|
·
|
acceptance of standards for wireless broadband products;
|
|
|
·
|
timely availability and maturity of technology from technology suppliers and chip-vendors, such as Intel, Sequans and Beceem;
|
|
|
·
|
capacity to handle growing demands for faster transmission of increasing amounts of data and voice;
|
|
|
·
|
cost-effectiveness and performance compared to other broadband wireless technologies;
|
|
|
·
|
reliability and security;
|
|
|
·
|
acceptance of new WiMAX ecosystem;
|
|
|
·
|
suitability for a sufficient number of geographic regions;
|
|
|
·
|
the availability of sufficient frequencies and site locations for carriers to deploy and install products at commercially reasonable rates; and
|
|
|
·
|
safety and environmental concerns regarding wireless broadband transmissions.
|
We may experience difficulties or delays in the introduction of new or enhanced products, which could result in reduced sales or unexpected expenses.
The development of new or enhanced products is a complex and uncertain process. We are engaged in the development of very advanced technologies. We have experienced and may continue to experience design, manufacturing, marketing and other difficulties due to delays in our development or delays by third party vendors, and these delays could continue to cause difficulties or prevent our development, introduction or marketing of new products or product enhancements and intensified competition. The difficulties could result in reduced sales, unexpected expenses or delays in the launch of new or enhanced products or the inability to timely introduce to the market the appropriate products, all of which may adversely affect our results of operations.
We engaged and may continue to engage in mergers and acquisitions which could harm our business, results of operations and financial condition, and dilute our shareholders’ equity.
We have pursued and, subject to market conditions, may continue to pursue growth opportunities through internal growth and acquisition of complementary businesses, products and technologies. We are unable to predict whether or when any prospective acquisitions will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’s attention. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition or results of operations. Past and future acquisitions may require substantial capital resources, which may require us to seek additional debt or equity financing, and could result, without limitation, in the following, any of which could seriously harm our results of operations or the price of our ordinary shares:
|
|
·
|
issuance of equity securities that would dilute our current shareholders;
|
|
|
·
|
the incurrence of debt and contingent liabilities;
|
|
|
·
|
difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies;
|
|
|
·
|
diversion of management’s attention from other business concerns;
|
|
|
·
|
risks of entering geographic and business markets in which we have limited or no prior experience;
|
|
|
·
|
loss of key employees of acquired organizations; and
|
|
|
·
|
negative impact on our cash reserve.
|
We have experienced in the past, and may experience in the future, quarterly and annual fluctuations in our results of operations which may cause volatility in the market price of our ordinary shares.
We have experienced, and may continue to experience, significant fluctuations in our quarterly and annual results of operations, in particular, in light of the continuing unfavorable global economic conditions. Any fluctuations may cause our results of operations to decrease below the expectations of securities analysts and investors. This would likely affect the market price of our ordinary shares.
Our quarterly and annual results of operations may vary significantly in the future for a variety of reasons, many of which are outside of our control, including the following:
|
|
·
|
the uneven pace of spectrum licensing to carriers and service providers;
|
|
|
·
|
purchasing patterns of our customers, the size and timing of orders and the timing of large scale deployments;
|
|
|
·
|
the fulfillment of all revenue recognition criteria;
|
|
|
·
|
customer deferral of orders in anticipation of new products, product features or price reductions;
|
|
|
·
|
the timing of our product introductions or enhancements or those of our competitors or of providers of complementary products;
|
|
|
·
|
seasonality, including the relatively low level of general business activity in the first and third quarters of each year;
|
|
|
·
|
disruption or changes in the quality of our sources of supply;
|
|
|
·
|
changes in the mix of products sold by us;
|
|
|
·
|
mergers or acquisitions, by us, our competitors and exiting and potential customers, if any;
|
|
|
·
|
one-time charges such as asset impairment and restructuring charges;
|
|
|
·
|
fluctuations in the exchange rate of the New Israeli Shekel (the “NIS”) against the United States dollar;
|
|
|
·
|
general economic conditions, including the unfavorable global economic conditions; and
|
|
|
·
|
network approval process dependencies.
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Our customers ordinarily require the delivery of products promptly after their orders are accepted. Historically, our business does not have a significant backlog of accepted orders. Consequently, revenues in any quarter depend primarily on orders received and accepted in that quarter. The deferral of the placing and acceptance of any large order from one quarter to another could materially and adversely affect our results of operations for the former quarter. In addition, our revenue recognition is complex and dependent on various parameters. If revenues from our business in any quarter remain in the same level or decline in comparison to any previous quarter, our results of operations could be harmed.
In addition, our operating expenses may increase significantly. If revenues in any quarter do not increase correspondingly or at a higher rate, or if we do not reduce our expenses in a timely manner in response to lower level or declining revenues, our results of operations for that quarter would be materially adversely affected. Because of the variations that we have experienced in our quarterly results of operations, we do not believe quarter-to-quarter comparisons of our results of operations are necessarily meaningful and you should not rely on results of operations in any particular quarter as an indication of future performance.
Our products have long and unpredictable sales cycles which could adversely impact our revenues and results of operations.
The sales cycle for most of our products encompasses significant technical evaluation and testing by each potential purchaser and a commitment of significant cash and other resources. The sales cycle can extend for more than one year and sometimes even two years from initial contact with a carrier to receipt of a purchase order. This time frame may be extended due to, among other reasons, a carrier’s desire to ensure that the systems work for a long period with increased number of subscribers’ coverage and capacity, a carrier’s need to obtain financing or other means of collateral to purchase systems incorporating our products, the regulatory authorization of competition in local services, delays in the licensing of spectrum for these services and other regulatory hurdles.
As a result of the length of these sales cycles, revenues from our products may fluctuate from quarter to quarter and fail to correspond with associated expenses, which are largely based on anticipated revenues. In addition, the delays inherent in the sales cycles of our products raise additional risks of customers canceling or changing their product plans. Our revenues will be adversely affected if a significant customer, or a significant potential customer, reduces, delays or cancels orders during the sales cycle or chooses not to deploy networks incorporating our products. Any such fluctuation in revenue or cancellation of orders may have an adverse effect on our business and may affect the market price of our ordinary shares. In addition, the global economic financial recession may continue to have an adverse effect on the length of our sales cycle.
Our business is dependent upon the success of our distributors, OEMs, system integrators and other partners, who are under no obligation to purchase our products.
A portion of our revenues is derived from sales to our independent partners, such as distributors, OEMs and system integrators. Our distributors resell our products to others, who further resell our products to end users. Changes in the distribution and sales channels of our products, a loss of a major distributor or a major distributor’s loss of a major end-user, or our inability to establish effective distribution and sales channels for new products may impact our ability to sell our products and result in a loss of revenues. Additionally, sales through OEM and system integrator channels expose our business to a number of risks, each of which could result in a reduction in the sales of our products. For example, some OEMs and system integrators may terminate their relationships with us, consolidate or face financial problems, as well as promote competing products or emphasize alternative technologies, which may turn them into our competitors rather than our partners, all of which may result in a decline in the purchase of our products.
We are dependent upon the acceptance of our products by the market through our partners' efforts in marketing and sales. In some cases, arrangements with our partners do not prevent them from selling competitive products and some of the arrangements do not contain minimum sales or marketing performance requirements. In addition, our efforts to increase sales may suffer from the lack of brand visibility resulting from the integration of these products into more comprehensive systems by OEMs and system integrators. Changes in the financial condition, business or marketing strategies of our partners could have a material adverse effect on our results of operations. Any of these changes could occur suddenly and rapidly.
If our revenues decrease and our days-sales-outstanding (“DSO”) increase, we may suffer from a cash shortfall.
Our DSOs increased in 2009, and we expect that over time our DSOs may continue to increase. We expect our DSOs to increase up to 120 days during 2010. This is mainly due to our customers requesting more favorable payment terms from us as part of increased competition, as well as the limited availability of credit in the capital markets, which, as a result, may also effect our ability to collect our customers' debts in a timely manner or at all. In addition, we may experience an additional increase in DSOs, and if our revenues decline in the future, that may result in a cash shortfall.
We may experience a continuing decrease in our gross margin levels in the future, which may adversely affect our financial results.
We believe that several market developments have caused, and may continue to cause, a decline in our gross margin. Such developments include the following: (i) increased competition in the regions in which we currently operate; (ii) changes in the mix of our products, such as an increase in the volume of sales of lower-margin Customer Premise Equipment (“CPEs”); (iii) the entry of new, large operators into our markets; (iv) changes in the market demand of some of our existing and potential products; (v) our engaging in “turn-key” projects, which involve lower margins on third party equipment and services; and (vi) our entry into new geographical markets with lower margins, such as India. We expect this decline in gross margin to continue over time. If our revenues do not increase and our operating expenses remain the same or increase, the decline in gross margin will have a negative impact on our results of operations.
Our products are complex and may have errors or defects that are detected only after deployment in complex networks.
Some of our products are highly complex and are designed to be deployed in complex networks. Although our products are tested during manufacturing and prior to deployment, our customers may discover errors after the products have been fully deployed. If we are unable to fix errors or other problems that may be identified in full deployment, including problems related to the site survey, radio planning and other problems that are not necessarily related to product functionality but to the associated services, or if we are unable to correct the errors in a timely manner, we could experience:
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costs associated with remediation;
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loss of or delay in revenues;
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failure to achieve market acceptance and loss of market share;
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diversion of deployment resources;
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diversion of research and development resources to fix errors in the field;
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increased service and warranty costs;
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legal actions or demands for compensation by our customers; and
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increased insurance costs.
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In addition, our products are often integrated with other network components. There may be incompatibilities between these components and our products that could significantly harm service providers or their subscribers. Product problems in the field could require us to incur costs or divert resources and may subject us to liability for damages caused by the problems or delay research and development projects because of the diversion of resources. These problems could also harm our reputation and competitive position in the industry.
We could be subject to warranty claims and product recalls, which could be very expensive and harm our financial condition.
Products like ours sometimes contain undetected errors. These errors can cause delays in product introductions or require design modifications. In addition, we are dependent on unaffiliated suppliers for key components incorporated into our products. Defects in systems in which our products are deployed, whether resulting from faults in our products or products supplied by others, from faulty installation or from any other cause, may result in customer dissatisfaction. We are continually marketing several new products. The risk of errors in these new products, as in any new product, may be greater than the risk of errors in established products. The warranties for our products permit customers to return for repair or replacement, within a period ranging from 14 to 21 months of purchase, any defective products. Any failure of a system in which our products are deployed (whether or not our products are the cause), any product recall and any associated negative publicity could result in the loss of, or delay in, market acceptance of our products and could harm our business, financial condition and results of operations. Although we attempt to limit our liability for product defects to product replacements, we may not be successful, and customers may sue us or claim liability for defective products and for related claims arising therefrom. A successful product liability claim could result in substantial cost or divert management’s attention and resources, which could have a negative impact on our financial condition and results of operations.
Our dependence on limited sources for key components of our products may lead to disruptions in the delivery and increased cost of our products, harming our business and results of operations.
We currently obtain key components for our products from a limited number of suppliers, and in some instances from a single supplier. In addition, some of the components that we purchase from single suppliers are custom-made. We cannot be sure that we will not experience increased costs or disruptions in the delivery of our product components. In addition, there is a global demand for some electrical components that are used in our systems and that are supplied by relatively few suppliers. Our dependence on these limited sources for key components for our products presents the following potential risks:
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delays in delivery or shortages of components, especially for custom-made components or components with long delivery lead times, could interrupt and delay manufacturing and result in cancellations of orders for our products;
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suppliers could increase component prices significantly and with immediate effect on the manufacturing costs of our products;
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due to the global financial recession, some of our suppliers may cease to exist or face financial difficulties which could affect the supply chain;
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we may not be able to develop alternative sources for product components;
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suppliers could discontinue the manufacture or supply of components used in our products which may require us to modify our products and which may cause delays in product shipments, increased manufacturing costs and increased product prices;
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we may be required to hold more inventory for longer periods of time than we otherwise might in order to avoid problems from shortages or discontinuance; and
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due to the political situation in the Middle East, we may not be able to import necessary components.
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In the past, we experienced delays and shortages in the supply of components on more than one occasion. We may experience such delays in the future, harming our business and results of operations.
We must be able to manage expenses and inventory risks associated with meeting the demands of our customers.
To ensure that we are able to meet customer demand for our products, we place orders with our subcontractors and suppliers based on our estimates of future sales. If actual sales differ materially from these estimates, our inventory levels may be too high, and inventory may become obsolete and/or over-stated on our balance sheet. This result would require us to write off inventory, which could adversely affect our results of operations. In 2007, 2008 and 2009, we recorded inventory reserves for inventory no longer required and provision for inventory purchase commitments in the amounts of $4.8 million, $3.5 million and $4.0 million, respectively.
In addition, we are required to place manufacturing orders well in advance of the time we expect to sell products, and this may result in us ordering a larger or smaller number of these products than required. In the event that we order the manufacture of a greater or lesser amount of these products than necessary, we may be required to purchase the surplus products or to forego or delay the sale or delivery of the products that we did not order in advance. In either case, our business and results of operations may be adversely affected.
The limited manufacturing capacity of a number of subcontractors we depend on may prevent us from filling orders in the timeframe and with the quality specifications our customers demand, which may harm our business and results of operations.
We currently depend on a number of contract manufacturers with limited manufacturing capacity to manufacture our products. The assembly of certain of our finished products, and the manufacture of custom printed circuit boards utilized in electronic subassemblies and related services are also performed by these independent subcontractors. In addition, we rely on third-party “turn-key” manufacturers to manufacture certain sub-systems for our products. Reliance on third-party manufacturers exposes us to significant risks, including risks resulting from:
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potential lack of manufacturing capacity;
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limited control over delivery schedules;
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quality assurance and control;
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manufacturing yields and production costs;
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voluntary or involuntary termination of their relationship with us;
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difficulty in, and timeliness of, substituting any of our contract manufacturers, which could take as long as six months or more;
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the economic and political conditions in their environments; and
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their financial strength.
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If the operations of our contract manufacturers are halted, even temporarily, or if our contract manufacturers are unable to operate at full capacity for an extended period of time, we may experience business interruption, increased costs, loss of goodwill and loss of customers.
Any of these risks could result in manufacturing delays or increases in manufacturing costs and expenses. If we experience manufacturing delays, we could lose orders for our products and, as a result, lose customers. There may be an adverse effect on our profitability and, consequently, on our results of operations, if we incur increased costs.
Regulation by governments or other public authorities may increase our costs of doing business, limit our potential markets or require changes to our products that may be difficult and costly.
Our business is premised on the availability of certain radio frequencies for two-way broadband communications. Radio frequencies are subject to extensive regulation under international treaties and local laws, which differ by country. Some of our products operate in license-free bands in the radio spectrum, while others operate in licensed bands. The regulatory environment in which we operate is subject to significant change, the results and timing of which are uncertain.
In some cases, the continued validity of licenses may be conditional on the licensee complying with various conditions. Since WiMAX technologies evolve and enable new applications, such as mobile services, in some countries the regulators may not permit an operator to use the spectrum previously allocated according to its full technology potential and its latest technological evolution. The regulators in some countries may avoid granting WiMAX spectrum to protect owners of other spectrums previously allocated or they may wait until new technologies such as LTE become available before starting the frequency allocation process. In addition to regulation of available frequencies, our products must conform to a variety of national and international regulations that require compliance with administrative and technical requirements as a condition to the operation or marketing of devices that emit radio frequency energy.
The regulatory environment in which we sell our products subjects us to several risks, including the following:
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Our customers may not be able to obtain sufficient frequencies for their planned uses of our wireless broadband products;
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Failure by the regulatory authorities to allocate suitable and sufficient radio frequencies in a timely manner could deter potential customers from ordering our wireless broadband products. Also, frequency licenses and other regulations may include terms that affect the desirability of using our products;
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The process of establishing new regulations for wireless broadband frequencies and allocating these frequencies to operators is complex and lengthy, and delays in this process may postpone the commercial deployment of our products;
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If our products operate in the license-free bands, Federal Communications Commission (“FCC”) rules and similar rules in other countries require operators of radio frequency devices, such as our products, to cease operation of a device if its operation causes interference with authorized users of the spectrum and to accept interference caused by other users;
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If the use of our products interferes with authorized users, or if users of our products experience interference from other users, market acceptance of our products could be adversely affected;
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Regulatory changes, including changes in the allocation of frequency spectrum, may significantly impact our operations by rendering our current products obsolete or non-compliant, restricting the applications and markets served by our products, or requiring us to modify our products;
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Regulatory changes and restrictions imposed due to environmental concerns, such as restrictions imposed on the location of outdoor antennas;
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Spectrum technology neutrality or specific technology allocation may be changed by regulatory authorities towards other competing technologies or to fit specific competitive solutions. Spectrum allocation may specify a particular technology, such as 3G, LTE or WiMAX rather than enabling the spectrum owner to determine the technology; and
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Export control laws and regulations which are applicable to all of our products and technology may become more stringent in the future.
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We may also be subject to certain European directives like the directive on Waste Electrical and Electronic Equipment and the directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment.
Our proprietary technology is difficult to protect, and its unauthorized use by third parties may impair our ability to compete effectively.
Our success and ability to compete depends and will continue to depend, to a large extent, on maintaining our proprietary rights and the rights that we currently license or will license in the future from third parties. We rely primarily on a combination of patents, trademarks, trade secrets and copyright law and on confidentiality, non-disclosure and assignment-of-inventions agreements to protect our proprietary technology. We have obtained several patents and have several patent applications pending that are associated with our products. We also have several trademark registrations associated with our name and some of our products.
These measures may not be sufficiently adequate to protect our technology from third-party infringement. Our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Third-party patent applications filed earlier may block our patent applications or receive broader claim coverage. In addition, any patents issued to us, if issued at all, may not provide us with significant commercial protection. Third parties may also invalidate, circumvent, challenge or design around our patents or trade secrets, and our proprietary technology may otherwise become known, or similar technology may be independently developed by competitors. Additionally, our products may be sold in foreign countries that provide less protection to intellectual property than that provided under U.S. or Israeli laws. Failure to successfully protect our intellectual property from infringement may damage our ability to compete effectively and harm our results of operations.
We could become subject to litigation regarding intellectual property rights, which could seriously harm our business.
From time to time we receive letters alleging that we have infringed upon a patent, trademark or other proprietary right. As the Broadband Wireless Access market transitions toward standardization, we are more exposed to intellectual property litigation by third parties who claim to hold intellectual property rights related to such standards. In addition, based on the size and sophistication of our competitors and the history of rapid technological change in our industry, it is possible that several competitors may have intellectual property rights that could relate to our products. Therefore, we may need to litigate to defend against claims of infringement or to determine the validity or scope of the proprietary rights of others. Similarly, we may need to litigate to enforce or uphold the validity of our patent, trademarks and other intellectual property rights. Other actions may involve ownership disputes over our intellectual property or the misappropriation of our trade secrets or proprietary technology. As a result of these actions, we may have to seek licenses to third-parties' intellectual property rights, which may not be able to be successfully integrated into our products. These licenses may not be available to us on reasonable terms or at all. In addition, litigation could be expensive and time consuming and could result in court orders preventing us from selling our then-current products or from operating our business. Any infringement claim, even if not meritorious, could result in the expenditure of significant financial and managerial resources and harm our business, financial condition and results of operations. We have no assurance that any such allegation will not have a material adverse effect on our business, financial condition or results of operations.
If we are unable to maintain licenses to use certain technologies, we may not be able to develop and sell our products.
We license certain technologies from others for use in connection with some of our technologies. The loss of these licenses could impair our ability to develop and market our products. If we are unable to obtain or maintain the licenses that we need, we may be unable to develop and market our products or processes, or we may need to obtain substitute technologies of lower quality or performance characteristics or at greater cost. We cannot assure you that we can maintain these licenses or obtain additional licenses, if we need them in the future, on commercially reasonable terms or at all. Also, some of our products utilize open source technologies. These technologies are licensed to us on varying license structures. These licenses and others like them pose a potential risk to products should they be inappropriately used.
We depend on key personnel.
Our future success depends, in part, on the continued service of key personnel. If certain of our key technical, sales or senior management personnel terminate their employment and we are unable to retain qualified replacements, our business and results of operations could be harmed.
We may be classified as a passive foreign investment company.
As a result of the combination of our substantial holdings of cash, cash equivalents and securities and the decline in the market price of our ordinary shares from its historical highs, there is a risk that we could be classified as a passive foreign investment company (“PFIC”) for United States federal income tax purposes. Based upon our market capitalization during the taxable years 2005 through 2009, and each taxable year prior to 2001, we do not believe that we were a PFIC for any such year and, based upon our valuation of our assets as of the end of each quarter of 2002 and 2003 and an independent valuation of our assets as of the end of each quarter of 2001, we do not believe that we were a PFIC for 2001, 2002 or 2003 despite the relatively low market price of our ordinary shares during some of those years. We cannot assure you, however, that the United States Internal Revenue Service or the courts would agree with our conclusion if they were to consider our situation. There is no assurance that we will not become a PFIC in 2010 or in subsequent taxable years. If we were classified as a PFIC, U.S. taxpayers that own our ordinary shares would be subject to additional taxes upon certain distributions by us or upon gains recognized after a sale or disposition of our ordinary shares unless they appropriately elect to treat us as a “qualified electing fund” or to make a “mark to market election” under the U.S. Internal Revenue Code. Our classification as a PFIC could also adversely affect the market price of our ordinary shares. For more information, see “Item 10—Additional Information—Taxation—United States Federal Income Tax Considerations with Respect to the Acquisition, Ownership and Disposition of our Ordinary Shares—Passive Foreign Investment Company Status”.
The price of our ordinary shares is subject to volatility.
The price of our ordinary shares has experienced significant volatility in the past and may continue to do so in the future. Since our initial public offering in March 2000, the price of our ordinary shares on the NASDAQ Global Market has ranged from a high of $53.12 to a low of $1.55. On December 31, 2009 and March 4, 2010, the closing price of our ordinary shares on the NASDAQ Global Market was $3.74 and $3.83, respectively. We may continue to experience significant volatility in the future, based on the following factors, among others:
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general economic conditions;
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actual or anticipated fluctuations in our sales and results of operations;
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variations between our actual or anticipated results of operations and the published expectations of analysts;
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general conditions in the wireless broadband products industry and general conditions in the telecommunications equipment industry;
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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures and capital commitments;
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introduction of technologies or product enhancements or new industry substitute standards that reduce the need for our products;
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the effect of general political conditions on our operations and results; and
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departures of key personnel.
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We may be named as a defendant in securities class action lawsuits, or in other time consuming and expensive litigation that requires extensive management attention and resources, and can be expensive, lengthy and disruptive.
We are currently a defendant in a securities class action litigation, as described in "Item 8—Financial Information—Legal Proceedings". We may be named in the future as a defendant in other securities class action lawsuits or in other time consuming and expensive litigation. Legal proceedings can be expensive, lengthy and disruptive to normal business operations, and can require extensive management attention and resources, regardless of their merit. Moreover, we cannot predict the results of legal proceedings, and an unfavorable outcome of a lawsuit or proceeding could materially and adversely affect our business, results of operations and financial condition.
Operating in international markets exposes us to risks, which could cause our sales to decline and our operations to suffer and could expose us to various legal, business, political and economic risks.
While we are headquartered in Israel, approximately 99% of our sales in recent years were generated elsewhere around the world. Our products are marketed internationally and we are, therefore, subject to certain risks associated with international sales, including the following:
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trade restrictions, tariffs, and technology import and export license requirements, which may restrict our ability to export our products or may make our products less price-competitive;
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effects of economic conditions and credit availability;
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adverse tax consequences;
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greater difficulty in safeguarding intellectual property;
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difficulties in managing our overseas subsidiaries and staffing multiple offices and multiple research and development centers, and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
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difficulties in enforcing contracts and implementing our accounts receivable function, which introduces revenue recognition, translation, proximity and cultural challenges;
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political and economic instability, particularly in emerging markets;
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reduced protection for intellectual property rights in some countries where we may seek to expand our sales in the future;
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laws and business practices favoring local companies;
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differing labor standards;
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costs of localizing our products for foreign countries and the lack of acceptance of localized products in foreign countries; and
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fluctuations in currency exchange rates and the implications on our financial statements.
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We may encounter significant difficulties with the sale of our products in international markets as a result of one or more of these factors. As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
There may be health and safety risks related to wireless products.
In recent years, there has been publicity regarding the potentially negative direct and indirect health and safety effects of electromagnetic emissions from cellular telephones and other wireless equipment sources, including allegations that these emissions may cause cancer. Our wireless communications products emit electromagnetic radiation. Health and safety issues related to our products may arise that could lead to litigation or other actions against us, or to additional regulation of our products. We may be required to modify our technology and may not be able to do so. We may also be required to pay damages that may reduce our profitability and adversely affect our financial condition. Even if these concerns prove to be baseless, the resulting negative publicity could affect our ability to market our products and, in turn, could harm our business and results of operations.
If our stock price declines sufficiently, we may need to write down our goodwill, which may have a material adverse affect on our operating results.
We account for goodwill and other intangible assets under ASC 350 “Intangibles – Goodwill and Others” (formerly SFAS No. 142). Under this standard, goodwill is tested for impairment annually or more frequently if certain events or changes in circumstances indicate that the carrying amount of goodwill exceeds its implied fair value. We operate our business in a single reporting unit under ASC 350, so we use an enterprise approach to determine our total fair value. In the current capital markets downturn, our stock price, and consequently our market capitalization, may decline in the future. If the value of our market capitalization falls below the value of our shareholders’ equity, it might indicate that a write-down of our goodwill is required. Our ability to reconcile the gap between our market capitalization and our enterprise value depends on various factors, such as an estimated control premium that an investor would be willing to pay for a controlling interest in us. If our market capitalization stays below the value of our shareholders’ equity, we may be required to record impairment charges for our goodwill.
Risks Related to Our Location in Israel
Conducting business in Israel entails special risks.
We are incorporated under Israeli law and our principal offices and the majority of our manufacturing and research and development facilities are located in the State of Israel. Political, economic and military conditions in Israel directly affect our operations. We could be harmed by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners or a significant downturn in the economic or financial condition of Israel. In the event of war, we and our Israeli subcontractors and suppliers may cease operations which may cause delays in the development, manufacturing or shipment of our products. Since October 2000, terrorist violence in Israel has increased significantly. In recent years, there has been an escalation in violence among Israel, Hamas, the Palestinian Authority and other groups, as well as extensive hostilities in December 2008 and January 2009 along Israel's border with the Gaza Strip, which resulted in missiles being fired from the Gaza Strip into southern Israel. There were also extensive hostilities along Israel's northern border with Lebanon in the summer of 2006. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations and cause our revenues to decrease.
Furthermore, several countries, principally some of those in the Middle East, still restrict business with Israel and Israeli companies. These restrictive laws and policies may seriously limit our ability to offer our services to customers in these countries.
Our results of operations may be negatively affected by the obligation of our personnel to perform military service.
Many of our officers and employees in Israel are obligated to perform annual military reserve duty until they reach age 45 and, in the event of a military conflict could be called to active duty. Our operations could be disrupted by the absence of a significant number of our employees due to military service or the absence for extended periods of one or more of our key employees due to military service. A disruption could materially and adversely affect our business, operating results and financial condition.
We currently benefit from government programs and tax benefits that may be discontinued or reduced.
We have received grants from the Government of Israel through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor (“OCS”) for the financing of a portion of our research and development expenditures in Israel, pursuant to the provisions of The Encouragement of Industrial Research and Development Law, 1984, referred to as the “Research and Development Law.” Pursuant to our current arrangement with the OCS, the OCS finances up to 20% of our research and development expenses by reimbursing us for up to 66% of the approved expenses related to our generic research and development projects. In addition, we obtain other grants from the OCS to partially fund certain other research and development projects. These programs currently restrict our ability to manufacture particular products or transfer particular technology outside of Israel. The Research and Development Law and related regulations permit the OCS to approve the transfer of manufacturing rights outside Israel subject to an approval of the research committee and in exchange for payment of higher royalties, for royalty-bearing programs. Under these programs we need to comply with certain conditions. If we fail to comply with these conditions, the benefits received could be canceled and we could be required to refund any payments previously received under these programs or pay additional amounts with respect to the grants received under these programs. If the Government of Israel discontinues or modifies these programs and potential tax benefits, our business, financial condition and results of operations could be materially and adversely affected.
In addition, we have been granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, 1959 (the “Investment Law”) for our production facilities in Israel. Such status enables us to obtain certain tax relief for a definitive period upon compliance with the Investment Law regulations. On April 1, 2005, an amendment to the Investment Law came into effect which significantly changed the provisions of the Investment Law. The amendment revised the criteria for investments qualified to receive tax benefits. An eligible investment program under the amendment will qualify for benefits as a “Privileged Enterprise” (rather than the previous terminology of Approved Enterprise). Among other things, the amendment provides tax benefits to both local and foreign investors and simplifies the approval process. However, the amendment provides that terms and benefits included in any certificate of approval granted prior to December 31, 2004 will remain subject to the provisions of the law as they were on the date of such approval. We believe that we are currently in compliance with these requirements. However, if we fail to comply with these conditions in the future, the tax benefits received could be canceled and we could be required to pay increased taxes in the future.
We are adversely affected by the devaluation of the U.S. dollar against the New Israeli Shekel and could be adversely affected by the rate of inflation in Israel.
Substantially all of our revenues are generated in U.S. dollars. A significant portion of our expenses, primarily salaries, building leases and related personnel expenses is currently incurred in NIS, and we anticipate that a significant portion of our expenses will continue to be denominated in NIS.
As a result, inflation in Israel and/or the devaluation of the U.S. dollar in relation to the NIS has and may continue to have the effect of increasing the cost in U.S. dollars of these expenses; hence, our dollar-measured results of operations are and may continue to be adversely affected. In order to manage the risks imposed by foreign currency exchange rate fluctuations, from time to time we enter into currency forward contracts and put and call options to hedge some of our foreign currency exposure. We can provide no assurance that our hedging arrangements will be effective. In addition, if we wish to maintain the dollar-denominated value of our products in non-U.S. markets, devaluation in the local currencies of our customers relative to the U.S. dollar may cause our customers to cancel or decrease orders or default on payment.
Provisions of Israeli law and our Articles of Association may delay, prevent or make difficult a merger or an acquisition of us, which could prevent a change of control and therefore depress the market price of our ordinary shares.
Our Articles of Association contain certain provisions that may delay or prevent a change of control, including a classified board of directors. In addition, the Israeli Companies Law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving directors, officers or significant shareholders, and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change of control, may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential acquisition transactions unappealing to us or to some of our shareholders.
It may be difficult to effect service of process and enforce U.S. judgments against our directors and officers in Israel or to assert U.S. securities laws claims in Israel.
We are incorporated in Israel. Our executive officers and a majority of our directors are not residents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to obtain a judgment in the United Stated or collect or get an Israeli court to enforce a judgment obtained in the United States against us or any of those persons. Furthermore, it may be difficult to assert U.S. securities laws claims in original actions instituted in Israel.
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.
As a foreign private issuer whose shares are listed on the NASDAQ Global Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules.
We do not comply with the NASDAQ requirement that we obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans. Instead, we follow Israeli law and practice in accordance with which the establishment or amendment of certain equity based compensation plans is approved by our board of directors.
As a foreign private issuer listed on the NASDAQ Global Market, we may also follow home country practice with regard to, among other things, executive officer compensation, director nomination, composition of the board of directors and quorum at shareholders’ meetings. In addition, we may follow our home country law, instead of the NASDAQ Stock Market Rules, which require that we obtain shareholder approval for an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company. Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.
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INFORMATION ON THE COMPANY
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HISTORY AND DEVELOPMENT OF THE COMPANY
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We were incorporated in September 1992 under the laws of the State of Israel. Since our inception, we have devoted substantially all of our resources to the design, development, manufacturing and marketing of wireless products.
On August 1, 2001, Floware merged with and into us. As a result of the merger, we emerged as the surviving company and Floware’s separate existence ceased. Upon the closing of the merger, we changed our name from BreezeCOM Ltd. to Alvarion Ltd. On April 1, 2003, we completed an acquisition of most of the assets and the assumption of related liabilities of InnoWave . In December 2004, we completed the amalgamation of interWAVE , and the interWAVE operations became our CMU. In November 2006, we completed the sale of our CMU to LGC Wireless, Inc. (“LGC”), a privately-held supplier of wireless networking solutions in exchange for promissory and convertible notes of LGC. In September 2007, LGC converted our convertible notes into LGC shares and thus we became a shareholder of LGC. In November 2007, ADC Telecommunication Inc. (“ADC”) acquired LGC and we sold our LGC shares to ADC for approximately $7.3 million. See “Item 5—Operating and Financial Review and Prospects—Operating Results.”
Our principal executive offices are located at 21A HaBarzel Street, Tel Aviv 69710, Israel, and our telephone number is 972-3-645-6262. In 1995, we established a wholly-owned subsidiary in the United States, Alvarion, Inc., a Delaware corporation. Alvarion, Inc. is located at 2495 Leghorn Street, Mountain View, CA, 94043, and its telephone number is 650-314-2500. Alvarion, Inc. serves as our agent for service of process.
We also have several wholly owned subsidiaries worldwide that handle local support, promotion, sales and developing activities. For a discussion of our capital expenditures and divestitures, see “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”
General
We concentrate our resources on the broad industry of wireless broadband. As a wireless broadband pioneer, we have been driving and delivering innovation for more than 10 years, from developing core technology to creating and promoting industry standards. Leveraging our key roles in the Institute of Electrical and Electronic Engineers (“IEEE”) and HiperMAN standards committees and having experience in extensive development and deployment of OFDM technology -based systems, we have been at the forefront of the WiMAX Forum™ in its focus on increasing the widespread adoption of standards-based products in the wireless broadband market and in leading the industry to adopt mobile WiMAX networks. The WiMAX standard is the outcome of the standardization work done by the WiMAX Forum™, widely based on the IEEE 802.16 standard working group.
Our primary business is to provide solutions based on the 802.16e-2005 WiMAX standard and other broadband wireless technologies for two main categories of customers, operating a wide variety of applications:
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Solutions for Carriers include WiMAX networks for fixed, nomadic and mobile subscribers, providing them with home, office and personal broadband connectivity for Internet access, Social Networking, Gaming, VoIP, Video and other broadband applications. Our solutions enable operators in both developed and emerging markets, to offer broadband services to subscribers anytime, anywhere where the WiMAX network is deployed, through the use of a variety of devices, such as laptops, PDAs and smart handsets which have undergone interoperability testing with our WiMAX system. In the Carriers category, we continue to offer our pre-WiMAX products in addition to our WiMAX standard products, which are growing in sales.
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Solutions for our Enterprise category include broadband wireless applications for a variety of vertical markets, providing owners and operators of public networks, private networks, utility companies and municipalities, with broadband connectivity and applications that fulfill each organization's own communication needs. Examples of such applications include government and municipal offices connectivity, security and surveillance services, campus-to-campus broadband connectivity, oil & gas and mining company applications, emerging Smart Power Grids and Public Mobile Radio ("PMR") applications. In this market, we sell both WiMAX and non-WiMAX solutions, primarily in the license-exempt frequency bands.
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With over 250 commercial WiMAX deployments worldwide, we believe that we are a worldwide leader in providing and deploying integrated WiMAX networks and wireless broadband access solutions. We supply top-tier carriers, ISPs, new communications service providers known as broadband service providers and private network operators with solutions based on the WiMAX standard, as well as other wireless broadband solutions.
Our growth strategy is focused on providing complete end-to-end integrated WiMAX networks and broadband wireless solutions, maintaining our current leadership position and growing along with the market demand for converged applications. We have accomplished significant milestones in terms of product development, including agreements with third parties to integrate their products into our complete solution, enhancement of know-how and execution of turn-key projects in order to offer a complete end-to-end WiMAX network to telecommunication operators.
INDUSTRY DYNAMICS
WiMAX Technology, Applications and Industry Advantages
Mobile WiMAX is a technology based on the IEEE 802.16e air interface standard and the ETSI HiperMAN wireless metropolitan area network (“MAN”) standard. WiMAX is the worldwide standard for wireless broadband access and personal mobile broadband applications. Solutions based on WiMAX technology enable fixed-line, cable, and mobile operators and challengers to compete with each other in the anticipated market for higher Average Revenue Per User (“ARPU”) services. WiMAX technology has the capacity to deliver sufficient bandwidth to enable value-added broadband applications, including live video broadcasting, high-speed data, toll-quality voice and multimedia content. Most importantly, the WiMAX (IEEE 802.16) standards were developed based on the concept of an "all-IP Network". A complete set of IP-based functions and interfaces allows for high quality service delivery, while keeping end-to-end Quality of Service (“QoS”) and minimizes investment and operating costs for operators with its distributed architecture and efficient, packet-based air interface.
WiMAX offers two technological advantages to the operators relative to the existing commercial technologies: (i) a superior radio access technology; and (ii) an open IP-based access network infrastructure.
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Superior radio access technology: WiMAX benefits from advanced Non-Line-of-Sight (“NLOS”) radio and antenna technologies, such as MIMO, Beam Forming, and Spatial Division Multiple Access (“SDMA”). These new technologies can be used in fixed, portable and mobile WiMAX networks and facilitate high spectral efficiency and obstacle penetration (e.g., walls) resulting in best network coverage, capacity, low latency and improved user experience. As a result, WiMAX offers lower infrastructure costs and reduced cost per subscriber for the operator, compared to any other wireless technology.
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Utilizing its built-in strong QoS mechanisms, WiMAX technology has the capacity to deliver maximum service quality under the subscriber’s Service Level Agreement ("SLA") to enable rich value-added applications, including high-speed data and Internet, live video multicasting, toll-quality voice and multimedia content in both download and streaming formats. These capabilities enable toll-quality delivery of differentiating services, coupled with enhanced subscriber Quality of Experience (“QoE”).
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Open IP-based access network infrastructure: The WiMAX (IEEE 802.16) standard was developed based on the concept of an open “all-IP Network,” which allows WiMAX to leverage the vast IP-based telecom and enterprise industries. WiMAX, as an IP-based connectivity standard, is able to easily and smoothly interface with any IP-based equipment, device or network. This approach, following the success of the World-Wide-Web Internet adoption, (a) minimizes investment in introducing new applications, thereby creating new interfaces and interoperability connections, (b) enjoys the low prices and abundance of information and know-how of the IP-based equipment world and (c) may significantly reduce the operator’s capital and operational expenditures when deploying such service networks. Therefore, the advantage of WiMAX over other mobile networks is in offering a complete OPEN IP architecture. The formation of an industry based on OPEN IP architecture can leverage on best-of-breed IP network equipment and IP-based consumer electronics devices, thus creating an open Internet model of wireline data over the new wireless WiMAX network.
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The WiMAX standards are defined by the WiMAX Forum™. The WiMAX Forum™ is a non-profit organization focused on increasing the widespread adoption of standards-based products in the wireless broadband market and leading the industry to mobile WiMAX solutions. The WiMAX Forum™ members work to promote the interoperability of multiple vendors’ products in the wireless broadband market. Since its establishment, the WiMAX Forum™ members, working together with the IEEE, have established the first standards on which wireless broadband systems operate, namely the IEEE 802.16d-2004 standard and IEEE 802.16e-2005 standard. These standards fully support fixed and nomadic broadband wireless applications.
The WiMAX Forum™ defines the following types of access to a wireless network:
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fixed access, at a single stationary location for the duration of the network subscription;
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nomadic access, at multiple stationary locations, allowing the user to change locations between sessions;
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portability, at multiple locations at walking speed, within a limited network coverage area, with hard handoffs between cells;
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simple mobility, at multiple locations at low vehicular speed, within a network coverage area, with hard handoffs between cells, enabling non-real time applications; and
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mobility, at multiple locations at high vehicular speed, within network coverage area, with guaranteed handoffs between cells, enabling service continuity for all applications.
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The Evolution of Wireless Broadband
The wireless broadband market has grown over the last decade due to the acceptance of wireless equipment as a high performance, cost-efficient alternative to wireline infrastructure for broadband connectivity.
In developed countries, government financial support encourages operators to complete broadband coverage in rural and suburban areas with low-density populations, where the business model for wired infrastructure is less cost-effective. In developing countries, government financial support is provided to encourage operators to offer basic telephony services and Internet access based on wireless broadband infrastructure in order to meet the demand, mainly in urban and suburban areas.
The worldwide success of broadband connectivity and services creates demand for additional broadband networks mainly in regions where broadband was not widely available. The accelerated proliferation of broadband services and networks around the world as well as commoditization of broadband devices and services has generated more demand for broadband in developing regions, often referred to as the world’s emerging markets. In these regions, wireline infrastructure is often non-existent, resulting in an accelerated widespread adoption of wireless broadband networks.
Government Deregulation Creates Demand
Global telecom deregulation is opening up the telecommunications industry to competition from new players. Wireless technologies require the use of frequencies contained within a given spectrum to transfer voice, multimedia and other data services. Usually, governments allocate a specific range of that spectrum, either licensed or license-exempt (“unlicensed”) bands, to carriers, operators, ISPs and other service providers, enabling them to launch a variety of broadband initiatives based exclusively on wireless networking solutions. During 2009, additional licensed and unlicensed spectrums were allocated in many regions around the world and we expect this trend to continue in the future. Increased availability of licensed and unlicensed spectrums enables operators to address increasing demand for wireless broadband.
Additional Factors in the Widespread Adoption of Wireless Broadband
Over the last few years, wireless broadband networks have increasingly grown in popularity, due in part to the inability of wired infrastructure to meet demand, but also because of the following factors:
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competition among various types of telecommunications players to offer multiple services using a single network;
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growing trend of public access providers to build infrastructures owned by municipalities;
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rapid progression of standardization by international authorities, such as the WiMAX Forum™, combined with the wide adoption of these standards by equipment vendors and carriers;
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attractiveness of the business model offered to operators that use high performance standardized and interoperable products;
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convergence of fixed and mobile services; and
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increasing availability of WiMAX ecosystem products, leading to reduction in the capital expenditures (CAPEX) and operating expenses (OPEX) of network deployment and the promotion of WiMAX operators’ competitiveness.
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Impact on Industry Dynamics in the aftermath of the Global Financial Crisis
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In the emerging markets, we expect innovative operators in the traditional broadband segment to continue facing difficulties raising funds to create Greenfield networks. In addition, the OPEX investment of incumbent broadband operators and incumbent cellular operators may decrease, while targeting broadband connectivity.
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In the developed markets, we expect to see lower budgets and lower investments by telecommunication operators, in regions such as rural areas or wide zones, where our technology is used to bridge the digital device.
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As a result of the economic crisis, we may see an increase in projects capitalized by governmental funds, as is the case in the United States, targeted to new broadband infrastructure in rural areas and underserved regions.
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Personal broadband innovation may be delayed, due to the overall credit crunch and the unwillingness of operators to take any risk with new infrastructure for innovative services.
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Mobile WiMAX for Personal Broadband Services and Applications
Personal broadband promotes convergence of the fixed and mobile spheres, offering subscribers a combination of high-speed broadband and mobile services that are available anywhere, anytime, using any device. Personal broadband offers always-on, high-speed and all- IP-based connectivity, providing direct access to the mobile Internet and creating a dynamic market for various services and applications.
Personal broadband capabilities are already embedded in a wide range of computing, telephony and consumer electronics devices that aim to optimize personal lifestyle and professional productivity. These new personal broadband capabilities would enhance traditional service provider business models and create opportunities for new entrants to penetrate the market with alternative business models.
However, for personal broadband services to be adopted widely by consumers and businesses, vendors must offer interoperable diverse and innovative applications with the right devices to utilize the applications.
We believe that WiMAX is currently the technology that is the most advanced and is well-suited to cost-effectively meet the requirements of personal broadband. WiMAX solutions, in addition to being standards-based, benefit from the open architecture of an all-IP network. The WiMAX industry, in contrast to other telecom standards and technologies, leverages the consumer electronics market capabilities, such as IP innovation, creativity, low cost and advanced services. We are aiming to be at the center of these dynamics through our position as a member of the WiMAX Forum™ and through our go-to-market strategy and business relationships with various partners. To that end, we are continually engaged in solution and product certification as well as interoperability testing to ensure our ability to offer full, end-to-end, converged WiMAX network solutions.
COMPANY STRENGTHS
For more than 15 years, our primary business activity has been focused on fulfilling the growing demand for IP wireless broadband in the telecom industry by providing solutions and services to build wireless broadband networks. In addition, we have deployed through our customers fixed wireless broadband solutions for applications, such as toll quality telephony service, mobile base station feeding, hotspot coverage extension, municipal and community interconnection, utility company metering and monitoring applications, as well as public safety communications. The Company’s key strengths include:
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Market Leadership and Brand Recognition: We believe that we are a worldwide leading WiMAX vendor with a single business focus in broadband wireless access equipment and networks, and we enjoy a strong brand identity.
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Customer Base: We have a broad customer base, with over 250 WiMAX commercial deployments. We believe that our products and solutions are the most extensive and relevant in the market.
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Technology: We have over 15 years of experience in end-to-end broadband wireless IP and we believe we have been a leader in the broadband wireless access market for more than a decade. In addition, we have continued our leadership in the relevant standardization organizations (IEEE 802.16, WiMAX Forum™).
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Execution Capabilities:
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We have the ability to deliver and deploy a complete end-to-end solution in terms of product, technology, and full end-to-end network deployments and to build long-term customer satisfaction.
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We believe that we have the ability to compete with any other player in this industry, while keeping our flexibility and technology differentiators according to customer demands and needs.
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Strategic Relationships: We are actively partnering with industry and market leaders to create go-to-market strategic relationships and best-of-breed end-to-end wireless broadband networks
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Experience in Wireless Broadband
Our experience in wireless broadband enabled us to identify the potential of WiMAX in early 2002, ahead of most equipment vendors. As a result of early strategic decisions, by 2007 we led the market in the number of deployed WiMAX–based networks. We have been at the forefront of developments with WiMAX technology since its inception, at a company and industry level. Examples of our active involvement include major roles in the standardization process through our work in the WiMAX Forum™ as a charter board member and by chairing key working groups. In addition, our employees are active in other related technology organizations, such as Wireless Communications Association, IEEE 802.16, ETSI BRAN-HiperMAN and ITU standards.
Evolving WiMAX Platform
We believe that we hold a distinct advantage in the market for personal broadband services, since our WiMAX platform was designed from the ground up according to the IEEE 802.16 standard and WiMAX Forum specifications to provide operators with broadband solutions ranging from fixed, to nomadic and mobile as well as a path of growth required for convergence of these services and evolution into the next generation of WiMAX services.
GROWTH STRATEGY
Our growth strategy is focused on providing complete end-to-end integrated WiMAX networks and broadband wireless solutions, maintaining our current leadership position and growing along with the market demand for converged applications. We have accomplished significant milestones in terms of product development, agreements with third parties to integrate their products into our complete solution, enhancement of know-how and execution of turn-key projects in order to offer a complete end-to-end WiMAX network to telecommunication operators.
Opportunities for Providing Solutions Based on an Open Architecture
The inherent, open architecture characteristics of WiMAX offer many opportunities for the Company as a major global WiMAX end-to-end network provider. Alvarion continually strives to be at the forefront of exploring and maximizing the benefits of WiMAX in order to create a new operator-centric model based on best-of-breed solutions from a variety of OPEN WiMAX ecosystem partners.
The WiMAX Transformation to Open Architecture
The dynamics of WiMAX creates an all-IP open architecture, removing barriers to entry and facilitating rapid innovation. Designed from the start as an open standardized interoperable technology, OPEN WiMAX is a network strategy that enables a complete ecosystem, including radio access network equipment, core network equipment, consumer electronics, service offerings and applications. This strategy enables communication service providers to choose the combination of vendors and partners that best fit their specific requirements.
OPEN WiMAX is designed to enable multiple telecom vendors to build a best-of-breed telecom access network in an open standard architecture. It creates a telecom operator-centric offering, concept or culture as opposed to a vendor-centric approach, historically used in large telecom projects.
OPEN WiMAX is highly scalable and suitable for large, medium or small deployments, assisting operators to optimize their WiMAX network deployment costs and to fit the expenditures to the desired services-centric network – both in terms of capital expenditures and operating expenses during the operation of the network. This “mix and match” multi-vendor approach helps promote competition, which drives prices down and enhances the product offering. Innovative products, services and applications for WiMAX, such as mobile TV and mobile gaming for personal use and Virtual Private Network and File Transfer for business use, enable vendors to distinguish themselves from the competition.
Open networks in general, and OPEN WiMAX in particular, promote the long-term success of service providers in the highly competitive markets of broadband services, by offering the following:
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Superior performance combination (i.e., “best-of-breed”) of network equipment to meet service providers’ requirements;
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Wide variety of subscriber service and openness to enable future services and applications;
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Increased purchasing power to promote service providers' business models; and
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Improved risk management, including sustainability against possible changes in vendors’ strategy, products and services, as a service provider is not limited to a single or only a few vendors.
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WiMAX is based on open IP networks; therefore, the OPEN WiMAX strategy is a direct implementation of one of the strong WiMAX innovation fundamentals. We believe that adopting our OPEN WiMAX strategy differentiates us from our competitors and provides us with a competitive advantage over large telecom vendors, as we offer a best-of-breed one stop-shop, rather than a single offering from a single vendor.
PRODUCTS
BreezeMAX Platforms - WiMAX Solutions for converged applications
Our WiMAX-based BreezeMAX Frequency Division Duplex ("FDD") and Time Division Duplex ("TDD") (“BreezeMAX”) platforms are designed from the ground-up according to the IEEE 802.16 standard. BreezeMAX platforms feature advanced OFDM and OFDMA technologies to support non-line-of-sight ("NLOS") operation, adaptive modulation up to QAM64 and the highest spectral efficiency available. Currently commercially available and operating in the 2.3, 2.3WCS, 2.5, 3.3, 3.5, 3.6 and 5.2 GHz licensed frequency bands, BreezeMAX meets the immediate customer demand for cost-effective, next generation broadband wireless systems with a platform designed around the implementation of the IEEE 802.16 and HiperMAN standards by the WiMAX Forum™. The BreezeMAX carrier-class design supports broadband speeds and QoS to enable carriers to offer quadruple play (meaning broadband data, voice, mobility and multi-media) services to thousands of subscribers in a single-base station.
BreezeMAX has quickly become a popular solution for operators offering fixed high-bandwidth, VoIP and data services to evolve their networks to industry-standard solutions with improved outdoor and indoor customer premises equipment ("CPE") economics. This platform includes an enhanced offering of primary voice services and allows an operator to leverage legacy voice infrastructure. The system’s features and cost-effective, versatile subscriber units make BreezeMAX a preferred broadband wireless solution for service providers that are interested in improving their business model.
In the course of 2007, the BreezeMAX indoor Si CPE opened the door for personal broadband and primary broadband WiMAX standard-based solutions and enabled nomadic services via quick deployments based on a plug-and-play installation. In addition, the BreezeMAX indoor Si CPE enabled centrally provisioned, portable connectivity for subscribers to use the CPE in various points within the network coverage and reconnect to the service after moving from one location to another. The BreezeMAX’s FDD platform was designed according to the IEEE 802.16-2004 standard, and was partially certified by the WiMAX Forum™ during 2006 for fixed and nomadic networks, for both Base Stations and CPEs. In early 2007, we introduced our TDD pre-certified IEEE 802.16-2005 platform that was designed for fixed and nomadic networks. Our BreezeMAX platform, which is part of our 4Motion solution, provides support for fixed, nomadic and mobile WiMAX, and has been designed according to the IEEE 802.16e-2005 standard for portable and mobile networks.
BreezeMAX Macro Outdoor is a Carrier-class, all outdoor, broadband wireless access platform. Based on the BreezeMAX Macro Indoor base station, BreezeMAX Macro Outdoor is a modular, scalable and reliable all outdoor base station which features flexible installation capabilities. The Outdoor Access Unit ("ODU") is a high power remote radio unit that connects to an external antenna, and provides high system gain and interference robustness by utilizing high transmit power and low noise figure. Supporting up to 20 MHz bandwidth, the ODU is scalable for future options such as increased capacity through carrier multiplexing or wider frequency bandwidths. The BreezeMAX Macro Outdoor base station offers a range of ODUs featuring diverse configurations and streamlining 2nd and 4th order diversity.
BreezeMAX Extreme 5000 is the first wireless broadband solution to bring WiMAX 16e technology to the 5 GHz license-exempt market. A highly integrated, all outdoor base station, BreezeMAX Extreme 5000 is designed for ease-of deployment and reduced total cost of ownership. Built with the customer in mind this solution offers easy configuration and a self sustained ecosystem, ideally suited for Wireless Internet Service Providers (WISPs), municipalities, utilities, enterprises and public safety networks.
BreezeMAX Extreme 3650 is an all outdoor zero footprint WiMAX 16e wireless broadband solution for rural America.
IEEE 802.16e-2005 compliant technology enables portable and mobile networks to be IP-based, with a focus on open standards, end users and consumer devices. Portable access is defined according to the WiMAX Forum™ to apply to handsets, PDA, laptop Personal Computer Memory Card International Association ("PCMCIA") or mini cards at multiple locations, at least at walking speed, and enables a hard handoff of devices, in which the subscriber terminal is disconnected from one base station before connecting to the next base station. Mobile access ranges in scope from low to high vehicular speeds but adds PDAs and smart-phone devices, multiple locations and enables a soft handoff, in which the subscriber maintains a simultaneous connection with two or more base stations for a seamless handoff to the base station with the highest quality connection. Both consumer and business users have driven the demand for this technology that has resulted from the convergence of fixed broadband networks and mobile voice networks towards mobile broadband communications.
4Motion™ Solution
Our mobile WiMAX solution, 4Motion™, was introduced to the market during the second half of 2006 and was commercially deployed in the market in mid 2008. 4Motion™ is an end-to-end mobile WiMAX solution designed to comply with the IEEE 802.16e-2005 standard. The solution portfolio was developed in conjunction with leading providers of core network and IP technology, devices and integration services and its evolution is under continuous development. 4Motion™ offers an open, end-to-end, carrier-class, scalable and cost-effective mobile broadband data solution that delivers personal broadband services of several Mbps per subscriber or more. Offering the benefits of the OPEN WiMAX approach to network strategy, our 4Motion™ solution provides operators with the flexibility to choose best-of-breed multi-vendor partners to add third-party IP services, while controlling costs.
The 4Motion™ solution includes Radio Access Network ("RAN"), which is based on our BreezeMAX WiMAX base-station platform and includes both Alvarion’s and third parties’ core network, radio and IP networking elements, end-user devices and subscriber applications.
Our Wireless Broadband Access Solutions (Non-WiMAX)
Although our primary focus is to provide solutions based on the WiMAX standard, we also continue to sell our non-WiMAX products to a variety of markets. We provide a broad range of integrated wireless broadband solutions, addressing different markets and frequency bands, designed for the various business models of carriers, service providers and private network owners such as municipalities, businesses, utilities and more. Our products address point-to-point and point-to-multipoint architectures for a wide scope of end-user profiles, including residential, small office/home office (“SOHO”), small/medium enterprises (“SME”), multi-tenant/multi-dwelling units (MTU/MDU) and large enterprises (corporate). Our products operate in licensed and license-free bands, ranging from 900 MHz to 28 GHz and comply with various industry standards. Our core technologies include spread spectrum radio, linear radio, digital signal processing, modems, media access control, IP-based mobile switches, networking protocols and very large systems integration (“VLSI”).
Most of our non-WiMAX wireless broadband solutions are based on OFDM technology with NLOS capabilities, creating more possibilities to cover a wireless access network.
Many applications can be deployed over wireless broadband systems. Data, voice and video applications can be utilized by telecom operators, service providers and regional carriers based on the needs of their regions of operation.
In addition to data and voice, applications such as video surveillance are deployed over our networks in municipalities and other markets such as mining, oil & gas, campus deployments and more.
Wireless broadband solutions are implemented in a modular infrastructure, enabling swift, cost-effective roll-out as needed. Sectorized base stations are deployed to provide radio coverage to the targeted area, and frequency channels are reused in non-adjacent base station sectors, making the most efficient use of the available spectrum. Base stations are connected to the operator’s central office, or point-of-presence, using wired or wireless point-to-point solutions. End users are provided with CPE, typically consisting of an outdoor unit with a radio and an antenna connected to an indoor unit or indoor self-installed unit, which present voice and data interfaces to the customer network.
BreezeACCESS Products (BreezeACCESS 4900, 900,VL,OFDM, Wi2)
BreezeACCESS enables fixed high-speed data and voice, point-to-multipoint wireless broadband applications. BreezeACCESS products operate in several frequency bands to meet the needs of our customers worldwide. The BreezeACCESS product family consists of base stations, including access units, controllers and subscriber units. The latter operates optimally when connected to computers or computer networks utilizing the Internet Protocol. The subscriber units include subscriber units for data applications and subscriber units for data and telephony applications. BreezeACCESS is modular in design, allowing for a low initial investment, and is scalable to enable future growth.
BreezeACCESS OFDM products support an extended coverage range in the 4.9, 5 GHz frequencies and the license-exempt 900 MHz frequency bands and feature embedded security mechanisms with hardware-based encryption to ensure consistently secure wireless links that do not degrade performance
BreezeACCESS 4900 is a critical communications tool for the United States public safety sector. Deployable in point-to-point and point-to-multipoint configurations, the solution provides secure and reliable wireless connectivity in any terrain, environment and climate. The 50 MHz licensed spectrum in the 4.940 GHz-4.990 GHz, reserved for public safety and homeland security use, assists local municipal groups to provide license-protected, secure access for public safety, medical, emergency, government security and surveillance applications with superior capacity, range and scalability.
Operating in the license-exempt 902-928 MHz band, BreezeACCESS 900 is a cost-effective Broadband Wireless Access solution that enables service providers to deliver high-speed, wireless data and voice services for fixed and mobile applications. BreezeACCESS 900 enables the reliable delivery of services in NLOS, foliage-dense environments.
BreezeACCESS VL is an OFDM based carrier-class, point-to-multipoint solution for wireless broadband outdoor connectivity and the delivery of high-quality data, voice and video services in urban and rural environments. BreezeACCESS VL lets WISPs, municipalities, governments, enterprises and utilities providers deliver an array of broadband wireless applications in urban and rural deployments. It provides enhanced QoS capabilities to enable the allocation of the necessary bandwidth and priority in line with application and user needs. BreezeACCESS VL supports an extended coverage range in the 4.9, 5 GHz frequencies and the license-exempt 900 MHz frequency bands, and features embedded security mechanisms with hardware-based encryption to ensure consistently secure wireless links that do not degrade performance. BreezeACCESS VL is a field-proven, flexible platform that enables diverse product configurations and power feeding options to match varying deployment needs. The solution adheres to Alvarion's "pay-as-you-grow" business model to ensure maximum scalability and supports a wide range of subscriber units to offer an affordable, optimized solution for top performance.
BreezeACCESS Wi2 combines the advantages of Wi-Fi access with the capabilities of BreezeACCESS VL systems to provide cost-effective solutions for personal broadband services today. BreezeACCESS Wi2 solutions can be deployed almost anywhere to provide personal broadband to standard IEEE 802.11 b/g end user devices such as laptops, PDAs, smart-phones and portable gaming devices. BreezeACCESS Wi2 solutions are ideal for operators, municipalities and communities looking to build metropolitan broadband networks or to integrate Wi-Fi hot zone capabilities into their existing broadband wireless access networks. These solutions provide personal broadband services ranging from public Internet access to public safety and Intranet applications.
OFDM technology, on which BreezeACCESS and BreezeACCESS VL are based, enables higher data rates of up to 12 Mbps and up to 54 Mbps, respectively, by utilizing the available radio spectrum in an efficient manner. In addition, OFDM technology enables NLOS operation with robust resistance to interference. OFDM-based products enable carriers to use the technology in applications where a high data rate is required, including serving medium to large enterprises and high-speed backbone applications.
BreezeNET B Products
Our BreezeNET B products are designed to provide highly reliable, backhaul, building-to-building bridging solutions, support mobile connectivity and provide individuals or small groups of users with wireless access to a LAN.
BreezeNET B products function as a wireless bridge system that provides high-capacity and high-speed point-to-point connectivity.
The BreezeNET B system operates in the unlicensed 2.4, 4.9-5.8 GHz bands and has flexible rate options: B10, B14, B28, B100, B300 delivering up to 250 Mbps with symmetric or fully symmetric, fixed or dynamically adjusted allocation reaching up to 60 km.
BreezeNET B operates in NLOS environments, such as buildings, foliage or ridgelines. The system also features adaptive modulation for automatic selection of modulation schemes to maximize data rate and improve spectral efficiency. BreezeNET B supports security sensitive applications through optional use of authentication and data encryption. The system supports Virtual Local Networks (“VLANs”), which enable secure operation, and VPN services, which allow workers in remote locations or remote offices to conveniently access their enterprise network.
eMGW Products
The enhanced MultiGain (eMGW) solutions are cost-effective, rapidly deployable, point-to-multipoint fixed wireless access systems that provide data and voice services for both residential and small business users, mainly in suburban and rural environments. Utilizing radio links instead of copper lines to bridge the last mile, the eMGW products enable rapid deployment of quality services to residential or SOHO customers. The products ensure the optimal utilization of the available spectrum and minimum interference, regardless of topography.
eMGW provides fast Internet access, corporate access and carrier-class telephony in a single system. It also enables LAN-to-LAN connectivity over IP-VPN tunnels for businesses, fax (G3) and dial-up modem (v.92/56Kbps) services for residential subscribers and leased line services. eMGW operates in a broad range of licensed and unlicensed (ISM) bands, from 1.5 to 5.7 GHz. eMGW provides coverage of up to 25 kilometers in very challenging environments and operates in NLOS installation scenarios. The eMGW is the optimal price / performance fixed wireless access system for operators who need to provide coverage to subscribers in green fields, to upgrade existing networks with advanced data services and to provide wireless DSL services in low and medium subscriber density areas.
eMGW, which has a scalable and modular architecture, is comprised of an indoor base station controller, an outdoor base station radio, an indoor subscriber interface and an outdoor subscriber terminal. It also includes a network planning tool and a network management system featuring fault, configuration, performance and security management.
eMGW is based on our frequency hopping Code Division Multiple Access ("CDMA") technology and utilizes our innovative “hybrid switching” transmission technology, combining circuit switching for toll quality voice and packet switching for fast data services, optimizing the utilization of spectrum resources. This “hybrid switching” concept provides a solution for the economic and technological challenges facing network operators today.
WALKair Products
The WALKair system is a wireless broadband system that enables carriers to provide high-speed Internet access, other data services and voice services primarily to SMEs. WALKair’s high spectral efficiency, dynamic bandwidth allocation, effective frequency reuse plan and high coverage capacity enable carriers to connect last-mile business subscribers to their network in an efficient and cost-effective manner.
Our WALKair products consist of WALKair 1000 that operates in the 3.5, 10.5 and 26 GHz licensed bands, and WALKair 3000 that operates in the 3.5, 10.5, 26 and 28 GHz bands.
WALKair products are based on time division multiplexing technology. WALKair systems support a complement of value-added classes of services including VPN, VLAN and QoS, based on per-user allocation of committed data rate and maximum data rate.
WALKair 3000 accommodates carriers’ requirements for broader bandwidth, primarily driven by the growing use of data-intensive Internet applications. It also enables carriers to efficiently connect multiple subscribers in multi-tenant buildings by a single terminal station. WALKair 3000 supports significantly broader bandwidth for each customer and increased capacity for each cell, increasing the peak speed of transmission of each terminal station to up to 36 Mbps. WALKair 3000 integrates smoothly with WALKair 1000, which enables carriers to deploy both systems on the same base station, serving a variety of subscribers with different needs for communication services, within the same cell.
Network Management Solutions
We provide advanced management applications for our wireless solutions. Our network management applications are equipped with graphical user interfaces and provide a set of tools for configuring, monitoring and effectively managing our wireless broadband networks. The Star Management Suite, our flagship carrier-class Network Management System, is fully compliant with Telecommunications Management Network (TMN) standards and simplifies network deployment and maintenance for networks of every scale. The Star Management Suite is designed specifically for WiMAX deployments and helps service providers to cost-effectively manage WiMAX deployments, roll out new services and maintain high service levels. The Star Management Suite is made up of specific management tools that cover the entire WiMAX service life-cycle - from initial installation to full service provision, and all monitoring, reporting and troubleshooting tasks required for efficient network operation. The Star Management Suite can be deployed gradually, module by module, in accordance with network needs. The Star Management Suite is made up of four modules:
AlvariStar is a carrier-class, field-proven Network Management System ("NMS") for managing Alvarion’s WiMAX base stations in mobile and fixed deployments.
StarACS automatic configuration server is a scalable solution for unified management of various WiMAX CPEs including; residential gateways ("RGW"s) and devices with WiFi, Data and VoIP capabilities as well as any fixed or nomadic TR-069-supported devices.
StarQuality is a network performance and traffic monitoring system that helps operators optimize WiMAX network usage, maximize traffic capacity, maintain high level, quality services and comply with maintenance service license agreements.
StarReport provides a quick and efficient way to generate network inventory reports for a full, accurate and easy to understand status of the entire network.
Accessories Offered by Alvarion
In order to support our products and provide comprehensive solutions to our customers, we provide a family of accessories designed to extend the range of our BreezeMAX, 4Motion, BreezeACCESS, WALKair and BreezeNET solutions. These accessories include antennas, cables, surge arrestors, amplifiers and other components.
Our Geographic Markets
Our network installations can typically be found in developing regions in developed countries and in emerging markets. In addition we are in the process of penetrating metropolitan centers of developed countries.
Within developed countries there are rural or suburban regions with low-density populations, often extending over vast distances, that have limited telecommunications infrastructures. WiMAX and wireless broadband have made inroads in these areas due to the business opportunities, robust equipment, extensive coverage and non line-of-sight capabilities. In addition, government assistance in “closing the digital divide” in these countries has served as an incentive for alternative operators to consider WiMAX systems for providing broadband services. Examples of these locations have been identified in North America, Western and Eastern Europe, Asia Pacific and South America.
We believe that wireless broadband service providers in emerging markets have found that deploying wireless broadband and new WiMAX solutions where there is a lack of telecommunication coverage due to poor infrastructure is an affordable means to provide broadband and telephony services. Emerging markets are countries where basic voice services combined with broadband data remain scarce. Examples of these locations are in Africa, Commonwealth of Independent States, former USSR ("CIS"), Eastern Europe, Latin America, Central America and Asia Pacific.
In 2009, the industry continued to show additional WiMAX penetration and a growing interest, primarily in emerging markets and developing regions within developed countries. In addition, the WiMAX industry began to provide cost-effective infrastructure that can compete with broadband DSL and cable operators in the developed countries.
We hope to continue to benefit from the expected evolution of WiMAX, building from nomadic and portable, to fully mobile services, that enables us to penetrate the high-end, metropolitan consumer and business user groups.
Geographic Breakdown of Our Revenue
| |
|
2007
|
|
|
2008
|
|
|
2009
|
|
| |
|
In thousands
|
|
|
North America
|
|
$ |
32,767 |
|
|
|
13.8 |
% |
|
$ |
42,683 |
|
|
|
15.2 |
% |
|
$ |
23,242 |
|
|
|
9.5 |
% |
|
Latin America
|
|
|
50,982 |
|
|
|
21.5 |
% |
|
|
53,183 |
|
|
|
18.9 |
% |
|
|
45,369 |
|
|
|
18.5 |
% |
|
Europe, Middle East and Africa
|
|
|
132,883 |
|
|
|
56.2 |
% |
|
|
156,201 |
|
|
|
55.5 |
% |
|
|
148,738 |
|
|
|
60.7 |
% |
|
Asia Pacific
|
|
|
19,941 |
|
|
|
8.5 |
% |
|
|
29,214 |
|
|
|
10.4 |
% |
|
|
27,890 |
|
|
|
11.3 |
% |
| |
|
$ |
236,573 |
|
|
|
100.0 |
% |
|
$ |
281,281 |
|
|
|
100.0 |
% |
|
$ |
245,239 |
|
|
|
100.0 |
% |
General – Industry Market Segments and Players
The operators in the wireless broadband market fall within the following categories, as determined by the industry:
Communications Service Providers: Tier One and Tier Two Operators
Tier One and Tier Two operators form the largest and most established group of telecom operators, with nationwide or global presence, serving tens of million of users. These operators are a primary focus for our WiMAX equipment since they have a strong, strategic interest in deploying WiMAX in their networks. Tier One and Tier Two carriers are looking for the technology that will enable them to maintain their position at the front line of communications business within their home countries, as well as quickly expand their business by providing telecommunications services in neighboring countries. Examples of Tier One and Tier Two carriers that have publicly indicated their strategy include: Telkom South Africa Ltd., Cable & Wireless International, Telenor, Sviaz Invest, Nippon Telegraph and Telephone West Corporation (NTT West), France Telecom, Eircom, Bharti and Telefonos de Mexico S.A. de C.V.
In addition, cellular operators are able to leverage their infrastructure, radio base-station sites and customer base, together with their marketing, services and billing platforms, and customer support investments, to offer media centric, personal broadband services and competitive broadband Internet access services to their existing customers or new customers. Examples of operators in this group include Orange, Vodacom, Digicel, Megafone, Meditel, MTN, Safaricom and Entel (Chile).
Broadband Service Providers
Broadband service providers build their business model primarily on converged WiMAX solutions, while providing in many cases improved services compared to legacy telecommunication operators. Broadband service providers are expected to constitute a greater portion of the WiMAX market in the future. Examples of service providers in to this category include Bolloré Telecom (France), Digital-Bridge Communications (USA), Open Range (USA), Enforta (Russia), Free (France), Iberbanda in Spain (a subsidiary of Telefonica de Espana), and Ertach (Argentina).
CLECs & Regional Carriers
Competitive Local Exchange Carriers (“CLECs”) seek to compete effectively with the Incumbent Local Exchange Carriers (“ILECs”). Wireless broadband is an attractive and cost-effective last-mile alternative to wired access solutions. CLECs are deploying our products to provide voice and broadband services in rural and suburban areas where wire line infrastructure does not exist or does not support the demand. In addition, in the areas of landline infrastructure in developed countries, wireless broadband systems offer carriers the ability to reach otherwise inaccessible customers, while providing increased bandwidth flexibility and service differentiation, surpassing the inherent limitations in wire line infrastructure.
CLECs have constituted an important part of our focus in our fixed wireless access product line and have increasingly exhibited an interest in WiMAX. The reduced installation costs, rapid roll-out potential and modular architecture, coupled with high network capacity and coverage and enhanced service options, present an appealing alternative to service providers and regional carriers seeking to supply their customers with reliable comprehensive data and voice solutions. Examples of these operators include Euskaltel (Spain), Finnet (Finland), TDS (USA), VMAX (Taiwan), Wisper (USA), Elro (Denmark), Linkem (Italy), Czech on line, Altitude (France), KDN (Kenya), Millicom, Open Range (USA) and Peterstar (Russia).
Government, Municipalities, Communities and Private Network Operators
Private and government sectors that operate private networks for business management and operations are in constant need of deploying technologies to support their operational requirements. Examples of such requirements are enterprises that require leased line replacement for cost-effective connectivity to provide VoIP and data services; metropolitan area networks for broadband connectivity; metering and monitoring applications used by utility companies to collect information and supervise operations; and cost-effective access within communities, municipalities and educational institutions. Another area that has leveraged broadband wireless very effectively has been surveillance, public safety and municipal applications. Government authorities and private organizations with government sponsored funds have begun to deploy broadband wireless systems to support remote video surveillance, traffic flow management, back-up for disaster recovery, leased line replacement, various forms of backhaul and other public safety uses. Examples may be found in various U.S. communities such as Lenexa, Kansas and Corpus Christi, Texas, and many others in the Silicon Valley.
2009 Partial Customer List for WiMAX and Other Fixed Wireless Broadband Systems
Telecom carriers and service providers using our products include, among others:
|
|
·
|
ADAM INTERNET, AUSTRALIA
|
|
|
·
|
ALTITUDE TELECOM, FRANCE
|
|
|
·
|
BHARTI TELE-VENTURES LIMITED ( AIRTEL ENTERPRISE SERVICES), INDIA
|
|
|
·
|
DIGITAL BRIDGE COMMUNICATIONS, USA
|
|
|
·
|
ERTACH SA (FORMERLY MILLICOM), ARGENTINA
|
|
|
·
|
JSC COMSTAR – UNITED TELESYSTEMS, RUSSIA
|
|
|
·
|
TELECOM NAMIBIA, NAMIBIA
|
|
|
·
|
TELKOM SOUTH AFRICA LTD., SOUTH AFRICA
|
TECHNOLOGIES UNDERLYING OUR PRODUCTS
We use internally developed core technologies and continue to invest heavily in augmenting our expertise in networking, radio, digital signal processing (“DSP”) modem technologies, Media Access Control ("MAC") technologies and Radio Resource Management ("RRM") technologies. We also participate as active members in international standards committees.
Networking Technology
To support the OPEN WiMAX concept and our 4Motion™ solution as well as the BreezeMAX platform and other products, we have developed or otherwise acquired, and continue to invest in, networking expertise in the areas of IP Access and Mobile IP that is particularly adapted for mobile WiMAX networks, Access Service Networks Gate Ways (“ASN-GW”), Point-to-Point Protocol Over Ethernet (“PPPoE”) tunneling, VPN and VoIP, based on industry standards, such as H.323, SIP and MGCP, and other Internet standards and protocols. To support the SentieM™ technologies embedded in our 4Motion™ solution as well as in the BreezeMAX platform and other products, we have developed or otherwise acquired, and continue to invest in, distributed radio architecture and hierarchical ASN-GW network architecture. We have also developed, and are continuing to develop, know-how to satisfy market requirements with respect to quality of service, classes of services, committed information rate, maximum information rate, virtual LAN management and prioritization. We are developing access technology based on the IEEE 802.16-2004 and the IEEE 802.16e-2005 standards, as well as the WiMAX Forum™ technical specifications for both radio access and networking to further support the needs of customers using WiMAX. We have also developed a network management system that provides network surveillance, monitoring and configuration capabilities for all our products.
Radio Technology
We have in-house radio development capabilities to address the diverse frequency bands and modulation methods of our products. The frequency bands include, among others, 900 MHz, 2.4 GHz, 2.3, 2.5-2.7 GHz, or MMDS, 3.3-3.8 GHz, 4.9-6 GHz, 10.5 GHz and 26 and 28 GHz. The modulation methods include Frequency Hopping Spread Spectrum (FHSS), Gaussian Frequency Shift Keying (GFSK), Direct Sequence Spread Spectrum (DSSS), Single Carrier QAM and OFDM and OFDMA. Our products include both TDD and FDD radios.
Our radio teams specialize in low cost, mass-production oriented radio design. The system level capability is software-assisted radio auto-calibration, which allows for reduced manufacturing costs and compensates for components’ parameter spread and instability, temperature-related changes and aging of components.
Our internal radio expertise enables us to attract customers by addressing promptly new needs, such as new frequency bands.
We have developed or otherwise acquired, and continue to invest in, radio technology expertise, specifically high efficiency, high power radios and new interfaces between the modem and the remote radio heads.
Digital Signal Processing ("DSP") Modem Technology
We maintain strong expertise in DSP and in modem design. Our capabilities include a hardware oriented design, as well as programmable DSP oriented design. Our modem design hinges on the Software Defined Radio paradigm. The extensive configurability of our base station modems, through Field Programmable Gate-Array (FPGA) and DSP reprogramming, allows us to readily introduce advanced features to our products and to follow amendments to emerging standards, including capability to upgrade deployed networks by downloading only software. Similarly, our CPE designs allow for upgradeability through over the air software download, simplifying our customers' operations.
We have developed the BreezeMAX base station platform, which is designed to support the WiMAX (IEEE 802.16 and HIPERMAN) air interface specification. The platform supports the multiple antenna elements per sector to exploit the smart-antenna signal processing techniques for improved coverage and network capacity. The programmable DSP-based architecture of the BreezeMAX platform enables us to support the IEEE 802.16d-2004 standard, as well as the IEEE 802.16e-2005 standard for mobile broadband communications, while enjoying the benefits of OFDMA and smart-antenna processing. The base station architecture and capabilities are closely aligned and synchronized with the CPE application-specific integrated circuit (“ASIC”) and reference design developed by Intel resulting from our collaboration, which began in 2003, to ensure optimum performance in future WiMAX deployments. We are working closely with additional mobile WiMAX user terminal system on a chip (SoC) silicon providers to ensure proper interoperation of our base station equipment with their devices.
To support the SentieM™ technologies embedded in our 4MotionTM solution, as well as the BreezeMAX platform and other products, we have developed or otherwise acquired, and continue to invest in MIMO, Beam Forming and SDMA technologies.
We have also developed mixed signal ASICs containing DSP cores. Inclusion on-chip of analog-digital converters is instrumental to both cost reduction and power consumption reduction. First generation ASIC supports our IEEE 802.11-based FH-GFSK products, with the above-standard capability of delivering 3 Mbps, with automatic fall back to 2 Mbps and 1 Mbps as necessary. Our second generation ASIC is optimized for OFDM modulation, as used by the IEEE 802.11a/g standards and the recently approved IEEE 802.16a standard. This ASIC is based on proprietary programmable “very long instruction word” DSP architecture. The programmable architecture allows us to implement numerous beyond-standard capabilities, such as OFDMA extensions to the baseline OFDM mode. This system-on-a-chip ASIC has been used as a key component of our BreezeACCESS-OFDM products. An additional ASIC developed in-house supports our WALKair products, with a full duplex point-to-multipoint single carrier trellis-coded 64QAM modem. An ASIC was developed for the eMGW product to reduce the product costs.
We designed the FWA eMGW system to provide data services to wireless subscribers on top of voice services. The subscriber unit is based on our ASIC implementing functions of the PHY and MAC layers of the air interface. The eMGW base station design includes Voice echo canceling and fax/modem detection algorithm to support high spectrum efficiency while ensuring toll quality voice.
MAC and RRM Technologies
We have developed or otherwise acquired, and continue to invest in, MAC and RRM technology expertise that support channel aware rate adaptation and power control technology (part of the SentieM™ suite) technologies as well as advanced packet data scheduling and OFDMA frame building technologies embedded in the BreezeMAX platform and 4Motion™ solution. Additional features developed or otherwise acquired are MAC and RRM support for MIMO transmissions in the downlink, collaborative MIMO reception in the uplink and beam-forming in the downlink.
Interoperability Testing (“IOT") Lab and Activities
To support our OPEN WiMAX strategy and appeal to top industry vendors we continue to develop and maintain our IOT lab. Our IOT lab tests a variety of products for interoperability on an ongoing basis, with the goal of ensuring that customer specific configurations, including CPEs and frequencies, are fully supported. The IOT lab is tasked with testing both various forms of CPEs, including dongles, PCCards, USBs, notebooks, laptops and standalones, and a range of core products, including ASN-GW's, AAA's and Home Agents. The products tested in our IOT lab are from a variety of vendors, and are tested in an Alvarion network environment using Alvarion Base-Stations and may also use an Alvarion ASN-GW, depending on the customer configuration. In addition, the IOT lab also performs scheduled maintenance for product versions which have already undergone IOT and can engage in provisioning activities which enable end-to-end integration of a full solution per customer requirements.
Participation in International Standards Committees
As part of our strategy to become a technology leader and influence the industry in specific areas, we have, since our inception, been active members in standardization committees.
We are a principal founder of the WiMAX Forum™, a non-profit organization whose members work to promote adoption of the IEEE 802.16 OFDM/OFDMA standard and to certify interoperability of compliant equipment. Our representative on the board of directors of the WiMAX Forum™ is Dr. Mohammad Shakouri, Corporate Vice President of Marketing at Alvarion, who holds the position of Vice President of the WiMAX Forum™.
The scope of the IEEE 802.16-based standard is the Wireless MAN, supporting larger range fixed/nomadic/mobile broadband access networks with more performance and dedicated high-end services. Our engineers actively participate in the technical group for defining inter-operability profiles and tests. Our representative, Dr. Vladimir Yanover, holds the position of chair of WiMAX Forum™’s Technical Working Group (TWG), which is responsible for defining the interoperability profiles and the interoperability and conformance tests for the IEEE802.16e-2005 standard.
We actively participate in the IEEE 802.16’s Broadband Wireless Access work group. Similarly, we are part of the WiMAX Forum™’s groups that define and improve the OFDM/OFDMA mode for both fixed and mobile broadband applications and that improve the ability of the IEEE 802.16 standard to increase its market footprint in license-exempt applications.
Mariana Goldhamer, Director for Strategic Technologies at Alvarion, is Chair of IEEE 802.16h, which targets Improved Coexistence in License-Exempt deployment. She is also ETSI BRAN (Broadband Radio Access Networks) Vice-Chair and HiperMAN Chair. ETSI HiperMAN has adopted the IEEE 802.16 OFDM mode and has recently embraced the OFDMA mode. Ms. Goldhamer is acting to harmonize the IEEE and ETSI standards to create a worldwide broadband standard for converged fixed-mobile applications.
We have participated in the IEEE 802.11 wireless LAN work group, which is the driving force behind increasing the data rate of the frequency hopping modem. Naftali Chayat, Alvarion’s Chief Scientist, chaired the IEEE 802.11a task group, which is the first OFDM based high-data rate wireless LAN standard.
We are also very active in the international regulatory arena, including ITU-R, which aims to promote WiMAX in the regulatory domain and to secure the spectrum for broadband fixed/mobile deployment.
SALES, MARKETING AND SUPPORT OF OUR PRODUCTS
We mainly market our solutions and products directly to large operators. We also market our products through an extensive network of more than 200 active partners. These include OEMs, global and local system integration and service fulfillment partners in various geographic regions, solution partners, national and local distribution partners, and resellers. Our distribution partners in turn sell to resellers, including value-added resellers and systems integrators, as well as to end users. We also market our solutions and products directly to large operators.
We currently sell and distribute our products in more than 150 countries worldwide. The use of different types of marketing channels through our partnership network enables us to market our products to many different markets and to meet the differing needs of our customers.
Our products are aimed at the WiMAX market in addition to other wireless broadband and wireless broadband combined with wireless voice markets. We sell in these markets directly or through OEM agreements or other strategic partner arrangements with leading telecommunications suppliers, as well as indirectly through our distribution channels, which market primarily to smaller ISPs and operators. Additionally, to achieve broad and rapid market penetration, we cultivate direct relationships with communication service providers. By doing so, we believe that we are better able to understand the needs of new operators, such as Tier One and global operators, and are better able to identify and anticipate trends in the wireless broadband market.
We have established relationships with major telecommunications equipment manufacturers such as Nokia-Siemens Networks, Nera Networks and global system integrators, such as Hewlett-Packard (HP) and IBM. Pursuant to arrangements entered into with these partners, they are permitted to distribute our products on either a regional or worldwide basis under private labels. We are seeking additional strategic relationships with international partners, strong local partners and other key companies to increase our exposure and establish ourselves as a supplier to service providers, telecom markets and end-user markets that are not reached by our present distribution channels.
We have strong relationships with leading incumbents and leading telecom operators to whom we sell our solutions directly. Our relationships are primarily based on the following common activities: (i) we are building together the industry and leadership position; (ii) we have a common strategy and participate in world-wide standards authorities and consortia; and (iii) we have a positive commercial relationship and share a common vision and joint marketing activities.
A distributor of our products is typically a data communications or a telecommunications marketing organization, or both, with the capability to add value with training and first-tier support to resellers and systems integrators.
We operate in various regions. Our subsidiaries and representative offices, located throughout North America, South America, Europe, Africa and Asia, support our international marketing network.
We derive our revenues from different geographical regions. For a more detailed discussion regarding the geographic allocation of our revenues based on the location of our customers, see “Item 5—Operating and Financial Review and Prospects—Operating Results.”
We conduct a wide range of marketing activities aimed at positioning and generating recognition and awareness of our brands throughout the telecommunications industry, as well as identifying leads for distributors and other resellers. These activities include public relations, participation in trade shows and exhibitions, advertising programs, public speaking at industry forums and website maintenance.
We maintain a highly trained global technical support team that participates in providing customer support to customers who have purchased our products. This includes direct support rendered by us when we perform turn-key projects, local support by distributors’ and system integrators’ personnel trained by our support team, support through help desks and the provision of detailed technical information on our website, expert technical support for resolution of more difficult problems, as well as participation in pre-sales and post-sales activities conducted by our distribution channels with large customer accounts and key end users.
We organize technical seminars covering general technologies, as well as specific products and applications. We also have qualification programs to advance the technical knowledge of our distributors and their ability to sell and support our products. These seminars are held in various countries and in different languages as needed.
MANUFACTURING OPERATIONS AND SUPPLIERS
We currently subcontract most of the manufacturing of our products. We have a pre-qualification process for our contract manufacturers, which includes the examination of the technological skills, production capacity and quality assurance ability of each contract manufacturer. Our manufacturing capacity planning is based on rolling forecasts done on a monthly basis. The forecasts provided to the subcontractors are based on internal company forecasts, and are up to six months. We purchase our raw materials from several suppliers.
Our products are currently manufactured primarily by several contract manufacturers located in Israel, the Philippines and Taiwan. Final assembly and testing are performed by our contract manufacturers and are monitored and controlled by our quality assurance. The testing criteria are validated by automatic fail safe mechanisms in order to ensure that all activities pass the testing criteria successfully . We have processes in place for the ongoing performance of quality assurance at our own facilities and at our subcontractors’ facilities. The automating testing equipment, which we develop and own, and the testing procedures at our subcontractors are part of our Approved Enterprise programs.
We monitor quality with respect to each major stage of the production process, including the selection of components and subassembly suppliers, warehouse procedures, assembly of goods, final testing and packaging and shipping.
We are ISO 9001, ISO 14000 and ISO 18000 certified. Our contractors are ISO 9002 certified.
All our manufacturing locations in Israel and in the Philippines comply with RoHS and WEEE regulations
PROPRIETARY RIGHTS
In order to protect our proprietary rights in our products and technologies, we rely primarily upon a combination of patents, trademarks, trade secrets, and copyrights, as well as confidentiality, non-disclosure and assignment of inventions agreements. We have 87 patents issued by patent offices in several countries, and 109 pending patent applications. The proprietary rights described above are material to our business and profitability. Because our proprietary rights are diversified and independent of each other, we believe that we are not dependent on any one patent.
We have trademark registrations in Israel, the United States, the European Union and many other countries. In addition, we have typically entered into nondisclosure, confidentiality and assignment of inventions agreements with our employees, our consultants and with some of our suppliers and customers who have access to sensitive information. We cannot assure you that the steps taken by us to protect our proprietary rights will be sufficiently adequate to prevent misappropriation of our technology or independent development or the sale by others of products with features based upon, or otherwise similar to, those of our products.
Given the rapid pace of technological development in the communications industry, we also cannot assure you that our products may not be adjudicated as infringing on existing or future proprietary rights of others. Although we believe that our technology has been independently developed and that none of our intellectual properties infringe upon the rights of others, from time to time, we receive letters alleging that we have infringed upon a patent, trademark, license or other proprietary right. We have no assurance that any such allegation will not have a material adverse affect on our business, financial condition or results of operations.
We license certain technologies from others for use in connection with some of our technologies. The loss of these licenses could impair our ability to develop and market our products. If we are unable to obtain or maintain the licenses that we need, we may be unable to develop and market our products or processes, or we may need to obtain substitute technologies of lower quality or performance characteristics or at greater cost.
As part of our efforts to support an ecosystem focused on broader choice, competitive equipment and service costs for WiMAX technology, devices and applications globally, we have recently joined the Open Patent Alliance ("OPA") as a board member. One of the key objectives is to form a WiMAX patent pool to aggregate patent rights, which are needed to implement the WiMAX standard. Currently, we participate in discussions of the license terms of creating WiMAX Patent Pools with other world-wide companies and IPR holders. As a result, we expect that patents pertaining to WiMAX and their associated royalty rates will be more predictable and transparent and have a lower cost. Furthermore, OPA may act as a “one stop shop” where companies building WiMAX solutions can obtain use of the patents more simply and cost effectively using a more competitive royalty structure that charges only for the features required to develop WiMAX products.
THE COMPETITIVE ENVIRONMENT IN WHICH WE OPERATE
The markets for our products are very competitive, and we expect that competition will increase in the future as WiMAX technology is further adopted by major network equipment providers and when the personal broadband WiMAX market matures, both with respect to products that we are currently offering and with respect to products that we are developing. We believe that the principal competitive factors in the markets for our products include:
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price and price/performance ratio;
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service and spectrum regulation and product certifications;
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end-to-end network integration;
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eco system terminal and modem variety;
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ability to support new industry standards;
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product time to market;
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brand strength, go-to market capabilities and sales channels;
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systems integration; and
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Companies that are engaged in the manufacture and sale or the development of products that compete with our wireless broadband products include Airspan Inc., Aperto Networks, Cisco Systems, Huawei Technologies, Motorola, Redline Communications, Samsung, and ZTE. Other vendor members of the WiMAX Forum™ may become our competitors in the future.
Our products use wireless media, which also competes with alternative telecommunications transmission media, including leased lines, copper wire, fiber-optic cable, cable modems, satellite technologies and television modems. Our products compete with other wireless media technologies, including (i) 3rd Generation cellular technologies (“3G”), HSPDA, HSUPA, EVDO and (ii) 4th generation cellular technologies ("4G"), such as UMB and Long Term Evolution ("LTE"). Although LTE and mobile WiMAX are based on the same fundamental technologies, they originate from different eco -systems. WiMAX technology is considered to have a few years time-to-market advantage over TDD LTE which is the technology that will directly compete with WiMAX since it can be adapted to the Spectrum owned by WiMAX operators. However, over the last two years, LTE’s 4G has been adopted rapidly by cellular operators and their traditional eco-systems throughout the world.Specifically TDD LTE has been driven and adopted in China only and we expect increased competition between WiMAX and LTE over the course of the next few years.
Some of our existing and potential competitors have substantially greater resources including financial, technological, manufacturing, marketing and distribution capabilities, and enjoy greater recognition than we do.
Increased competition in our market results in price reductions, new business alliances, shorter product life cycles, reduced gross margins, longer sales cycles and loss of market shares, which could harm the results of our operations. We have designed and engineered our products to minimize costs, maximize margins and improve competitiveness. However, we cannot assure you that we will be able to compete successfully against current or future competitors.
For more information regarding our competitive strengths, please see “Item 4—Information on the Company—Business Overview—Company Strengths”.
GOVERNMENT REGULATION
Our business is premised on the availability of certain radio frequencies for two-way broadband communications. Radio frequencies are subject to extensive regulation under the laws of each country and international treaties. Each country has different regulation and regulatory processes for wireless communications equipment and uses of radio frequencies. In the United States, our products are subject to FCC rules and regulations. In other countries, our products are subject to national or regional radio authority rules and regulations. Current FCC regulations permit license-free operation in FCC-certified bands in the radio spectrum in the United States. Outside of the United States the use of spectrum license, if any, and the purposes of such use, vary from country to country. Some of our products operate in license-exempt bands, while others operate in licensed bands. The regulatory environment in which we operate is subject to significant changes, the results and timing of which are uncertain.
In many countries, the unavailability of radio frequencies for two-way broadband communications has inhibited the growth of these networks. The process of establishing new regulations for wireless broadband frequencies and allocating these frequencies to operators is complex and lengthy. The regulation of frequency licensing began during 1999 in many countries in Europe and South America and continues in many countries in these and other regions. Licensed blocks in 2.3, 2.5, 3.3, 3.5 and 3.6 GHz were released in some countries. However, this frequency licensing regulation process may suffer from delays that may postpone commercial deployment of products that operate in licensed bands in any country that experiences this delay. As an example, India was expected to allocate licenses during 2009 but, due to delays in spectrum allocations, such licenses were delayed into 2010. License allocation is a lengthy process and additional delays may occur. In Europe, the European Civil Code (the “ECC”) assigned the spectrum in 3.4-3.8GHz to broadband applications, in a flexible and technology-neutral mode. However, the implementation of the ECC decisions in individual countries may suffer delays or may be limited to a relatively small range of spectrum. In addition to the above, in some countries, particular frequency bands were allocated for licensing; for example, in 2007, the AWS band was auctioned by the FCC in the United States. Our current customers that commercially deploy our licensed band products have already been granted appropriate frequency licenses for their network operation. In some cases, the continued validity of these licenses may be conditional on the licensee complying with various conditions. In October 2007, the Radio-communication Sector of the International Telecommunication Union (ITU-R) made a decision that effectively includes WiMAX technology in the IMT-2000 set of standards. This inclusion of WiMAX in IMT-2000 may be viewed as placing WiMAX on equal footing with the legacy-based technologies ITU-R already endorses. However, establishing new regulations in individual countries for wireless broadband frequencies and allocating frequencies to operators is complex and lengthy. The European Commission started a process to revise the 2.5-2.69GHz regime to provide more flexibility in the spectrum usage and a more balanced protection of the TDD operation. A change in the European regulation may imply a need for revised type approval norms; such revisions may involve a lengthy process.
There is a trend to release more license-exempt bands. For example, in the United States, FCC rules were modified to include an additional 255MHz of spectrum, though actual use of this allocation is not permitted until a technical issue is resolved between the NTIA (which manages government-used spectrum) and the FCC (which manages commercial and public spectrum). In Europe, the process is slower. We see potential for new markets in rural areas and developing countries, created by the availability of licensed-exempt spectrum in the 5GHz band. The FCC enforced the 3.65-3.7GHz spectrum to be used in a shared mode; the upper 25MHz require a special coexistence protocol. Such a protocol is defined for the WiMAX systems in 802.16 and this process might be lengthy.
An additional trend affecting our business involves allowing TDD operation in frequency bands allocated in the past for FDD operation. Generally, TDD operation allows for lower cost equipment and is currently the preferred mode of operations, according to the adopted WiMAX Forum’s profiles. However, the operation of TDD networks in proximity to FDD networks creates a mutual interference hazard that may postpone customer decisions, impede network deployment or require higher cost solutions to address such issues.
In addition to regulation of available frequencies, our products must conform to a variety of national and international regulations that require compliance with administrative and technical requirements as a condition to marketing devices that emit radio frequency energy. These requirements were established, among other things, to avoid interference among users of radio frequencies and to permit the interconnection of equipment.
We are subject to export control laws and regulations with respect to all of our products and technology. In addition, Israeli law requires us to obtain a government license to engage in research and development, and export, of the encryption technology incorporated in some of our products. We currently have the required licenses to utilize the encryption technology in our products.
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C.
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ORGANIZATIONAL STRUCTURE
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The following is a list of our subsidiaries, each of which is wholly-owned:
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Alvarion, Inc., incorporated under the laws of Delaware, United States;
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Alvarion Mobile, Inc., incorporated under the laws of Delaware, United States, is a wholly owned subsidiary of Alvarion Inc.;
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Alvarion UK LTD., incorporated under the laws of England;
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Alvarion SARL*, incorporated under the laws of France;
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Alvarion SRL, incorporated under the laws of Romania;
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Alvarion Asia Pacific Ltd., incorporated under the laws of Hong Kong;
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Alvarion do Brasil LTDA, incorporated under the laws of Brazil;
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Alvarion Uruguay SA, incorporated under the laws of Uruguay;
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Alvarion Japan KK, incorporated under the laws of Japan;
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Alvarion Israel (2003) Ltd., incorporated under the laws the State of Israel;
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Alvarion Spain, S.L, incorporated under the laws of Spain;
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Tadipol-ECI Sp.z o.o.,** incorporated under the laws of Poland;
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Alvarion Telsiz Sistemleri Ticaret A.Ş, incorporated under the laws of Turkey;
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Alvarion de Mexico S.A de C.V, incorporated under the laws of Mexico;
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interWAVE Communications International SA, incorporated under the laws of France;
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Alvarion Philippines incorporated under the laws of Philippines;
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Kermadec Telecom B.V. incorporated under the laws of Holland;
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Alvarion South Africa (Pty) Ltd., incorporated under the laws of South Africa;
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Alvarion Italy SRL incorporated under the laws of Italy;
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Alvarion GmbH incorporated under the laws of Germany;
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Alvarion Singapore PTE LTD., incorporated under the laws of Singapore.
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India 4Motion Broadband Wireless Network Private Limited, incorporated under the laws of India;
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Alvarion Ltd., Taiwan Branch Preparatory Office,*** incorporated under the laws of Taiwan.
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Alvarion del Ecuador S.A, incorporated under the laws of Ecuador;
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Alvarion Chile LIMITADA, incorporated under the laws of Chile;
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Alvarion S.A., incorporated under the laws of Argentina; and
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Alvarion Costa Rica S.A, incorporated under the laws of Costa Rica.
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*Alvarion SARL is a wholly-owned subsidiary of Alvarion UK LTD.
** Alvarion – Tadipol – ECI Sp.zoo is a wholly-owned subsidiary of Kermadec Telecom B.V.
*** Alvarion Ltd., Taiwan Branch Preparatory Office is a wholly-owned branch of Alvarion Singapore PTE LTD.
In addition, we have representative offices in China, Italy and Russia.
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D.
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PROPERTY, PLANTS AND EQUIPMENT
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We do not own any real estate. As of December 31, 2009, we leased an aggregate of approximately 231,423 square feet in Israel for annual lease payments (including management fees) of approximately $3.7 million and incurred annual parking expenses in connection with these leases of approximately $0.5 million. These premises consist mainly of our corporate headquarters in Tel-Aviv, Israel, and two separate warehouses located in Israel. We have been occupying our main premises since April 2001 these premises serve as our corporate headquarters, as well as the site at which we conduct our main research and development activities and some quality assurance, final assembly and testing operations. Our main lease expires in the year 2011. We also lease approximately 34,519 square feet of office facilities in Mountain View, California, at an annual rent of approximately $0.2 million. These premises serve as the corporate headquarters of our U.S. subsidiary, Alvarion Inc, and as our principal sales and marketing office in North America. We also lease approximately 30,171 square feet of office facilities in Romania, at an annual rent of approximately $0.7 million. These premises serve as the corporate headquarters of our Romanian subsidiary, Alvarion SRL, and as our principal Research and development and technical support office in Romania. In addition, we lease office space for the operation of our facilities in France, Romania, China, Uruguay, Taiwan, Brazil, Mexico, Philippines, Poland, Russia, Singapore, Italy, South-Africa and Spain. We believe that the facilities we currently lease are adequate for our current requirements.
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UNRESOLVED STAFF COMMENTS
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Not applicable.
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OPERATING AND FINANCIAL REVIEW AND PROSPECTS
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The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in “Item 3—Key Information—Risk Factors.”
Overview We concentrate our resources on the broad industry of wireless broadband. As a wireless broadband pioneer, we have been driving and delivering innovation for more than 10 years, from developing core technology to creating and promoting industry standards. Leveraging our key roles in the IEEE and HiperMAN standards committees and having experience in extensive development and deployment of OFDM technology-based systems, we have been at the forefront of the WiMAX Forum™ in its focus on increasing the widespread adoption of standards-based products in the wireless broadband market and in leading the industry to adopt mobile WiMAX networks. The WiMAX standard is the outcome of the standardization work done by the WiMAX Forum™, widely based on the IEEE 802.16 standard working group.
We believe we will experience demand in the carrier and enterprise segments for access to bandwidth-intensive applications (video, data and voice) in the portable and anticipated mobile environment. Our vision is to deliver personal broadband networks, which will combine broadband and mobility, to subscribers by being at the forefront of exploiting the benefits of OPEN architecture characteristics of WiMAX.
We believe that one of our key challenges is to become a major player in the wireless broadband equipment market and win support for our OPEN WiMAX strategy, which enables communication service providers to choose the combination of vendors and partners that best fit their specific requirements.
As a wireless broadband pioneer, we have been driving and delivering innovations for more than 10 years from core technology development to creating and promoting industry standards. Leveraging our key roles in the IEEE and HiperMAN standards committees and experience in deploying OFDM-based systems, we have been in the forefront of the WiMAX Forum™ in its focus on increasing the widespread adoption of standards-based products in the wireless broadband market and leading the entire industry to mobile WiMAX solutions.
Our solutions are usually used in a point-to-multipoint architecture and address a wide scope of end-user profiles, from the consumers, residential and SOHO markets, through SMEs and multi-tenant units/multi-dwelling units as well as applications in various vertical markets.
Our products operate in licensed and license-exempt bands, ranging from 450 MHz to 28 GHz and comply with various industry standards. Our core technologies include spread spectrum radio, linear radio, digital signal processing, modems, MAC, IP-based mobile switches, compact mobile networks, networking protocols and VLSI. We have intellectual property in these technologies.
2009 Highlights
2009 was a difficult year for us in light of the global financial crisis. In 2009, our revenues decreased by 13% to approximately $245.2 million from approximately $281.3 million in 2008, primarily due to the postponement of some WiMAX projects, as a result of the limited availability of funds due to the global credit crisis and delays in allocation of spectrum in several countries . Despite the difficult conditions, our BreezeMAX revenues reached $179 million, a small improvement over 2008.
In 2009, we won several turnkey projects, providing complete turnkey solutions from design and planning to implementation, on our own and together with partners. We believe a few of the turnkey projects we won in 2009 have the potential to generate, in the aggregate on a cumulative basis, revenues in excess of $100 million in the next three to five years in various regions of the world. Towards the second half of 2010 and into 2011, we expect to begin translating these deals to revenues as we reach various milestones. In addition, we formed numerous OPEN WiMAX strategic relationships, adding technology, integration and channel partners. In order to ensure the timely introduction of a host of mobile WiMAX devices, we successfully completed interoperability testing with major chips and device manufacturers.
We believe that there is a strong demand for broadband access, and governments around the world, including in Japan, Europe, Australia and the United States, are creating programs to extend broadband coverage as a matter of national competitiveness.
In addition, a host of new mobile data opportunities in public safety, border control, utilities and other vertical markets are emerging. We believe WiMAX is the most cost effective and mature technology available in the market which addresses all these applications.
Corporate and consumer spending has been reduced by the global economic slowdown during 2008 and 2009, and the public perception that this economic slowdown may continue. This has created challenges for us and may create new challenges for us if the general unfavorable economic conditions experienced in 2008 and 2009 fail to improve or deteriorate further.
During 2009, we experienced limited revenue growth from our WiMAX products (approximately 1% over 2008) and a revenue decrease from our non-WiMAX products of 40%, due primarily to the continuing market transition to WiMAX-based products.
In addition, during 2009 our gross margins decreased to approximately 46% of our revenues, compared to approximately 47% of revenues in 2008. This decrease in gross margin is mainly a result of the standardization of the market as competition increases, as well as the shift in the mix of products that generate our revenues, such as the increase in the volume of lower-margin third party equipment and services revenue. During 2009, due to the global slowdown and the credit crunch in the global capital markets we implemented a further cost reduction plan in addition to that implemented in 2008, which included the layoff of approximately 90 employees and vacating certain leased premises. As a result, we recorded a restructuring charge of approximately $2.8 million in 2009.
Our net loss amounted to approximately $(7.2) million compared to net loss of approximately $(5.5) million in 2008. This increase in net loss was primarily a result of the decrease in revenues to approximately $245.2 million in 2009 compared to approximately $281.3 million in 2008, the decrease in gross margins from 47% in 2008 to 46% in 2009, together with a decrease in our financial income to approximately $1.7 million due primarily to the lower interest rates that we obtained on our deposits and marketable securities. Our operating expenses decreased to $122.4 million in 2009 compared to $143.2 million in 2008 due to the cost reduction measurements which the company implemented, as mentioned above.
Critical Accounting Principles
Our financial statements are prepared in accordance with United States generally accepted accounting principles and audited in accordance with standards of the Public Company Accounting Oversight Board (United States). A discussion of the significant accounting policies that we follow in preparing our financial statements is set forth in Note 2 to our consolidated financial statements included in Part III of this Annual Report. In preparing our financial statements, we must make estimates and assumptions as to certain matters, including, for example, the amount of new materials and components that we will require to satisfy the demand for our products based on our sales estimates and the period of time that will elapse before our products become obsolete. While we endeavor diligently to assure that our estimates and assumptions have a reasonable basis and reflect our best assessment as to the future circumstances in which we anticipate, actual results may differ from the results estimated or assumed and the differences may be substantial as to require subsequent write-offs, write-downs or other adjustments to past results or current valuations.
The following is a summary of certain critical principles, which have a substantial impact upon our financial statements and which we believe are most important to keep in mind in assessing our financial condition and operating result:
Revenue Recognition. We generate revenues from selling our products indirectly through distributors and OEMs, as well as selling them directly to end users.
Revenues are recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” and with ASC 605-25 “Multiple-Element Arrangements” (formerly EITF 00-21) when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price to the buyer is fixed or determinable, no further obligation exists and collectability is probable .
We generally do not grant a right of return on our products. However, we have granted to certain distributors limited rights of return on unsold products. Product revenues on shipments to these distributors are recognized based on their history of actual returns provided that all other revenue recognition criteria are met.
In prior years, in cases under which we were obligated to perform post delivery installation services, revenues generated from such arrangements were recognized upon completion of the installation.
In 2009, for arrangements which include multiple elements, we consider the sale of equipment and related services (installation and service level agreements) to be separate units of accounting in the arrangement in accordance with ASC 605-25 since now the equipment has value to the customer on a standalone basis, and fair value of the services exists. In such arrangements, since the services are not essential to the functionality of the equipment, revenues from the sale of equipment are recognized upon delivery, if all other revenue recognition criteria are met. We defer the fair value of the services (but not less than the amount of the services in the arrangements) to the period in which such services occurs. Since we did not have significant projects as of December 31, 2009 where the equipment had been delivered and the installation services were not provided yet and an acceptance clause was not required, the impact of this change is immaterial.
In transactions, where a customer’s contractual terms include a provision for customer acceptance, revenues are recognized either when such acceptance has been obtained or the acceptance provision has lapsed.
Accounts Receivable. We are required to assess the collectability of our accounts receivable balances. Generally, we do not require collateral; however, under certain circumstances we require letters of credit, additional guarantees or advance payments. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including, but not limited to, the current credit-worthiness of each customer. We regularly review the amounts due and related allowance by considering factors, such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. For certain accounts receivable balances, we are also covered by foreign trade risk insurance. Should we consider it necessary to increase the level of provision for doubtful accounts, required for a particular customer, then additional charges will be recorded when they become probable.
Inventory Valuation. Our policy for valuation of inventory and commitments to purchase inventory, including the determination of obsolete or excess inventory, requires us to perform a detailed assessment of inventory at each balance sheet date which includes a review of, among other factors, an estimate of future demand for products within specific time frames, valuation of existing inventory, as well as product lifecycle and product development plans. The business environment in which we operate the wide range of products that we offer and the sales-cycles we experience all contribute to the exercise of judgment relating to maintaining, utilizing and writing-off inventory. The estimates of future demand that we use in the valuation of inventory are the basis for our revenue forecast, which is also consistent with our short-term manufacturing plan. Inventory reserves are also provided to cover risks arising from non-moving or slow-moving items. We write-down our inventory for estimated obsolescence or excess inventory equal to the difference between the cost of inventory and the estimated market value which is based on assumptions about future demand and market conditions. We may be required to record additional inventory write-downs if actual market conditions are less favorable than those projected by our management.
Note 2(g) to our financial statements describes the write-offs and provisions that we made and recorded in 2007, 2008 and 2009 to reflect the decline from our expectations in the value of inventory, which had become excessive, unmarketable or otherwise obsolete or the inventory of new materials and components that we had purchased or committed to purchase in anticipation of forecasted sales which we did not consummate. In addition, changes in demand, which result in increased demand for our products, may lead to utilization of our previously written-off products. Note 2g to our financial statements describes the effect of the utilization of the related products of our prior years’ written-off components, which are reflected in our revenues without additional cost in the cost of sales in the period the inventory was utilized.
If there were to be a sudden and significant decrease in demand for our products, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology and customer requirements, we could be required to increase our inventory allowances and our gross margin could be adversely affected. In addition, if the demand for our products increases beyond our expectations following a write-off of inventory, we may need to further utilize our previously written-down inventory. Such utilization may contribute to our gross margin in future periods. Inventory management remains an area of management focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements.
Goodwill. We review goodwill for impairment annually and whenever events or changes in circumstances indicate its carrying value may not be recoverable in accordance with ASC 350 “Intangibles – Goodwill and Others” (formerly SFAS No. 142). Goodwill impairment is deemed to exist if the carrying value of a reporting unit exceeds its fair value. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.
We operate in one operating segment, and this segment comprises our only reporting unit. As of December 31, 2009, we had total goodwill of $57.1 million on our balance sheet. In calculating the implied fair value of the reporting unit, we used market capitalization calculated based on our share price for a reasonable period. For the years ended December 31, 2009, 2008 and 2007, no impairment loss was identified.
Marketable Securities.
We account for investments in debt securities in accordance with ASC 320 "Investments - Debt and Equity Securities" (formerly SFAS No. 115).
We determine the appropriate classification of investments in debt securities at the time of purchase and reevaluate such determinations at each balance sheet date. Debt securities are classified as held-to-maturity when we have the positive intent and ability to hold the securities to maturity and are stated at amortized cost. The amortized cost of held-to-maturity securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization, impairment of value judged to be other than temporary, and interest are included in financial income, net.
For the years ended December 31, 2008 and 2009, for all securities covered by ASC 320 we have designated them as held-to-maturity.
We recognize an impairment charge when a decline in the fair value of its investments below the amortized cost basis is judged to be other-than-temporary. We periodically assesses whether its investments with unrealized losses are other than temporarily impaired.
On April 1, 2009, we adopted the FASB's updated guidance relating to the impairment and presentation model for its held-to-maturity debt securities. Under the amended impairment model, an other-than-temporary impairment charge exists when we do not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists). For investments that do meet these criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income.
For the years ended December 31, 2007, 2008 and 2009, no other-than-temporary impairment losses have been identified.
Warranties.
We provide a 14 to 21 month warranty period for all of our products. The specific terms and conditions of a warranty vary depending upon the product sold and customer it is sold to. We estimate the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time a product is delivered. Factors that affect our warranty liability include the number of units, historical rates of warranty claims and cost per claim. We periodically assess the adequacy of its recorded warranty liabilities and adjust the amounts as necessary. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in decreased gross profit.
Stock-Based Compensation Expense. We account for equity-based compensation in accordance with ASC 718 “Compensation - Stock Compensation” (formerly SFAS No. 123(R)). Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service periods. Stock-based compensation expense recognized under ASC 718 for 2007, 2008 and 2009 was $7.4 million, $7.6 million and $4.2 million, respectively. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, including the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted. Our stock based compensation decreased in 2009 as a result of the large number of unvested options that were forfeited following the cost reduction plan we implemented.
We estimate the fair value of employee stock options using a Black-Scholes-Merton valuation model and for restricted stock units and options granted with par value exercise price, the fair value is calculated by multiplying the share price at the date of grant with the number of options granted. The fair value of an award is affected by our stock price on the date of grant as well as other assumptions, including the estimated volatility of our stock price over the expected term of the awards, and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption is based upon United States treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our publicly traded stock options in order to estimate future stock price trends. In order to determine the estimated period of time that we expect employees to hold their stock options, we use historical behavioral patterns rates of employee groups by job classification. In 2008 and 2009, the expected term of options granted is estimated based on historical experience and represents the period of time that options granted are expected to be outstanding. In 2007, the expected term was determined based on the simplified method in accordance with SAB 107. Our expected dividend rate is zero since we do not currently pay cash dividends on our ordinary shares and do not anticipate doing so in the foreseeable future.
Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. In addition, we are subject to the continuous examination of our tax returns by the local tax authorities in each country that we have established corporations. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for taxes.
Results of Operations
The following tables present our total revenues attributed to the geographical regions based on the location of our customers for the years ended December 31, 2007, 2008 and 2009:
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2007
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2008
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2009
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Total
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Total
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Total
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revenues
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Percentage
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revenues
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Percentage
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revenues
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Percentage
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In thousands
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Of sales
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In thousands
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Of sales
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In thousands
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Of sales
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Israel
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$ |
861 |
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0.4 |
% |
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$ |
1,254 |
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0.4 |
% |
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$ |
697 |
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0.3 |
% |
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North America (including the United States and Canada)
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|
32,767 |
|
|
|
13.8 |
% |
|
|
42,683 |
|
|
|
15.2 |
% |
|
|
23,242 |
|
|
|
9.5 |
% |
|
Europe (excluding France, Italy, Spain and Denmark)(1)
|
|
|
67,779 |
|
|
|
28.7 |
% |
|
|
61,799 |
|
|
|
22.0 |
% |
|
|
24,398 |
|
|
|
9.9 |
% |
|
France
|
|
|
8,096 |
|
|
|
3.4 |
% |
|
|
12,047 |
|
|
|
4.3 |
% |
|
|
17,252 |
|
|
|
7.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Italy
|
|
|
13,269 |
|
|
|
5.6 |
% |
|
|
11,873 |
|
|
|
4.2 |
% |
|
|
19,281 |
|
|
|
7.9 |
% |
|
Spain
|
|
|
13,767 |
|
|
|
5.8 |
% |
|
|
11,301 |
|
|
|
4.0 |
% |
|
|
9,734 |
|
|
|
4.0 |
% |
|
Denmark
|
|
|
2,501 |
|
|
|
1.1 |
% |
|
|
19,378 |
|
|
|
6.9 |
% |
|
|
35,483 |
|
|
|
14.5 |
% |
|
Africa
|
|
|
26,609 |
|
|
|
11.3 |
% |
|
|
38,549 |
|
|
|
13.7 |
% |
|
|
41,893 |
|
|
|
17.1 |
% |
|
Asia
|
|
|
19,942 |
|
|
|
8.4 |
% |
|
|
29,214 |
|
|
|
10.4 |
% |
|
|
27,890 |
|
|
|
11.4 |
% |
|
Latin America (excluding Argentina) (1)
|
|
|
48,191 |
|
|
|
20.3 |
% |
|
|
47,098 |
|
|
|
16.4 |
% |
|
|
29,313 |
|
|
|
12.0 |
% |
|
Argentina
|
|
|
2,791 |
|
|
|
1.2 |
% |
|
|
6,085 |
|
|
|
2.5 |
% |
|
|
16,056 |
|
|
|
6.5 |
% |
| |
|
$ |
236,573 |
|
|
|
100 |
% |
|
$ |
281,281 |
|
|
|
100 |
% |
|
$ |
245,239 |
|
|
|
100 |
% |
|
|
(1)
|
We have listed Italy, Spain, Denmark, France and Argentina separately within this table because each of these countries generated at least 5% of our total revenues during at least one of the last 3 years.
|
The following tables set forth, for the periods indicated, selected items from our consolidated statement of operations in U.S. dollars in thousands and as a percentage of total sales:
| |
|
Year Ended December 31,
|
|
| |
|
2007
|
|
|
2008
|
|
|
2009
|
|
| |
|
(In thousands)
|
|
|
Sales
|
|
$ |
236,573 |
|
|
$ |
281,281 |
|
|
$ |
245,239 |
|
|
Cost of sales
|
|
|
114,099 |
|
|
|
144,326 |
|
|
|
128,461 |
|
|
Write-off of excess inventory and provision for inventory purchase commitments
|
|
|
4,762 |
|
|
|
3,457 |
|
|
|
3,993 |
|
|
Gross profit
|
|
|
117,712 |
|
|
|
133,498 |
|
|
|
112,785 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, gross
|
|
|
54,967 |
|
|
|
69,952 |
|
|
|
54,674 |
|
|
Less – grants and participations
|
|
|
3,578 |
|
|
|
10,273 |
|
|
|
3,884 |
|
|
Research and development, net
|
|
|
51,389 |
|
|
|
59,679 |
|
|
|
50,790 |
|
|
Selling and marketing
|
|
|
55,943 |
|
|
|
60,521 |
|
|
|
52,022 |
|
|
General and administrative
|
|
|
15,426 |
|
|
|
18,813 |
|
|
|
15,087 |
|
|
Amortization of intangible assets
|
|
|
2,544 |
|
|
|
1,327 |
|
|
|
132 |
|
|
Impairment of investment
|
|
|
- |
|
|
|
- |
|
|
|
1,554 |
|
|
Restructuring and other related expenses
|
|
|
- |
|
|
|
2,914 |
|
|
|
2,787 |
|
|
Total operating expenses
|
|
|
125,302 |
|
|
|
143,254 |
|
|
|
122,372 |
|
|
Operating loss
|
|
|
(7,590 |
) |
|
|
(9,756 |
) |
|
|
(9,587 |
) |
|
Other income
|
|
|
8,265 |
|
|
|
- |
|
|
|
731 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income, net
|
|
|
6,453 |
|
|
|
4,297 |
|
|
|
1,668 |
|
|
Income (loss) from continuing operations
|
|
|
7,128 |
|
|
|
(5,459 |
) |
|
|
(7,188 |
) |
|
Income from discontinued operations, net
|
|
|
5,413 |
|
|
|
- |
|
|
|
- |
|
|
Net income (loss)
|
|
$ |
12,541 |
|
|
$ |
(5,459 |
) |
|
$ |
(7,188 |
) |
| |
|
Year Ended December 31,
|
|
| |
|
2007
|
|
|
2008
|
|
|
2009
|
|
| |
|
(As a percentage of sales)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost of sales
|
|
|
48.2 |
|
|
|
51.3 |
|
|
|
52.4 |
|
|
Write-off of excess inventory and provision for inventory purchase commitments
|
|
|
2.0 |
|
|
|
1.2 |
|
|
|
1.6 |
|
|
Gross margin
|
|
|
49.8 |
|
|
|
47.5 |
|
|
|
46.0 |
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, gross
|
|
|
23.2 |
|
|
|
24.9 |
|
|
|
22.3 |
|
|
Less – grants and participations
|
|
|
1.5 |
|
|
|
3.7 |
|
|
|
1.6 |
|
|
Research and development, net
|
|
|
21.7 |
|
|
|
21.2 |
|
|
|
20.7 |
|
|
Selling and marketing
|
|
|
23.6 |
|
|
|
21.5 |
|
|
|
21.2 |
|
|
General and administrative
|
|
|
6.6 |
|
|
|
6.7 |
|
|
|
6.2 |
|
|
Amortization of intangible assets
|
|
|
1.1 |
|
|
|
0.5 |
|
|
|
0.1 |
|
|
Impairment of investment
|
|
|
- |
|
|
|
- |
|
|
|
0.6 |
|
|
Restructuring and other related expenses
|
|
|
- |
|
|
|
1.0 |
|
|
|
1.1 |
|
|
Total operating expenses
|
|
|
53.0 |
|
|
|
50.9 |
|
|
|
49.9 |
|
|
Operating loss
|
|
|
(3.3 |
) |
|
|
(3.4 |
) |
|
|
(3.3 |
) |
|
Other income (loss)
|
|
|
3.5 |
|
|
|
- |
|
|
|
0.3 |
|
|
Financial income, net
|
|
|
2.8 |
|
|
|
1.5 |
|
|
|
0.7 |
|
|
Income (loss) from continuing operations
|
|
|
3.0 |
|
|
|
(1.9 |
) |
|
|
(2.9 |
) |
|
Income from discontinued operations, net
|
|
|
2.3 |
|
|
|
- |
|
|
|
- |
|
|
Net income (loss)
|
|
|
5.3 |
% |
|
|
(1.9 |
)% |
|
|
(2.9 |
)% |
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Sales. Sales in 2009 were approximately $245.2 million, a decrease of approximately 13% compared to sales of approximately $281.3 million in 2008. In 2009, BreezeMAX revenues totaled approximately $179 million or 73% of total revenue, compared to approximately $171 million or 61% of total revenue in 2008. The decrease of our total sales in 2009 was primarily due to the postponement of some WiMAX projects , as a result of the unfavorable general economic conditions and delays in allocating spectrum in several countries. Our revenues from non-WiMAX broadband wireless products decreased approximately 40% compared to the previous year, reflecting a shift toward the WiMAX platform and the ongoing decline in legacy products.
Sales in Europe, the Middle East and Africa reached approximately 60.7% of our sales in 2009 and totaled approximately $149 million, which represents a decrease of approximately 4.5% compared to our 2008 sales in this region which were approximately $156 million. Sales in Central and Latin America accounted for 18.5% of our sales in 2009 compared to 18.9% of our sales in 2008. Sales in North America accounted for approximately 9.5% of our sales in 2009, compared to 15.2% in 2008. Sales in Asia Pacific accounted for approximately 11.4% of our sales in 2009 compared to approximately 10.4% in 2008 in this region.
In 2009, one customer accounted for 15% of revenues, compared to no customers that accounted more than 10% of revenues in 2008 and 2007. Because of the nature of our agreements and the associated large initial payments due, the identity of major customers generally varies from quarter to quarter and we do not believe that we are materially dependent on any one specific customer or group of customers.
Cost of sales. Cost of sales consists primarily of cost of components, product manufacturing and assembly, labor, overhead and other costs associated with production. Cost of sales was approximately $128.5 million in 2009, a decrease of approximately 11% compared to cost of sales of approximately $144.3 million in 2008. Cost of sales as a percentage of sales increased to approximately 52.4% in 2009 from approximately 51.3% in 2008. This increase is primarily attributable to the change in the mix of products that comprise our revenues. As the market continues to move towards standardization and more players enter into the market making it more competitive for us, and as we shift the mix of products that comprise our revenues, such as an increase in the volume of lower-margin third party products, we expect our cost of sales as a percentage of sales to increase.
Write-off of excess inventory and provision for inventory purchase commitments. We periodically assess our inventories valuation in accordance with obsolete and slow-moving items based on revenue forecasts and technological obsolescence. Should inventories on-hand exceed our estimates or become obsolete, for example, due to the transition in demand from non-WiMAX to WiMAX products, they would be written down or written off. This would result in a charge to our statement of operations and a corresponding reduction in our inventory and shareholders’ equity. Changes in demand for our products and in our estimates for demand create changes in provisions for obsolete inventory. As part of our ordinary course of business we evaluate, on a quarterly basis, our actual inventory needs versus our sales projections and write-off excess inventory and un-cancelable purchase commitments from our suppliers and subcontractors. As a result, we recorded charges related to the write-off of excess inventory and accrued a provision for inventory purchase commitments of new materials and components that we had purchased or committed to purchase in anticipation of forecasted sales that we did not consummate. Primarily as a result of the decrease of our sales, our write-off of excess inventory and our accrual of a provision for inventory purchase commitments increased and amounted in the aggregate to approximately $4.0 million for the year ended December 31, 2009 compared to approximately $3.5 million for the year ended December 31, 2008.
Inventory utilization. We perform periodically an inventory evaluation model in order to align our inventory levels to the market conditions and anticipated customer demand. In 2009 and 2008, approximately $0.6 million and $2.5 million, respectively, of inventory previously written-off consistent with our inventory evaluation model was used as components in our regular production course and was sold as finished goods to end users. The sales of these related manufactured products were reflected in our revenues without increasing the cost of sales in the period the inventory was utilized. This inventory utilization increased our gross margin by 0.2% in 2009 and by 0.9% in 2008.
If the demand for our products suddenly and significantly decreased, or if there were a higher incidence of inventory obsolescence because of rapidly changing technology, standardization and customer requirements, we could be required to increase our write-off of excess inventory, and our gross margin could be adversely affected. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times and the risk of inventory obsolescence. However, if the demand for our products increases beyond our expectations following write-down of inventory, we may further utilize our written down inventory. Such utilization may contribute to our gross margin in future periods. We cannot predict the likelihood of utilizing previously written-off inventory in future operations.
Research and development expenses, net. Gross research and development expenses consist primarily of employee salaries, development-related raw materials and subcontractors, and other related costs partially offset by research and development funding. Gross research and development expenses were approximately $54.7 million in 2009, a decrease of approximately 21.8% compared to gross research and development expenses of approximately $70 million in 2008. This decrease is primarily attributable to the cost reduction plans that the company implemented during 2009 and 2008.Gross research and development, as a percentage of sales was 22.3% in 2009, compared to 24.9% in 2008. Grants and other participations for funding approved research and development projects totaled approximately $3.9 million in 2009 and $10.3 million in 2008. Research and development expenses, net, were approximately $50.8 million in 2009, compared to approximately $59.7 million in 2008.
Selling and marketing expenses. Selling and marketing expenses consist primarily of costs relating to compensation attributable to employees engaged in selling and marketing activities, promotion, advertising, trade shows and exhibitions, travel and related expenses. Selling and marketing expenses were approximately $52.0 million in 2009, a decrease of approximately 14% compared to selling and marketing expenses of approximately $60.5 million in 2008. This decrease is primarily attributable to the cost reduction plans that the company implemented during 2009 and 2008. Selling and marketing expenses as a percentage of sales decreased to 21.2% in 2009 from 21.5% in 2008.
General and administrative expenses. General and administrative expenses consist primarily of compensation costs for administration, finance and general management personnel, office maintenance, insurance costs, professional fees and other administrative costs. General and administrative expenses were approximately $15.1 million in 2009,a decrease of approximately 20% compared to general and administrative expenses of approximately $18.8 million in 2008. This decrease is also related primarily to the cost reduction plans that the company implemented during 2009 and 2008. General and administrative expenses as a percentage of sales decreased to 6.2% in 2009 from 6.7% in 2008.
Amortization of intangibles assets. As a result of our mergers and acquisitions activity in prior years, we had annual amortization charges of approximately $0.1 million recorded in 2009, compared to $1.3 million in 2008. The decrease is a result of the completion of amortization of intangible assets with useful lives of 3.75 years in 2008.
Impairment of investment. During 2009, we recorded impairment of the investment in affiliate in the amount of $1.6 million.
Restructuring costs. During 2009 and 2008, we implemented two cost reduction plans including the layoff of approximately 90 employees in 2009 and approximately 100 employees in 2008. We recorded a restructuring charge of approximately $2.8 million in 2009 and approximately $2.9 million in 2008, which primarily consists of employees' termination benefits, lease abandonment and repayment of grants.
As of December 31, 2009 the 2008 restructuring plan was completed except of the provision related to the repayment of grant which will be paid upon demand. The expected completion date of the 2009 restructuring plan is by the end of 2010.
The restructuring expenses do not include the impact related to stock based compensation.
Financial income, net. Financial income, net, was $1.7 million in 2009, a decrease of approximately 61% compared to financial income, net, of approximately $4.3 million in 2008. The decrease in financial income is attributed mainly to decreased yields on investments compared to the previous year due to the decrease in the global interest rates and increase in our bank expenses.
Net income (loss). In 2009, net loss was approximately $(7.2) million, compared to a net loss of approximately $(5.5) million in 2008.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
On November 21, 2006, we sold substantially all of the assets and certain liabilities related to the CMU, a separate reporting unit, representing the majority of former interWAVE business, to LGC. Pursuant to the terms of the sale agreement, LGC issued to us promissory notes and a convertible note. At closing, we recognized such transaction as a divestiture of operations and therefore the results of the CMU activities for all reported periods were presented in one line item in the statement of operations below the results from continuing operations under the "Income (loss) from discontinued operations". The results of the CMU operations are presented as discontinued operations for all periods presente.d. Note 1c to our financial statements further describes this transaction.
Sales. Sales in 2008 were approximately $281.3 million, an increase of approximately 19% compared to sales of approximately $236.6 million in 2007. In 2008, BreezeMAX revenues totaled approximately $171 million or 61% of total revenue, compared to approximately $124 million or 52% of revenue in 2007. The increase of our total sales in 2008 resulted primarily from the continued growth of the BreezeMAX revenues, which was caused by the continued transition in the market from non-WiMAX to WiMAX based solutions. Our revenues from non-WiMAX broadband wireless products remained at approximately the same level as the previous year.
Sales in Europe, the Middle East and Africa reached approximately 56% of our sales in 2008 and totaled $156.2 million, which represents an increase of approximately 18% over our 2007 sales in this region which were $132.8 million. This increase is mainly attributed to the fact that some trials and small-scale WiMAX deployments in 2007 and 2006 emerged into larger scale commercial deployments in 2008 and due to increased revenues primarily with a customer in Denmark. In addition, we experienced continued progress in the spectrum allocation process in this region and the adoption of our broadband wireless products by well-capitalized independent operators. Sales in Central and Latin America accounted for 19% of our sales in 2008 compared to 21% of our sales in 2007 in this region, which represents an increase of approximately 4% in percentage of total sales in this region mainly due to sales to several repeated customers in Mexico, Peru, Chile and Paraguay. Sales in North America accounted for approximately 15% of our sales in 2008, a minor change from our sales in 2007 in this region. Sales in Asia Pacific accounted for approximately 10% of our sales in 2008 compared to approximately 8% in 2007 in this region.
Cost of sales. Cost of sales was approximately $144.3 million in 2008, an increase of approximately 26.5% compared with cost of sales of approximately $114.1 million in 2007. Cost of sales as a percentage of sales increased to approximately 51.3% in 2008 from approximately 48.2% in 2007. This increase is primarily attributable to the change in the mix of products that comprise our revenues.
Write-off of excess inventory and provision for inventory purchase commitments. We recorded charges related to the write-off of excess inventory and accrued a provision for inventory purchase commitments of new materials and components that we had purchased or committed to purchase in anticipation of forecasted sales that we did not consummate. In 2008, primarily as a result of the increase of our sales and due to efficiency steps taken within our operations, our write-off of excess inventory and our accrual of a provision for inventory purchase commitments decreased and amounted in the aggregate to approximately $3.5 million for the year ended December 31, 2008 compared to approximately $4.8 million for the year ended December 31, 2007.
Inventory utilization. In 2008 and 2007, approximately $2.5 million and $2.9 million, respectively, of inventory previously written-off consistent with our inventory evaluation model was used as components in our regular production course and were sold as finished goods to end users. The sales of these related manufactured products were reflected in our revenues without increasing the cost of sales in the period the inventory was utilized. This inventory utilization increased our gross margin by 0.9% in 2008 and by 1.2% in 2007.
Research and development expenses, net. Gross research and development expenses were approximately $70.0 million in 2008, an increase of approximately 27.3% compared to gross research and development expenses of approximately $55.0 million in 2007. This increase is primarily attributable to an increase of approximately 5% in our research and development personnel in 2008, the intense investment in our WiMAX development and to certain research and development projects which were partially funded by the NRE grants and participations. Gross research and development, as a percentage of sales was 24.9% in 2008, compared to 23.2% in 2007. Grants and other participations for funding approved research and development projects totaled approximately $10.3 million in 2008 and $3.6 million in 2007. Research and development expenses, net, were approximately $59.7 million in 2008, compared to approximately $51.4 million in 2007.
Selling and marketing expenses. Selling and marketing expenses were approximately $60.5 million in 2008, an increase of approximately 8.2% compared to selling and marketing expenses of approximately $55.9 million in 2007. This increase is primarily attributable to the increase in revenues. Selling and marketing expenses as a percentage of sales decreased to 21.5% in 2008 from 23.6% in 2007.
General and administrative expenses. General and administrative expenses were approximately $18.8 million in 2008, an increase of approximately 22.0% compared to general and administrative expenses of approximately $15.4 million in 2007. This increase is related primarily to labor costs and legal expenses. General and administrative expenses as a percentage of sales increased to 6.7% in 2008 from 6.6% in 2007.
Amortization of intangibles assets. As a result of our mergers and acquisitions activity in prior we years, had annual amortization charges of approximately $1.3 million recorded in 2008 compared to $2.5 million in 2007. The decrease is a result of the completion in 2008 of the amortization of intangible assets with useful lives of 3.75 years.
Restructuring costs. During 2008, we implemented a cost reduction plan including the layoff of approximately 100 employees. We recorded a restructuring charge of approximately $2.9 million, which primarily consists of employees' termination benefits, lease abandonment and repayment of grants.
Financial income, net. Financial income, net, was $4.3million in 2008, a decrease of approximately 33.4% compared to financial income, net, of approximately $6.5 million in 2007. The decrease in financial income is attributed mainly to decrease yields on investments compared to the previous year due to the decrease in the global interest rates.
Net income (loss). In 2008, net loss was approximately $(5.5) million, compared to net income of approximately $12.5 million in 2007 which included income from discontinued operations of approximately $ 5.4 million and other income of approximately $8.3 million.
Impact of Inflation and Currency Fluctuations
A devaluation of the U.S. dollar against the NIS has a direct influence on the U.S. dollar cost of our operations. The majority of our sales, and part of our expenses, are denominated in dollars. However, a significant portion of our expenses, primarily labor expenses, is denominated in NIS unlinked to the U.S. dollar. Inflation in Israel and/or the devaluation of the dollar in relation to the NIS has the effect of increasing the cost in dollars of these expenses and has a negative effect on our profitability.
Because exchange rates between the NIS and the U.S. dollar fluctuate continuously, exchange rate fluctuations as recently experienced in Israel and especially larger periodic devaluations or revaluations, will have an impact on our profitability and period-to-period comparisons of our results of operations. The effects of foreign currency re-measurements are reported in our consolidated financial statements in the statement of operations.
To protect against exchange rate fluctuations, we have instituted several foreign currency hedging programs. These hedging activities consist of cash flow hedges of anticipated NIS payroll and forward exchange contracts to hedge certain trade payables in NIS. In 2009, the cash flow hedges were all effective. For more information, see "Item 11—Quantitative and Qualitative Disclosures About Market Risk".
The following table presents information about the rate of inflation in Israel, the rate of devaluation or appreciation of the NIS against the U.S. dollar, and the rate of inflation of Israel adjusted for the devaluation:
|
|
|
|
|
|
Israeli devaluation (appreciation)
rate %
|
|
|
Israeli inflation adjusted for devaluation %
|
|
| |
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2.4 |
|
|
|
6.8 |
|
|
|
(4.4 |
) |
|
2006
|
|
|
(0.1 |
) |
|
|
(8.2 |
) |
|
|
8.1 |
|
|
2007
|
|
|
3.4 |
|
|
|
(9.0 |
) |
|
|
12.4 |
|
|
2008
|
|
|
3.8 |
|
|
|
(1.1 |
) |
|
|
4.9 |
|
|
2009
|
|
|
3.9 |
|
|
|
(0.7 |
) |
|
|
4.6 |
|
We cannot assure you that we will not be materially and adversely affected in the future if (i) the appreciation of the NIS against the U.S. dollar continues; (ii) the dollar appreciates against the NIS, the inflation in Israel exceeds the devaluation of the NIS against the dollar; or (iii) the dollar appreciates against the NIS and if the timing of the devaluation lags behind inflation in Israel.
For a discussion of certain policies or factors relating to our being an Israeli company and our location in Israel, see "Item 3—Key Information—Risk Factors—Risks Related to Our Location in Israel".
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B.
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LIQUIDITY AND CAPITAL RESOURCES
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The following sections discuss the effects of changes in our balance sheets, cash flows and commitments on our liquidity and capital resources.
Balance Sheet and Cash Flows
Total cash, cash equivalents, short-term and long-term marketable securities and deposits were $118.5 million as of December 31, 2009, a decrease of approximately $22.2 million or 15.8% from $140.6 million at December 31, 2008. Total cash, cash equivalents, short-term and long-term marketable securities and deposits as of December 31, 2008 reflect an increase of approximately $1.7 million or 1.2% from $138.9 million at December 31, 2007.
Total cash and cash equivalents as of December 31, 2009 were $69.1 million, an increase of $5.4 million or 8.5% from $63.7 million at December 31, 2008. The increase resulted mainly from collecting cash proceeds from maturity of held-to-maturity marketable securities. Total cash and cash equivalents as of December 31, 2008 were $63.7 million, an increase of $11.6 million or 22.2% from $52.1 million at December 31, 2007.
Our continuing operating activities used cash of approximately $15.5 million in 2009 and provided cash of approximately $9.0 million and $13.5 million in 2008 and 2007, respectively. The cash flows used in operating activities for 2009 consisted primarily of net loss adjusted for non-cash activities, including stock-based compensation expenses, depreciation of fixed assets and impairment of investments in an affiliate plus a decrease in other accounts receivable and prepaid expenses and a decrease in inventories, offset by an increase in trade receivables, a decrease in trade payables and decrease in other accounts payable and accrued expenses. The positive cash flow from operating activities for 2008 consisted primarily of net loss adjusted for non-cash activities, including stock-based compensation expenses, depreciation of fixed assets and amortization of intangible assets plus an increase of trade payables and other accounts payables and accrued expenses, partially offset by an increase in trade receivables, inventories and other accounts receivables. The positive cash flow in 2007 resulted from improvement in our operating results and an increase in other accounts payable partially offset by the increase in inventory, which was lower than the accounts payable increase.
Our investing activities provided cash of approximately $20.5 million and $6.9 million in 2009 and 2008, respectively and used approximately $9.0 million of cash in 2007. Our investing activities consist mainly of investments in bank deposits, marketable securities and fixed assets. In 2009, our investing activities provided proceeds from the maturity of marketable securities, proceeds from maturity of bank deposits, as well as the remaining proceeds from the sale of our CMU to LGC, which were partially offset by investments in bank deposits, marketable securities and fixed assets. In 2008, our continuing investing activities provided proceeds from the maturity of marketable securities as well as proceeds from the LGC transaction which were partially offset by investments in bank deposits, marketable securities and fixed assets. In 2007, our continuing investing activities used cash mainly for investments in bank deposits, marketable securities and fixed assets partially offset by proceeds from the maturity of marketable securities and bank deposits. In addition, in 2007 these investments were offset by cash proceeds from the sale of our investment in LGC. Capital expenditures were approximately $7.2 million and $10.8 million in 2009 and 2008, respectively. These expenditures principally financed the purchase of research and development equipment and manufacturing equipment.
Our financing activities provided cash of approximately $0.4 million in 2009, and used cash of approximately $4.3 million in 2008 and provided cash of approximately $2.4 million 2007. In 2009, the amount of cash provided was attributable to proceeds from the issuance of shares in connection with the exercise of employees’ options in the amount of approximately $0.4 million. In 2008, the amount of cash used was attributable primarily to the repurchase of our shares in the amount of $5 million, partially offset due to issuance of shares in connection with the exercise of employees' options, in the amount of approximately $0.7 million. In 2007, the amount of cash provided was attributable primarily to proceeds from the issuance of shares in connection with the exercise of employees’ options in the amount of approximately $4.0 million partially offset by repayment of maturities of a long-term loan of $1.7 million.
We expect that cash provided or used by continuing operations may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, shipment timing, accounts receivable collections, inventory management, and the timing of other payments and investments.
Accounts Receivable, Net. Accounts receivable, net was $65.5 million and $59.8 million as of December 31, 2009 and 2008, respectively. DSOs as of December 31, 2009, December 31, 2008 and December 31, 2007 were 97 days, 78 days and 47 days, respectively. The increase in the accounts receivable balance in 2009 is mainly a result of the increase in DSOs. Our DSOs in 2009 ranged between 90 and 120 days.
Inventories. Inventories were $36.0 million as of December 31, 2009 compared to $53.7 million as of December 31, 2008. Inventories consist of raw materials; work in process and finished goods and inventories at customer sites that are not recognized as revenues yet. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements. We are focusing our operational efforts to increase inventory turns in order to enhance our responsiveness to future customers’ needs and market changes. Our inventory turns were approximately 3.6 times in 2009 and approximately 2.7 times in 2008.
WORKING CAPITAL
Our working capital was approximately $132.8 million as of December 31, 2009 compared to $115.8 million as of December 31, 2008 and $113.1 million as of December 31, 2007.
Commitments
Leases. We lease office space in several worldwide locations. Rent expense totaled $6.8 million, $7.3 million and $5.4 million in 2009, 2008 and 2007, respectively. We lease certain computers under operating lease agreements which expire in 2012. Computer leasing expenses totaled $0.5 million, $0.6 million and $0.3 million in 2009, 2008 and 2007, respectively. We also lease various motor vehicles under operating lease agreements, which expire in 2012. Motor vehicle leasing expenses were $3.6 million, $3.4 million and $2.8 million in 2009, 2008 and 2007, respectively.
Future annual minimum lease payments under all non-cancelable operating leases as of December 31, 2009 were as follows (in thousands):
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Rental of premises
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Lease of computers
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Lease of motor vehicles
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2010
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$ |
5,541 |
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$ |
427 |
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$ |
2,364 |
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2011
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2,072 |
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149 |
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1,245 |
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2012
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774 |
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30 |
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427 |
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2013
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639 |
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- |
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- |
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2014
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14 |
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- |
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- |
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$ |
9,040 |
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$ |
606 |
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$ |
4,036 |
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Royalties. We participated in programs sponsored by the OCS of the Israeli Government for the support of research and development activities. We are obligated to pay royalties to the OCS amounting to 3%-5% of the sales of the products and other related revenues generated from certain research and development projects, up to 100% of the amount granted by the OCS. The obligation to pay these royalties is contingent upon actual sales of the products, and in the absence of such sales, no payment is required. We have not received grant-bearing royalties from the OCS from 2006 through 2009.
During 2009, we paid or accrued royalties to the OCS in the amount of $0.2 million. As of December 31, 2009, the aggregate contingent liability to the OCS amounted to $8.8million.
The following table of our material contractual obligations as of December 31, 2009 summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated (in thousands):