Harmonic Inc (HLIT) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Harmonic Inc. third quarter's earning conference call.

During the presentation all participants will be in a listen only mode.

Afterwards we will conduct a question and answer session.

At that time if you have a question please press the one followed by the four on your telephone phone.

As a reminder, this conference is being recorded Wednesday, October 23rd, 2002.

I would now like to turn the conference over to Mr. Anthony Ley, President, Chairman and Chief Executive Officer of Harmonic, Inc.

Please proceed sir.

Thank you.

Good afternoon, I'm Tony Ley, president and CEO of Harmonic.

With me in the headquarters in Sunnyvale California, Robin Dickson our Chief Financial Officer and Michael Newman our Investor Relations spokesman, thank you for joining us.

As most of you know, Harmonic designs, manufactures and markets fiber optic, for delivering video, voice and data over cable, satellite and networks.

Today we reach our results for the third quarter, ended September 27, 2002.

As we discussed a few weeks ago while our customers remain very cautious in the near term, we are introducing new products [Inaudible].

We also continue to be very focused on reducing our cost and managing our cash.

Despite the current market uncertainty we believe the long term effort for broad band communication remains bright and we intend to maintain our strong market and financial foundation in order to capitalize on market opportunities.

As is our custom Robin will now review our financial results, after that I will discuss other significant events that have occurred during the quarter and our outlook in future periods.

Robin.

Thank you Tony, and good afternoon everyone.

During this call we may make projections or other forward looking statements regarding future events or the future financial performance of the company.

We caution you that such statements are only predictions and that actual events or results may differ materially.

We refer you to the documents that Harmonic filed with the F.C.C. including our 10K and 10Q reports.

These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.

Today we announce our results for the third quarter ended September 27th 2002.

For the quarter we reported revenue of $37 million down from $57.5 million from the third quarter of last year and down sequentially from $66.3 million from the third quarter in 2002.

As we discussed during our conference call a few weeks ago we are facing a very challenging capital spending environment worldwide which impacted our convergence systems and broadband access networks divisions.

Convergence systems which provides digital head-end systems to a variety of broadband service operators accounted for 64% of our total revenue.

Of the third quarter, CS division reported sale of 23.8 million down from $39.7 from the third quarter of 2001 and down sequentially from $32.7 from the second quarter of 2002.

Our Broadband Access Networks division which provides fiber optic systems principally for cable networks accounted for 36% of our total revenue.

For the third quarter our band sales were $13.2 million down from sales of 17.8 million for the third quarter of 2001, and down sequentially from $23.6 million in the second quarter.

Domestic sales represented 68% of our revenue in the third quarter compared to 77% in the second quarter.

So in absolute dollars our international sales held up fairly well and fell only slightly by about $1 million compared to the second quarter.

The big sequential drops were in both the domestic cable and domestic satellite segments.

The major MSO's are being very cautious about capital spending following the Adelphia collapse and the subsequent scrutiny from the investment community.

Also we saw lower shipments of N.S.G.'s for video on demand deployments than in the first half of the year.

We believe that we are now at the point where the initial major VOD launches are under way and most operators will be accessing the results before they move ahead on a large scale in additional systems.

N.S.G. however continue to be a very significant product line for conversions, second only to encoders.

In the satellite segment we believe that the continuing review of the merger between EchoStar and DirecTV depressed spending to even lower level than we anticipated.

However we are pleased that the review process appears to be moving towards a resolution although it could still be sometime before the dust settles.

While the satellite segment was hurt by the ongoing merger reviews, I'm pleased to report that we added another new video over DSL customer in the telecom market and our broadcast market was very solid as T.V. stations continue to transition to digital transmission.

However our largest customer remain the M.S.O.'s and our two 10% customers in the third quarter were Charter at 23% of total revenue and ComCast at 12%.

Sales in the cable industry as a whole represented 72% of our total worldwide sales in the third quarter, very similar to second quarter.

Gross margins in the third quarter were 26%, down from 31% from the third of last year and down sequentially from 35% from the second quarter.

Lower than expected sales levels have clearly impacted our gross margins despite of our continuing efforts to cut costs and improve efficiencies.

Operating expenses excluding special charges were 23.5 million for the third quarter, down from 29.3 million for the third quarter of last year and down sequentially about 7% from 25.1 million in the second quarter.

We remain very focused on cost control efforts.

With a view to weathering the current storm without hurting our long term competitive position.

Our headcount is currently around 630 down from over 700 at the end of Q2.

We reported the charge for severance costs of approximately $800,000 in the third quarter for a recent workforce reduction in July.

As we noted a few weeks ago in the light of reduced head count, current business conditions and the very depressed local commercial real estate market we have reassessed accrual for excess facilities.

It is extremely difficult to sublease surplus real estate due to the substantial amount of vacant space already on the market.

Therefore our assumptions with regard to both the rates at which we could sublease and the time it could take to find sub tenants have changed.

Consequently we reported a third quarter charge of 22.5 million for the cost of excess facilities.

Finally we reported a special benefit of $2.1 million resulting from products sold in the quarter which has been reserved in prior years as excess inventory.

Excluding these special charges and credits and the effects of non cash accounting charges for the amortization of intangibles, our pro-forma net loss for the third quarter of 2002 was $13.3 million or 22 cents per share.

Compared to a pro-forma net loss of $11.9 million or 20 cents per share for the same period of 2001.

Including these special charges and credits and the effects of accounting charges for the amortization of intangibles, the gap net loss for the third quarter of 2002 was 38 million dollars or 63 cents per share.

Turning to the balance sheet our cash balances at the end of the third quarter, was 54.6 million.

Up slightly from the end of last year and down modestly from $56.9 million at the end of the second quarter.

We are pleased with our continuing success in maintaining cash levels which reflects our strong focus on balance sheet management.

Receivables were 23.4 million at the end of the third quarter down sequentially from 38.5 million at the end of June.

Outstanding historically low 57 days compared to 61 days at the end of the second quarter and 65 days at the end of last year.

We put significant work into monitoring credit terms and collecting receivables and these efforts are paying off.

Inventory was $32 million at the end of Q3 up sequentially from 27.8 at the end of the second quarter.

Our increased inventory resulted mostly from the unexpected sales short fall that we experienced during the third quarter.

We have made the necessary adjustments to purchasing and production levels and most of the increase represents current products that we expect to sell in the near future.

Our capital spending in the third quarter was less than $1 million and we expect no significant capital spending in the 4th quarter.

This would put capital spending at less than $5 million for the full year 2002.

With respect to our immediate outlook we believe that we will continue to see caution on the part of our major customers.

In light of these difficult conditions our current expectations for revenues in the 4th quarter are in the range of $37-$40 million.

With a similar pro forma loss to that reported in Q3.

With respect to next year however we may be seeing some early signs of possible improvement.

First we believe that the outcome of the proposed satellite merger will be finally resolved if not within the next few weeks then certainly by early next year.

Secondly while capital spending outlook and cable generally remains mixed, the anticipated closing of the ComCast AT&T merger seems to be leading already to a pick up in activity.

And finally although we expected the difficulties of many of our large European customers will take some time to be completely resolved, progress is being made and we believe that some customer will be in the position to spend again during 2003.

In summary we're dealing with the current conditions by continuing to reduce our operating expenses and managing our balance sheet and cash very carefully.

We expect to end the year with cash balances between $45 and $50 million.

We remain well equipped to continue to develop and roll out new products and maintain our competitiveness in all of our markets worldwide.

That's all from me.

Tony.

Thanks Robin.

Despite the disappointing spending environment in the third quarter we continue to leverage on our products to penetrate further into both existing markets and into new markets.

During the quarter, we saw interest in video-on-demand continue to increase in domestic cable.

We announced that Charter Communications is deploying [Inaudible] and gig light PWDM transport systems for video-on-demand solutions in 12 markets, with additional markets planned for later.

We now have these deployments with virtually all of the major M.S.O.'s in the United States, including two new V.O.D. customers added in the quarter.

We also announced that TeleWest Broadband has installed our Metrolink 100 gigahertz TWM transmission system in southwest England.

This represents the first deployment anywhere of this system.

We've also continued to expand satellite customer base worldwide.

During the third quarter, APT satellite, a leading provider of satellite network services in China and the Asian Pacific region announced the deployment of encoders and multiplexing systems to expand it's broadcast capacity within its existing satellite bandwidth.

We also made head way in new markets, during the third quarter NorTV in Brazil selected our digital head-end system for it's new wireless MMDS technology to allow access to services for approximately 200,000 homes.

We expect to make more shipments in coming weeks.

We also shipped a video overlay solution to a new domestic tell co customer and another video over DSL solution to a new international customer.

We expect we will talk more about some of these new applications in coming periods.

We also announced interaction solutions for transmitting MPEG to video over IP.

We've overcome the technical difficulties surrounding the transmission of MPEG to video over IP, and released broadcast network gateway, which together enable a reliable delivery across the public and dedicated IP base networks.

While the current market conditions are very challenging, the factors that drive our business long term remain in tact.

According to a recent report by Informa-media, there were approximately 34 million broadband subscribers at the end of 2001.

By 2007 the number is forecast to grow to over 225 million subscribers with the majority in cable modems.

We believe many customers are going to make significant upgrades to their networks in order to keep pace with services worldwide and to remain competitive.

While our customers remain very cautious in the near term we believe some of the impediments to spending may start to be removed shortly.

A decision on the EchoStar DirecTV merger, AT&T Broadband merger and the financial restructuring of some of the larger European cable operators should provide a boost to our market and we should begin to see the results of this early next year.

In conclusion, we remain very active in introducing new products and strengthening our technology across a wide range of broadband markets.

We continue to be very focused on reducing our cost and managing our cash.

Despite the current market uncertainty we believe the long term outlook remains for broadband communications remains bright, we intend to maintain our strong market position in order to capitalize on future market opportunities.

This concludes the formal part or our presentation and now Robin and I will be pleased to entertain any questions you may have.

Thank you, sir, ladies and gentlemen, if you would like to register a question please press the one followed by the four on your phone.

If your question has been answered and you would like to withdraw your registration please press the one followed by the three, if you are using a speakerphone, please lift your handset before entering your request.

One moment please for the first question.

Our first question comes from the line of Alan Bezoza with CIBC world market.

Please proceed with your question.

Hi Tony, Hi Robin.

Couple of questions, first on AT&T broadband some of your competitors have been seeing up take recently from AT&T, they increased their spending on infrastructure upgrades, can you tell us what you see there and do you continue to think you are keeping up with certain levels of share there?

And on Charter, many of your competitors have seen fall off from charters, I understand you are selling the NSG product there but do you think that the levels there are sustainable?

Thank you for your questions.

AT&T broadband I think will agree, activity level there has increased and is increasing as we speak, and we are very confident about our position within the AT&T systems.

With respect to Charter, I think Charter has made it very public that they expected their capital spending to decrease during the second half of this year and of course they have been a very large account for us and the spending has come down more or less as they predicted.

So going forward do you expect it to fall off even more?

I'm sure they are busy doing their plans for next year, we expect to have a very significant part of their business.

As you know we are a very large supplier to Charter, particularly the fiber optics.

The more we go forward, the more we can see what they will do.

But given what they achieve, we would expect spending to be less next year than this year for sure.

A question on operating expenses.

Where do you see them [Inaudible] R and D does that continue to decline and also in sales and general administrative?

I think we will continue to keep the efforts going to keep our costs in line with our business.

And this is a company that focuses very much on technology and a very high level of services support for it's customers and we will go on protecting those areas as we should.

Any comments on levels of R and D?

No I think it's very early at this stage.

This is a continuous process and we will let you know as we go forward.

I think it's reasonable we could expect some continuing reduction in Q4, I can't point to any significant change at this point which is why I said earlier that we would expect our loss in Q4 to be similar to Q3 on similar levels, but we certainly continue to move on taking costs out of the company as best we can.

My last question is on the international front.

Besides TeleWest what other do you have for continued growth on the international side?

Let's see, taking that in pieces.

Actually continues to remain fairly level for us and what we're seeing is that re-structuration of companies like NTL is nearing completion and we're starting to see activity of the sort, but you get before they start to place orders.

We're engaged with a number of these companies in the design of their systems and looking at what they do next.

Thanks guys.

Next question comes from line of Dennis Galleger with SoundView Technology group.

Thanks, not a lot of questions, just looking out over the next quarter or two is your cost structure in place where you want it to be?

No, ideally it's not.

But clearly as we look towards 2003 we do believe there's some reason for optimism that some of the impediments as Tony called them is to customer spending may be removed, not all of them, but certainly some.

And again we're talking about resolution of the DBS merger in the U.S. and hope for optic spending in places like AT&T ComCast and so forth.

We certainly look to see relief on the revenue line, but at the same time we are going to drive it in the other direction as well and as we said earlier try to continue to take out costs, it's a continuum.

So the answer to your question is no we're not happy because we're losing money.

We would like to take care of that.

But you are anticipating keeping your expense lines, driven another billion out of R and D, I assume you don't want to take that anymore out of there.

I think it depends on the outlook for next year.

When we're certain what it is we will bring expenses in line to get the finances where they need to be and nothing in these times [Inaudible], if we find it necessary to cut back, we will cut projects in R and D.

We are looking pretty hard in plans for next year which is basically based on a large extent of what we are hearing from our customers who's own plans are still being formed, it's a bit of a moving target at the moment, but once we have some news we'll talk about it.

Thanks.

Next question comes from the line of Daniel Ernst with Rodman and Renshaw.

Please proceed with your question.

A follow-up on the Charter situation.

With them being 23% of revenues and you've already shipped the products for the 12 first markets, it's reasonable to assume that could fall off more than 50% in the next quarter unless you have backlog or you have a definitive order set for additional markets?

It's a little more complicated than that.

We've been selling a great deal of fiber optic equipment to Charter as they have built up their networks.

If you know, as we said, we're starting to get involved now on the side initially with N.S.G. product and that's just initial deployment of that product.

So when we refer to a reduction in spending, we are really referring to the fiber side of the network, we're not expecting so much next year and this year.

On the other hand when it comes to the whole problem with digital head-ends of helping them more effectively by merging more channels to digital and so on, we would expect that side of our business to increase.

Right, but given your forecast of a straight flat revenues for next quarter are you assuming an aggressive down turn or pick up in some of the other activities from AT&T and ComCast in particular to make up the difference?

We would expect them to decline and AT&T to come up, absolutely.

Coming back to the style of question -- have you had additional conversations with those folks, now that the decision is effectively made or is that someone still on hold?

Sorry, which folks?

EchoStar and Dish.

We have very profound relationships with them, I think all we can say is until this is settled, everything is on hold.

Fair enough, thank you.

Next question comes from the line of Eric Buck with Cattidon Advisors.

Please proceed with your question.

Thank you.

Couple of questions, first of all in looking at the cash position that you thought you could close the year with that looks like more substantial cash strain than in last several quarters, does that mean you have -- what you can from a working capital standpoint and then secondly and a kind of a deeper question on the satellite business, I know the timing of when this gets settled has some impact, but I would assume what the outcome is has an impact as well.

Maybe you could kind of go through the various potential scenarios whether the deal goes through, whether it stays separate or whether some other deal is structured and what the relative impact might be on your business with the satellite companies?

Okay, Eric let me address the cash question and I'll turnover the satellite question to Tony.

I think on cash we're recognizing that given the lower level of revenue we had in the third quarter, although we have done a pretty good job of maintaining cash balances for the 9 months, they will take a little bigger hit than we have seen before, a little bigger hit in the 4th quarter.

We've been pretty conservative in giving guidance on cash, I hope we end up with the same result, but I think it's reasonable to expect given the type of quarter we've had that we will see a bit of a hit.

But I still think we are going to end up in the high 40's which is plenty of cash to upgrade the company as its currently structured.

What is the appreciation and amortization?

It runs a little under $4 million per quarter.

You could say about $15 million a year that excluding the intangibles, that's the other stuff.

In regard to the satellite situation, I think from our point it's fairly clear that whichever way it goes these systems will be requiring more of our product for one reason or another.

I really don't feel it's appropriate for me to get into how that will shape out if it goes one way or the other.

We just look forward to the issue being settled and the industry moving forward.

Is it fair to say if there are more than one operator out there that there would be more demand for local channel availability?

It all depends on what the plans of the operators are and if they are combined or separate, that's really as far as I'm going to go.

Okay thanks.

Next question comes from the line of Anton Wahlman with Wedum and Company.

Please proceed with your question.

Can you hear me?

Couple of things, first of all, you mentioned video overlay project and video over DSL project that were new in the quarter, can you give a little more detail on that?

Video over DSL, it's an international project, it's fairly large and it's one of these situations where we built the head-ends to support couple of channels of video each of the regular rate on an DSL network and that system is shipped and installed and operating [Overlapping speakers] I'm not sure the commercial service is rolled out but our piece is done.

I am sorry what was that piece?

Is it in Europe, Asia, Latin America?

We can't name the customer at this point, but it is outside the U.S.

Is this the same video overlay project or were those two differnt?

No, let me explain.

The video over DSL is digital head end where the analog signals are converted and transmitted over IP, this is sent over the DSL network.

The video overlay we think is a very good area for us.

This is case of building phones and networks at that site and this is to provide analog video over those networks.

So you're saying that's the fiber optic outside plant?

Sorry?

The video overlay is more of a outside plan --

I'm not 100% sure, it's designed to go over networks, this particular one, I believe it's for TelCo, and they are using it as overlay on their network.

You said you made first shipments of the curb switch this quarter, is this more for business or for residential use in the first phase of this?

We are pretty sure that curb switch that we've designed, the main application initially is for business.

So this is sort of a domestic trying to serve business customers with some flavor of 100 Base-T equivalent.

That's exactly.

The curb switch let's you provide, using the existing fiber network, both let's you run down the street and then you can run up to 24 100-base T fibers from that node into businesses and it provides 100 base T into the business.

Is this over builders or one of the traditionally incumbent M.S.O.'s?

The first shipments were initially for international but we do have orders in our back logs for North American M.S.O.'s.

Final Question, on AT&T given their sharp increase in business started a little bit this year and hopefully will continue as we go into next year, how would you comment on pricing competition, in terms of everybody fighting for this business, what kind of pricing have you seen?

Have others been asked to jump through new types of hoops keeping inventory for customers -- are terms of business same as usual just business higher volume?

From what I've seen so far our business with AT&T has been very much on outstanding terms and standard terms and conditions but with very tough delivery commitments, we are very pleased with the way it's going.

By the tough delivery commitments, what does that mean in practice?

We're supposed to deliver on the days when they ask for the product.

Okay,

Which might be very reasonable request.

Thank you.

Thank you.

The next question comes from the line of Greg Menasa from SCR and Company.

Please proceed with your question.

Just a quick question, Robin you mentioned earlier in the call that in the quarter you basically saw lower shipments of N.S.G. for video-on-demand deployments with most of the major V.O.D. launches under way and later on in the call Tony painted a much more bullish picture of the N.S.G. market opportunity.

Could you kind of reconcile those two views and give us a little more color on that?

Thanks.

Tony can maybe add some color.

In terms of what we said, I don't think the statements were inconsistent, our total shipments of N.S.G. in the third quarter were down from what we saw in the first and second quarter.

Nevertheless we did add, what Tony pointed out, two more, we added two more significant customers during the quarter.

Both statements are true.

I think we have seen in the first half some pretty sizable shipments to M.S.O.'s who are launching service almost as we speak or certainly for the fall.

I think we are expecting to see a little bit of a pause if you like, until we see the results of those efforts.

I think it's marketing curve -- everybody puts in their initial systems now they have to ring it all out, get it going.

Then they will get back to the rest of the systems and we expect the market to increase at that point.

Thank you for the clarification.

As a reminder ladies and gentlemen, to register a question press the one followed by a four on the phone.

Alan Bezoza with CIBC world market please proceed with you follow-up.

What did you say to Eric that the depreciation and amortization was?

It is close to $4 million.

It is in the 3.7, 3.8 to about 4, about that range.

You can assume at the moment it's running about 15 million per year.

And on the N.S.G. server, [Inaudible] what is the drive towards Ethernet?

Has that continued for V.O.D. or slowed down and has anyone converted from D.V.D. transport to Ethernet?

I think if someone has gotten an E.S.I. system and put it in the transmission system and it's working they will leave it alone.

As far as we see they use -- gig Ethernet as the mechanism to aggregate signals together for service and transport them from head ends to hops.

This is the right way to go and industry has adopted.

How has the pricing been on the product?

It's been fine.

With all the competition rumbling in the winds, but I think people deliver products for the application are really Harmonic and Atlanta and I believe they use this interface.

How does it change as some of the V.O.D. servers have signaling going out of the server, does that change anything for your server?

No it's perfect, because what you do, in the head ends you have a bunch of servers, the gigabit outputs goes to an Ethernet switch which kind of aggregates them.

Then you need transmission system from the switch down to the hub.

That's where we have an opportunity to sell our gigalight which does that and can go up to 400 kilometers.

And then at the far end the M.S.G.'s has been designed with the gigabit input already in place.

You just take your fiber with this gigabit on it and plug it straight into the N.S.G.

The product works really well in this application.

Thanks for clearing that up.

Gentlemen, there are no further questions at this time, please proceed with your presentation or any closing remarks.

Thank you very much for joining us, we look forward to see you again next quarter.

Thank you and goodbye.

Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you please disconnect your line.