Avid Technology Inc (AVID) 2002 Q3 法說會逐字稿

Good day and welcome everyone to the Avid Technology Third Quarter Earnings Results conference call. Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer -- Mr. David Krall. Please go ahead, sir.

Thank you and good afternoon. I'm David Krall, President and CEO of Avid Technology. And I'd like to welcome you to our third quarter, 2002 results conference call.

In a moment, I'll turn the call over to Paul Milbury, our CFO, who will provide a detailed discussion of this quarter's financial results. Then I'll discuss some trends in several of the markets we serve and how they are influencing our business.

Finally, Paul will come back and provide you with our financial outlook for the fourth quarter of 2002. And the full year 2003.

Following our prepared remarks, we will be happy to take your questions.

Before we begin, please note that the information discussed today is current as of October 17, 2002. Remarks made on this call may include forward looking statements, including statements about new product releases and functionality, projected growth of existing or new markets and anticipated results of operations during the balance of 2002 and beyond.

There are a number of factors that could cause actual events to -- or results to differ materially from those indicated by such statements -- such as delays in product shipments, the competitive markets in which Avid operates, market acceptance of Avid's existing in new products. And other factors set forth under the caption "Certain Factors That May Affect Future Results".

In the company's quarterly report on Form 10Q for the quarter ended June 30, 2002 and other documents files with the Securities and Exchange Commission. In addition, any forward looking statements in our remarks represent our estimates only as of today. And should not be relied upon as representing our estimates as of any subsequent date.

While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.

For the quarter ended September 30, 2002 we are pleased to report higher than expected revenues of $107.8 million. We reported net income of $2.3 million or $0.09 per diluted share. Our strong results this quarter are especially important because they demonstrate we can grow our revenues in our low cost and core post-production markets at the same time.

In Q '3, we grew sales of Avid Express DV by more than 125 percent, while simultaneously driving better than expected sales of our Flagship Product, Avid Media-Composer.

What's more, we continued to experience demand for another flagship product in the line -- Digital Lines [phonetic] Pro-Tolls HD. And that, too, was a significant revenue driver this quarter.

For the nine months ended September 30, 2002, revenues were $305.9 million. And we reported a net loss of $1.3 million or $0.05 per share.

Paul will now review these results in more detail.

Thank you and good afternoon, everybody. As David said, we reported revenues of $107.8 million for the third quarter of 2002. Revenue from our video segment was $73.8 million, up from $70.2 million in the prior quarter.

Our European video business was particularly strong, posting both sequential and year over year growth. For Digi [phonetic] Design, our audio segment, revenue was $34 million, down slightly from the prior quarter, reflecting normal seasonalilty.

In addition to reporting stronger than expected revenue for the third quarter, we further increased our backlog, substantially improving our visibility going into the fourth quarter.

Gross margin for the third quarter was 50.6 percent, consistent with the previous quarter. And operating expenses, excluding amortization or restructuring, were $52 million.

Operating income for the third quarter was $2.6 million before amortization and restructuring.

Interest and other income net was $259,000. Our provision for income taxes for the second quarter was $300,000. And amortization was $257,000.

For the third quarter, our reported net income was $2.3 million or $0.09 per diluted share on weighted average diluted shares of 26.6 million.

We continued to strengthen our balance sheet during the quarter. Our cash and marketable securities balance as of September 30 was $78.2 million, up approximately $13 million from the June 30 balance.

The increase in cash was primarily due to a reduction in accounts receivable of more than $15 million.

Days sales outstanding decreased from 66 days to 52 days, primarily due to an improvement in the skew of our sales. That is, we shipped more product earlier in the quarter, resulting in higher collections during the quarter.

Inventory turns were 7.1 times for the third quarter and accounts payable declined from the June level as expected.

In the first quarter of this year, we pre-paid our only long-term debt. And since the end of the March quarter, we have increased our cash balance by almost $25 million.

I'll now turn the call back to David for discussion of our business in the various markets we address.

Thank you, Paul. Before I move into a more detailed discussion of our business segments, I want to underscore an earlier point about our ability to grow revenues this quarter in both the core and low cost segments of our product line.

We believe this is important because it demonstrates that Avid is capable of strengthening its core business among seasoned post-production professionals while simultaneously building market share among a new generation of content creators who are acquiring and editing media in DV format.

It is important to do both and we are succeeding. We're also succeeding in our efforts to further Digi-Designs position as the market leader in digital audio workstations, with the introduction earlier this year of Pro-Tools HD [phonetic].

Sales of Pro-Tools HD were again strong during the third quarter, fueled by an upgrade program from Pro-Tools Mix [indiscernible] as well the ongoing introduction of new third party plug-ins.

Pro-Tools HD also took first place honors for best digital audio work station at this years tech awards at AES this month.

Digi Solid results this quarter also reflect the on-schedule shipping of the Digi-002, which is the first ever fire wire based Pro-Tools product.

The Digi-002 is a project studio designed for home recording as well as the performing musician that will enable Digi to expand its market reach, much as Avid Express DV has expanded Avid's reach into the low end video marketplace.

Switching now to our video marketplace, favorable reviews in recent trade magazines are helping to derive strong sales of Avid Express DV. The October issue of DV Magazine and the November issue of MacWorld both contain reviews on Avid Express DV Version 3.5 and have awarded the software 4 ½ points out of a total possible of 5.

DV Magazine also presented the product with the publications award of excellence. The reviewer in DV Magazine concluded "Express DV in 3.5 is the best software only [phonetic] NLE I have ever used. For facilities that do a significant amount of DV editing, it's worth the $500 difference in street price over Apple's final cut-pro."

Similarly, the headline for the MacWorld reads "Avid Express DV 3.5 -- answer to Apple's final cut pro was worth the wait."

Our revenue from Avid Express DV in Q3 is up 40 percent over Q2. And is up 125 percent over Q3 of last year.

Now, while the success of Express DV is significant on its own, the way it fits into a larger Avid solution is even more compelling.

A great example of this is in the education market where Avid's low end to high end scalability is attracting customers across the country.

During the third quarter, we announced several large sales to colleges and universities, which encompassed multiple Avid products from Express DV software and media composer to Avid [indiscernible] Media Network Systems for high speed networking and shared storage.

The common thread among these institutions is that they have selected Avid because they want their students to be job ready when they graduate. This was certainly the case in television schools like NYU, Savannah College of Art and Design and the Art Institute -- as well as newer programs such as Chapman University, Columbia College Chicago and Ball [phonetic] State University.

Since introducing Express DV 3.5 in June for example, more than 175 universities, colleges and secondary schools have purchased this software.

The Intent Solution [phonetic] opportunity is also a dominant theme within our broadcast group, where the conversion to digital newsroom solutions is continuing at a steady pace in Europe, Asia and the Americas.

Just this morning, we announced the largest broadcast news order in Avid's history in 8.6 million Euro newsroom systems for France TV, which is France's largest broadcaster.

We're especially excited about this deal because France TV chose not only our state of the art broadcast technology, but also Avid's capabilities in installation, integration, training and technical support.

Using Avid's unity, newscutter, media browse and Ex-Tech [phonetic] systems, France TV will install a newsroom system in Paris to deliver news programming for both the [indiscernible] and France 3 TV channels.

Also, in Europe, the BBC is breaking new ground by using portable Avid products to produce news stories in their Florida bureau and then transmitting the finished stories to their UK studios over the Internet.

This technology allows them to source finished stories from virtually anywhere in the world quickly, efficiently and at significantly lower cost than using traditional satellite transmission.

In Asia, we're continuing to build on the momentum we started in Q2, with the sales of Formosa TV in Taiwan, which is the first complete [indiscernible] news environment in that country.

This quarter, we also completed the sale of a pilot project to KBS, one of the top broadcasters in Korea.

Back in this country, in Q3, we received important broadcast orders from UniVision owned KMEX TV of Los Angeles -- which is the largest Spanish language television station in the US. And WGVO TV in Chicago.

Our success with UniVision is part of a larger strategy to build stronger relationships with entire station groups.

[Gannet] and [Sinclair] are other examples of this effort. Recently, three more Gannet stations converted to digital news production with Avid, including WMAZ-TV in Macon, Georgia, WXIA-TV in Atlanta and KPNX-TV in Phoenix.

Once these stations are up and running, they'll join five other Gannet stations that have already deployed Avid systems as their standard for news production and delivery.

Earlier this month, Sinclair announced that it plans to increase the amount of local news programming delivered through many of its television stations.

To do this, Sinclair will install Avid solutions that will enable them to produce national news centrally and then distribute it to their local stations.

Sinclair believes this will allow even the smallest and most remote stations to become more profitable by delivering national news at a higher level of quality. And allowing the local stations to dedicate their efforts to providing rich local news coverage.

Switching away from broadcast are three [indiscernible] Softimage [phonetic] was busy in Q3 building momentum for the newest version of XSI. In July, the team from Softimage attended its most important trade show of the year -- Sigraf [phonetic], where they unveiled version 3.0 of XSI -- their flagship high end animation software.

The new version is scheduled to be released on October 31. This latest version of XSI is focused on improved productivity and through-put. This and its rich feature set are allowing XSI to become the standard for the customers in multiple markets.

For example, Stan Winston's studios, which did much of the effects work for "Jurassic Park", "Terminator" and "Aliens", recently standardized on our XSI software. And in the video game market, when "[Electronic Farts]", which is the largest game developer in the world, needed to build their next generation soccer and basketball games, they evaluated several providers of 3-D software and chose XSI.

Also, this quarter, Cap-Com, which is one of the largest game companies in Japan, standardized on XSI as their main altering platform for all games production.

Finally, in the HD marketplace, we continued to lay the groundwork for [Abbot DHSD], especially in the Hollywood market. Already, at least 26 out of the 97 prime time comedies and dramas on broadcast networks and cable are shot in high definition format.

This is largely being done to save time and money. Regardless of whether or not the shows are broadcast in HD format. We expect DS will capture more and more of this market because a large percentage of shows are currently being edited off-line on Media Composer. And DSHD offers the best on-line conform on the market for media composer.

We'll report further on this market in future quarters.

On that note, I'd like to hand it back to Paul to discuss the fourth quarter of 2002 as well as 2003. Paul?

Thanks, David. Our results for the last two quarters indicate that the markets we serve are beginning to recover and our customers are slowly starting to invest in new technology.

On the other hand, the external economic and political environment remains uncertain. So we will continue to be conservative about our assumptions for revenue going forward. And be especially careful to keep our expense structure in line with those expectations.

Our goal is profitable growth. For the fourth quarter of 2002, we are increasing our guidance for revenue to $110 million. This would bring our full year 2002 revenue to approximately $416 million.

Gross margins for the fourth quarter are expected to be approximately 50 percent. And operating expenses, excluding amortization and restructuring, are expected to remain level with the third quarter at approximately $52 million.

This would put our operating expenses at $203.5 million, down approximately 9 percent from 2001.

Assuming $110 million of revenue, 50 percent gross margin, and $52 million of operating expenses, we should deliver an operating profit for the fourth quarter of about $3 million excluding amortization.

Below pro-forma operating income, other income is expected to be approximately $300,000. Our tax provision is expected to remain level at $300,000. And amortization is expected to be about $300,000.

Diluted shares outstanding are expected to be about $300,000. Diluted shares outstanding are expected to be approximately 27 million for Q4.

On the balance sheet side, I would expect cash to come down slightly from the current level to about 75 million by year end.

Receivables should be up both due to higher volumes and to DSO trending back to the 60 day area. Inventory should come slightly down from the Q3 level, offsetting some of the increase from the receivables.

Looking forward to 2003, we are assuming revenue in the range of $440 to $450 million. Sequentially, we would expect Q1 revenues to be down slightly from Q4, 2002, reflecting normal seasonality.

Given our new product plans and our movement to increase solution selling in both broadcast news and post-production, we are expecting our gross margin to increase and be at least 52 percent for the year.

We feel our current cost structure is appropriate, enabling us to continue our ambitious product development plans, which are vital to Avid's long term success.

For 2003, excluding amortization, we expect to maintain our operating expenses at the current level of approximately $52 million per quarter, with the second quarter being somewhat higher due to the cost of the NAB trade show.

Nevertheless, we continue to place strong emphasis on finding ways to do more with less and are committed to identifying opportunities to reduce costs wherever possible.

Based on these assumptions, we expect to achieve an operating profit of approximately 5 percent of revenue for the full year.

For 2003, other income and expense is expected to be about $1.2 million. Taxes are expected to be about $2 million. And amortization is expected to be approximately $1.2 million.

Finally, fully diluted shares for 2003 are expected to be approximately $27.6 million.

We plan to update the 2003 guidance during our conference call in January. At that time, we will provide additional details around quarterization and segments. These conclude my remarks. David and I would now be pleased to take your questions.

(CALLER INSTRUCTIONS)

We'll take our first question from Brian Horry with Equity Growth.

Depreciation and amortization in Cap-Ex for this year and next?

Depreciation for next year would probably be in the $12 million area. And capital spending probably around 10.

Depreciation in this current quarter was around 2.8 and capital spending was a little less than a million and a half, down about 50 percent from the prior quarter.

Okay. Can you highlight at all for the growth next year -- can you differentiate between the different product areas as to where you see the major sources of growth looking forward into next year?

Well, specifically, Paul mentioned in the guidance that we'll break it down by segment and quarterization when we do the update in January.

But if you just want the qualitative terms of what we're looking at, is growth across our product lines -- so we're looking for growth in our ability to do HD finishing -- which we're expected ongoing growth in the DV editing marketplace.

We're expecting ongoing growth in broadcast. We're expecting growth in our audio business and we're also expecting some growth in the 3-D area.

So we're looking for a pretty broad based recovery in the markets that we serve.

Okay. And can you talk about -- as you're looking at next year, what are the drivers that could help push margins up at a faster rate. In particular, on the gross margin, what are the things that could really help there?

Yeah, there's a couple of things. You know, Paul alluded to some of our investments in new products that are going to help drive improvements in gross margins. And that's because we're always focused on improving the price performance of our products. Which means we're pushing up the performance and pushing down our own cogs on them.

So next year, we expect to be introducing some new products that will provide that for us. In addition, in broadcast, a lot of these large deals are done directly and they carry pretty good gross margins with them as well. So we think that that'll be a driver for us in improving margins.

And certainly, as we continue to sell higher percentages of software only products, those carry very good gross margins.

Can you give us any sense as to what you think across all the product lines -- the split will be if software versus hardware -- this year versus next year.

Yeah, that's always a difficult one for us to split out because we have products that are very closely intertwined between hardware and software. And, in fact, I'd even point that out as a distinct advantage that Abbot has, particularly in the video side and in the audio side. That it's our system capabilities of delivering integrated hardware and software platforms that really differentiates [indiscernible]

So internally, we have a few products that are software only. For example, Express DV or XSI. And those things are very clearly entirely software based revenue. But for almost everything else we sell, there's a component of hardware to it. So we don't generally look at it as a split that way.

Okay. Thank you.

You're welcome.

Our next question will be from Matt [Rynar] with C.L. King and Associates.

Hi guys. Nice quarter, good work. As far as the profit breakdown, do you have an idea of what that is yet between the two segments for the quarter?

For this quarter just passed?

That just ended, yes. I know you normally break it out in the quarter; I don’t know if you have it available yet.

Actually don’t have the detail in front of me, but the Audio segment was, I believe, around $4 million and there was a small loss in the overall Video segment to get to the 2.5 of operating profit.

Okay, that’s what I was — that’s kind of what I guessed. On the — as far as the linear shipments in the quarter, you were saying you had more shipping in the front end. Does that imply that it’s slow at the back end, or did you just hold stuff back when you got to a comfortable point in the quarter?

Well, we went into the — we went into this quarter with a fairly strong backlog that allowed us to start shipping pretty early in the quarter, when in the past, with the backlog not quite so strong, it’s taken us longer to kind of get on a roll.

So you’ll be starting this quarter with a similar pattern?

We have an even more significant backlog going into this quarter, but it’s — it can be a little bit tricky to tie that exactly to shipments. There are some items in the backlog where there is some materials shortages. It might take us a little while to catch up. But it should be relative to other quarters in the recent past. We should be in pretty good shape in terms of linearity.

For the second half of your question, just as whether or not we had a slowdown toward the end, there wasn’t a slowdown. We in fact had some acceleration that we typically see at the end, but that went into backlog.

Okay, good. And as far as inventory was a little bit off, you said in your guidance that you expected it to come down a little bit next quarter. With that little bit up, just, you know, stockpiling for the orders for this quarter.

A little bit of that. There was a little bit of an increase in our Audio Division that really is just timing related, the materials related to Q4 products that came in earlier than expected. And then in addition to that, there’s an increase in inventory that’s related to large deals that have shipped, but for which we have not recognized revenue yet.

Oh, Okay.

We maintain those in inventory until we either collect cash or recognize the revenue.

Got it! As far as the tax rate, you gave some guidance on that. Is that — when does that get back to where it starts becoming a tax rate versus like a fixed amount?

Not for, you know, quite some time to come, and it’s primarily as a result of the fact that we have very significant net operating loss tax carry-forwards in the U.S., you know, in excess of roughly $200 million. So the taxes that we’re expensing really relate to our foreign operations and those, you know, should rise gradually, but not at all in proportion to total revenue and profitability.

Okay, great! Thank you. Good job.

Our next question will be from Gene Munster with Piper Jaffray.

How are you guys. Sorry I missed the timing of the call here, but I’m sure you’ve gone over this. If you could just kind of recap, give a little help. I’ve seen some names from certain broadcasters that their business is starting to improve. Obviously that plays well into your mix. Are you starting to see tangible dollars opened up in terms of their spending in the past quarter or so? Or is this more — the news I’m hearing more front end to the cycle?

Hi Gene, this is David. Yes, we are seeing a — I guess I’d say just increased optimism among many broadcasters. You’ve probably noticed that we had the release this morning about our France TV deal. That was very significant to us, not just because of the size of the deal, but also the importance of France TV in the region. That deal was almost two years in the making for us, which gives you a sense of the timeline of how far in advance broadcasters tend to plan these things.

So, what we’re expecting to come out of the improvement in the overall environment from broadcasters is both a near-term and also a longer-term benefit because some of the deals that we will be able to come across will have near-term opportunities, but some of them will be kicked off now and then not materialize until six months to a year from now. There’s a pretty good uptick going on.

How does that actually match with yourself? Do you just get more inbound calls or are your sales people starting to uncover more leads, or is there anything that’s sort of more tangible points?

I’d say that one of the biggest things that is working to our advantage is that we’ve got now over 50 systems and digital newsroom systems that are either on-air or being installed worldwide. And one of the important qualities about the broadcast market is that they tend to operate on word of mouth. We’re finding that a lot of our original sites that were installed a year or two ago are now serving as demonstration sites for new broadcasters who come in and want to see the equipment actually working.

So, more important than any ad that we could place is actually having a very impressive set of working stations out there that are on-air day after day that now serve as proof points for the next generation of customers to come in and take a look at it.

Good examples would be FTV that we announced last quarter in Taiwan. They’re now being viewed by other regional stations to see how things are going. And likewise, our Gannett sales that were our first customers here in the U.S. have served as a wonderful proof point for subsequent customers to look at.

Gene, I was going to say, in addition to that, we’re doing more and more repeat business with those customers that represent groups of stations so the Gannett Group, we just announced I think our sixth, seventh, and eighth station deals with the Gannett Group.

Yes, in fact to add on to Paul’s point, if you just looked at the total number of stations in the station groups that we’ve already penetrated, there’s something like over a hundred now additional stations that below to those station group who have not yet converted.

How about just [indiscernible] broadcasting as a percentage of revenue. Is it 25 percent? Is it 20 percent?

We don’t usually report that out externally.

Less than a quarter?

Less than a quarter of the Video business?

Or, you know, your overall business.

The broadcast market probably is less than a quarter. On the other hand, I should say that in this — in this quarter, you know, we had decent broadcast revenue, but the real story here was broadcast orders that were very, very robust and they’re now in the backlog.

Okay. I guess you’ve probably already talked about this, I guess sort of detail on what the backlog is?

Well, again, I hate to keep saying we don’t report things, but we don’t report that out. What we did say was that we went into the third quarter with a stronger backlog than we had had recently before that and we improved upon it fairly substantially in the quarter, which gives us really good visibility going into the fourth quarter.

And just one final question in terms of — and I think I caught part of this question too, but R&D spending, are there certain areas you’re focusing on because you guys are pretty heavy in terms of the R&D spending, areas that you’re focusing on over other areas, or any sort of commentary on where R&D spending is as a percentage of revenue going forward?

Well, in terms of what we’re doing in our product line, R&D goes the full range of 3D Video and Audio. You’ve seen that pay off on the Audio side with the introduction this year of [indiscernible] HD, and then also more recently MBox and then Digi-002, and there are additional things coming out later this year.

On the 3D side, we’ve had two major revs of XSI in one year, which is a pretty significant accomplishment for that team, with version 3 due out in October, at the end of this month. And then on the Video side, we’re investing for a product refresh across our product line from the low end to the high end. This year in June, in fact, we had the largest across-the-board release of products in the Video segment in the Company’s history. We refreshed our entire product line and we’re expecting to introduce a number of new products over the course of the next year as well.

So, the investment in R&D is pretty much across our business segments. But long term, we’d like to see the R&D get down in the range of 15–17 percent from where it is today. Some of the pressure we hope will start to come off the R&D later on next year.

Our next question will be from Neal Gagnon with Gagnon Securities.

Hi guys. I’m sorry to do this from a cell-phone, but David, you mentioned the elements that would be helping growth in ’03, HD finishing, [DB Editing] Broadcasting, Audio, 3D. Can you rank those for us to give us some idea of what’s going to be most important in the total sense of the Company? And then maybe over the next couple of years.

Sure. We’ve certainly talked a lot about the opportunity in Broadcast, which is not only broadcast news, but also broadcast production, so show production within a broadcast environment. And we expect that that percentage of our total revenue will increase over time.

We’re also expecting though for a recovery in the broad Post Production marketplace. With the decline in ad spending that took place over the preceding four, five, six quarters, there had been a decline in the need for production — in post production in commercial editorial, and we’re beginning to see the excess capacity taken up and now a moderate upsurge in business there. And we’re expecting that upsurge to continue over the course of next year.

HD actually we do believe is going to be a catalyst in driving the turnover of infrastructure in the post production marketplace because much of the infrastructure that’s in place today cannot fully support HD production. And the dynamics behind HD are being driven largely due to economics. It’s just cheaper and more efficient to do production in HD than it is to do it in film. And that we think is going to be one of the big drivers for propelling HD production forward, whether or not the final material is ever broadcast in HD.

In Audio, we’re actually expecting that — we did get a strong boost in Audio this year, and we’ll have a slight moderation in the growth rate of our Audio business next year. And then in 3D, we’re expecting a recovery there, but as you know, 3D represents a smaller percentage of our total revenue as a Company.

Good review. Thank you.

Our next question will be from Brian Gagnon with Gagnon Securities.

Congratulations on the third quarter, guys. The increase in the number of studios that have been installed, I believe in the first quarter it was 30 and in the second quarter it was 40, and now 50, with a lot more in backlog. But the most interesting thing I want to ask you about is this, in that situation, I remember when you announced the first one, and now you’re on your sixth, seventh, and eighth. Is that going to be a trend for many of the broadcasters, put one in, check it out, see how it works, and then go through the rest of their system?

Yes, actually it’s a good point and we do believe so. That a lot of these station groups, what they do is actually a very smart thing. They tend to do a pilot project at one station. Often it could be a Greenfield site, which was the case with Gannett. They chose WKYC in Cleveland, which was a brand new facility, but they have subsequently put it into other facilities that were retrofitted now for an all-digital environment.

Another example would be Sinclair where basically what they’re doing is putting in an entire network, centralized national news, and then distribute it to local news. That’s a very new business model and it’s pretty exciting because it’s going to allow them to really deliver very different economies of scale for how news can be produced for a large syndicated network.

So we think that that will be a pretty common trend among broadcasters, assuming that they are happy with their initial installations. And I’ll guarantee, we’re doing everything we can to make sure they’re happy with their initial installations.

How much money do they have to spend to retrofit not equipped with your equipment?

Well, to give you a sense of it, at WKYC where it was a Greenfield site, the amount of money that they spent on their Avid complete N10 digital newsroom was a small fraction, roughly three or four percent of the total cost of the facility. So that’s what it is for a Greenfield site.

If you’re looking at retrofitting, the amount of money necessary for a retrofit could be anywhere from — if it’s a small regional station, it might be a quarter-of-a-million dollars. And if it’s a large installation, it can go all the way up to, as you saw with France TV, 8.6 million Euros. That’s obviously a much larger network, but that’s how — that’s how big the system can scale.

Thanks guys.

Our next question is from John Evans with Coker Palmer.

Can you talk a little bit about, I guess — I get the sense from your backlog comments and the strong orders that you got that it was from the broadcast side. Doesn’t that carry better margins? And, I guess, if it does, why would you assume that your gross margins would go down sequentially?

The backlog is not all related to the broadcast orders. Some of that backlog represents unfilled demand for upgrades in a program that we had in the third quarter. And some of the broadcast orders that are in the backlog, you know, may not actually ship or be recognized as revenue until quarters beyond next quarter.

And normally in the seasonality, I mean, DSOs came down so dramatically and the receivables in dollars came down so dramatically, even though the revenues were up. Normally, from second to third quarter of seasonality, do DSOs normally go up?

From the second to the third quarter?

Yes, just because of, you know, Euros and some of the issues there?

I don’t think there’s any particular pattern in our DSOs in the — in the second versus the third quarter. I’d have to go back and look at that.

This drop in DSOs was related to the SKU within the quarter, with more of the revenue being delivered in the earlier part of the quarter. So we were able to collect our receivables earlier.

We had less of a hockey stick in the quarter, so to speak, than we usually do.

Okay, thanks so much.

At this time we have one question remaining in the queue. I’d like to remind everyone that if you’d like to ask a question or if you have a follow-up question, please press star, one, to signal. We’ll take our next question from David Diamond with High Rock Capital.

A very nice job obviously in your math through the numbers. You clearly get to a level of earning power well above what limited [indiscernible] is out there. But I guess what I’m wondering is, you talked a little bit about the increase of backlog and the objective to get the gross margin to 52 percent plus. I guess what I’m wondering is, if we look at the components of backlog that are going to ship into next year, do they have those types of margins in there, or is it stuff that you’re going to be introducing in the next year?

The follow-on to that is, to the extent of the stuff you’re introducing in the next year, typically what’s the tail or legs to new product introductions? So, for example let’s say — I’ll put out a number — 25 to 30 percent of your revenue’s mixture in new products at much higher gross margin, do those have a five-year tail to them or is it a two-year? I guess what I’d like to know is, you know, are we moving from the 70-cent level of earning power to much higher levels in the out years? Are you following me?

I’m following you. Let me sort of back up to the first one. The — some of the orders — some of the orders in the backlog are orders, like the broadcast orders, that do have those, you know, very attractive margins on them that we would expect to fall into next year and contribute to improved margins next year.

In addition to that, as David said earlier, we’ve got a number of important new products that will be coming out over the course of the year that also have very attractive margins in them that obviously are not yet in the backlog today.

The answer about the tails is, I’m not prepared to make any kind of a specific comment about financial results beyond 2004, other than to say, you know, we certainly hope those new products that we’re introducing are going to be with us, you know, well beyond 2003.

I guess another way of looking at it, if we look at the historical life cycle of products to the extent you introduce new products, do we get efficiency of volumes over time so that the gross margins ramp, let’s say, in year two, or do we have a scale-down of gross margin because of [indiscernible] degradation?

I think historically we’ve been able to maintain the gross margins on our products by continually improving them and adding features over time.

Okay. So, I guess the answer is if we assume [indiscernible] component, this uptick of margins is new stuff that you introduced during the course of the year, and let’s assume it’s not all linear because you’re going to introduce them over the course of the year, I suspect. Then one would assume that we’d see the full benefits of that margin, or conceivably higher margins, in the out years, again assuming that the demand is there for the product.

Sure.

Okay. Thanks.