Harmonic Inc (HLIT) 2002 Q4 法說會逐字稿

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Your conference call will begin shortly.

Once again, please continue to stand by, and thank you for your patience.

Ladies and gentlemen, thank you for standing by.

Welcome to the Harmonic 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 "1" followed by the "4" on your telephone.

As a reminder, this conference is being recorded Wednesday, January 22, 2003.

I would now like to turn the conference over to Anthony Ley, Chairman, President and CEO with Harmonic.

Please go ahead, sir.

Good afternoon.

I am Tony Ley, President and CEO of Harmonic.

With me in our headquarters in Sunnyvale, California, are Robin Dickson our CFO, and Michael Newman our Investor Relations Consultant.

Thank you for joining us.

As most of you know, Harmonic designs, manufactures and markets fiber-optic and digital head-end systems for delivering video, voice and data over cable, satellite and Telco networks.

Today we released our results for Q4 and full year 2002.

While many of our international customers continue to confront financial restructuring and regulatory issues, the resolution of business consolidations in the US has resulted in improvements in capital spending, and a more positive outlook for moving into 2003.

During Q4, we were pleased with our sequential sales increase as well as the continued execution of our strategy to introduce new products and strength of our technology leadership across a wide range of broadband markets.

We also continue to streamline our operations and conserve cash.

During 2002, we maintained our strong market position and our financial foundation in order to capitalize on an anticipated increase in capital spending during 2003 and beyond.

As is our custom, Robin will now review our financial results.

After that, I'll discuss other significant events that have occurred during the quarter, and our outlook for future periods.

Robin?

Thank you Tony, and good afternoon, everyone.

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

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

We refer you to documents that the company files with the SEC, 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 of forward-looking statements.

Today we announced our results for Q4 and Year Ended December 31, 2002.

For Q4, we reported revenue of $39.3 million, down from $56.7 million for Q4 of 2001, but up sequentially from $37 million in Q3 of 2002.

For the full year, we reported revenue of $186.6 million, compared to $203.8 million in 2001.

As anticipated, our Q4 revenue reflects continuing weak capital spending worldwide.

However, the modest sequential revenue increase over Q3 reflected improving demand from some domestic customers.

Domestic sales represented 70% of total sales for Q4-up from 68% in Q3, and with international sales essentially flat with Q3, at just under $12 million, or 30% of sales.

Our broadband access network division, which provides fiber-optic systems principally for cable networks, had sales of $18.3 million; up 39% sequentially from $13.2 million in Q3.

Convergent systems, which provides digital head-end systems through a variety of broadband service operators, had sales of $21 million, compared to $23.8 million for Q3 of 2002.

Our largest customers remain the domestic cable operators.

Sales to the cable industry represented 67% of our total worldwide revenue in Q4, compared to 72% in the previous quarter-in Q3.

Our two 10% customers in the quarter were Charter at 13% and Comcast, which if we combine with AT and T on a pro forma basis for the full Q4, accounted for 23% of our sales.

The band division benefited from completion of the Comcast-AT and T broadband merger.

As Comcast appears to have already started the process of upgrading AT and T systems.

We are optimistic about Comcast's announced plans to upgrade the former AT and T systems in order to be eventually able to roll out more digital services.

Just as Comcast has done quite successfully in many of its own systems.

On the other hand, in Convergent systems we saw pause in video-on-demand deployments, as most of the major MSOs focused on turning up the systems they have already equipped, although our NSG continues to attract new customers such as Insight communications.

As I indicated, Charter remained a major customer.

But our overall business with them was down, again, sequentially.

With this network upgrade program now in the later stages, we expect total revenue from Charter to be lower in 2003 than in 2002, both in absolute dollars and as a percentage of revenue.

This will principally affect our band division, while Convergent expects to see continuing opportunities in their new service launches, including additional VOD deployments.

The satellite segment represented 25% of our total worldwide sales in Q4.

Up from 11% in Q3.

During Q4, as most of you know, we saw the government reject and the company subsequently call off the proposed merger between EchoStar and Direct TV.

Just after New Year, Direct TV announced that they would launch local channels in an additional 50 markets, along with additional high-definition services.

Following a year in which the merger proposal review was center-stage, we see this announcement as a sign that the satellite providers are likely to expand services, both in new local markets and with new offerings during 2003.

Our gross margins in Q4 were 24%--down from 33% from Q4 of 2001, and also down slightly on a sequential basis from 26% for Q3.

Mostly due to the effects of a slightly less-favorable product mix.

Our lower sales levels in the second half of 2002 also had an overall impact on our gross margins.

During Q4, we streamlined the management of our manufacturing organization, resulting in lower overhead, which should begin to provide cost savings in 2003.

I should also point out that our gross margin calculation excludes a benefit of $1.9 million, resulting from products sold during the quarter, which had been reserved in prior years as excess.

Pro forma operating expenses excluding severance costs, were $21.1 million for Q4, down from $26.7 million for Q4 of 2001, and down sequentially from $23.5 million in Q3.

We remain very focused on cost control efforts.

By the end of December, we had reduced our total headcount to 587; down from over 750 at the end of 2001.

We reported $400,000 in cost of sales and $300,000 in operating expenses in respect of severance costs in Q4, related to workforce reductions.

Excluding these total severance charges of $700,000, and the inventory benefit of $1.9 million and the effects of non-cash accounting charges for the amortization of intangibles, our pro forma net loss for Q4 was $11.5 million, or $0.19 per share, compared to a pro forma net loss of $8.3 million, or $0.14 per share for the same period of 2001.

The GAAP loss net loss for Q4 of 2002 was $13.8 million, or $0.23 per share.

A reconciliation between pro forma and GAAP reporting for Q4 and full year and explanatory notes are contained in our press release.

Turning to the balance sheet, our cash balance at the end of 2002 was $49.2 million.

This is down modestly, as we expected, from $54.5 million at the end of September.

During all of 2002, we used only $5 million in cash, reflecting our continued strong focus on balance sheet management.

Receivables were $25.4 million at the end of Q4-up slightly in line with our sales, from $23.4 million at the end of Q3.

Day sales outstanding remained at a low 58 days, compared to 65 days at the end of 2001.

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

Inventory was $25.9 million at the end of Q4-down sequentially from $32 million at the end of Q3.

You may recall that we ended Q3 with more inventory than we'd anticipated, because of a sudden sales shortfall we experienced during Q3.

We are pleased with the adjustments we've made to our purchasing and production levels, to bring inventories down during Q4.

Our capital spending was about $500,000 in Q4, and approximated $3-to-3.5 million for the full year.

In 2003, we again expect CAPEX to be under $5 million.

With respect to our immediate outlook, we see continued caution on the part of our major international customers, which financial difficulties will need more time to be resolves.

However, we are pleased to see NTL emerge from bankruptcy-perhaps a first step to seeing some improvement in Europe later this year.

Domestically, however, we're already seeing signs of improvement.

The completion of the Comcast AT and T merger and resolution of the EchoStar Direct TV merger situation have generated increased order activity in Q4.

They point toward continuing gradual improvement in 2003.

Although Q1 is seasonally our slowest quarter and often sequentially down from Q4, our current expectations are for a sequential increase in revenues in Q1.

We anticipate revenues to be in the range of $40-42 million, with a pro forma net loss in the range of $0.12-0.16.

We expect to see continuing sequential revenue growth in Q2, but it's still too early in the year to provide a range of numbers, because we just don't have enough visibility into timing.

In summary, we've weathered some very challenging market conditions in 2002 by continuing to execute on our market and product strategy, reduce our operating expenses, and manage our balance sheet and cash very carefully.

While our international business remains soft, we are seeing signs of improvement domestically as we move into 2003.

We remain well-equipped to continue to develop and roll out new products, maintain our competitive position, and expand our position in broadband markets worldwide.

Tony?

Thanks, Robin.

Although the CAPEX environment remains soft in Q4, there were many developments I'd like to call to your attention.

In the cable market, the most important news is that Comcast announced they intend to upgrade the systems they acquired with AT and T broadband.

They also stated their objective to improve the picture quality and to add video-on-demand services.

As most of you know, we've been a significant equipment vendor to both AT and T broadband and to Comcast.

Most specifically, we continue to build on our position as a leader in video-on-demand.

Today, seven out of the top eight cable operators in the United States have deployed our [Mericast] services gateway.

The use of IP for the transport of video from central head-ends to remote huts which Harmonic pioneered is becoming the standard of architecture.

In many systems, we supply our [Gigolyte] system for IP transport.

According to a recent industry survey by [In-stat's] [MDR], the number of subscribers taking and paying for video-on-demand is expected to go from 3 million today to over 11 million in 2006.

We believe our industry product line will continue to be successfully deployed for these services.

In the satellite market, we expanded our worldwide customer base with a new deployment at Sun TV, a major broadcaster in Southern India.

Sun TV has installed our [MPEK] Sun Video encoders and statistical multiplexes for an extensive head-end upgrade.

The upgrade enables twice as many channels to be carried today on their existing satellite bandwidth, leaving bandwidth to spare for future channel expansion.

This is a much more economical way of developing broadband services-by launching more satellites or leasing additional transponder capacity.

Robin mentioned that the EchoStar Direct TV deal has been resolved.

Now that the uncertainty of the structure of the industry has been removed, we expect to see our market opportunities return.

To that end, we are pleased to see operators with plans to expand coverages into 15-year markets for services, and also to increase a number of high-definition channels.

Our domestic satellite customers are extremely demanding when it comes to their requirements for product development and improvements in system performance.

As a result, they help us remain at the forefront of technology.

We continue to make progress in new markets.

Our [broadband] market remains very solid, as TV stations continue the transition to digital.

In the Telcom arena, we recently announced that SoftBank Broad Media Corporation of Japan selected our digital television head-end for its TV over DSL service-expected to be the largest in the world.

Our video systems will enable broadcast-quality digital video to be offered to more than 1 million DSL subscribers-the fastest-growing broadband network in Japan.

The services that SoftBank provides include multi-channel broadcast television and also video-on-demand.

This is the first of its kind in Japan.

The service was launched in Tokyo at the end of the year and will extend to other cities during the next 12 months.

We're very pleased to have won yet another system in the Asia-Pacific market.

Meanwhile, we continue to develop and roll out new products.

During Q4, we introduced the [Maxling] plus-a [5-lb, 15-ml] transmitter using external modulation.

This transmitter is at the very core of our band division of fiber optics.

I'm personally delighted to see that we have once more extended the state-of-the-art with a quite dramatic increase in performance over existing products.

The transmitter is based on an invention for which we've been granted a patent.

The result is that we can transmit much further over longer distances.

This is very important in the interconnection of head-end.

Use of this type of transmitter is far less expensive than compressing all the analogue channels through digital format for transmission to a remote site.

A second application of importance is in the broadcast transmission in DWDM systems such as our MetroLink, and also in video overlays in [passive] optical networks.

The increased performance of the transmitter greatly reduces the amount of optical amplification, and hence the overall cost of the network.

We've also expanded our family of [nodes] with the introduction of the PowerBlazer III.

Until now, all of our [nodes] have been designed specifically for strand-mounting on poles.

While they can be installed in street cabinets, that's not the best solution.

The PowerBlazer III was designed after extensive market surveys-especially with our European customers-for use in street cabinets and inside buildings.

It makes use of the quite extensive array of modules designed for the other PowerBlazer [nodes].

To our knowledge, we're the only company that's succeeded in designing a common family of modules for all the different [nodes], with advantages to us in manufacturing, and to our customers in terms of the stocking of spares and training of their technicians.

We don't stray from, once again, our commitment to stay on the leading edge of open-industry standards.

First, we announced our own [inaudible] encoders had completed the fourth phase of the digital program insertion tests at table [lapse].

Digital program insertion is very important, as it permits the injection of local digital television programs or advertising material into a digital video stream that originated in another geographic location.

Unless this is used as such a standard, the active insertion causes the set-top box to lose its lock on the video, and the viewer is subjected to a second or so of chaos on his screen.

When all the signals comply with this standard, material can be added locally into a national broadcast, or a broadcast transmitted from original head-end.

Secondly, we were mentioned in the announcement by Sony, of its new [Passage] technology, which was introduced at the Broadband Plus Show at Anaheim, in December.

Passage allows more than one conditional access system to co-exist on a single network.

This means for the system, making use of proprietary set-top boxes, it can be modified to permit other standard set-top boxes to be installed, as well.

There are obvious financial and performance advantages to the operator.

A special version of the Harmonic BNG is used to modify the [MPEG II] stream, and insert the additional encryption.

We believe this new development could have major repercussions within the industry.

In summary, while the current market conditions remain a challenge, we believe the outlook for broadband remains very bright.

The number of broadband subscribers worldwide is expected to grow from around the present 34 million to over 225 million by 2007.

We believe many of our cable, satellite and Telco customers will need to upgrade their networks to keep pace with the long-term demand for more channels and more attractive services.

We expect to see an intensifying battle to capture subscribers between the cable, satellite and Telco operators and this competitive environment will accelerate the upgrades.

While many of our international customers continue to face financial and regulatory impediments, the resolution of the major mergers in the United States has resulted in an increase in domestic sales during Q4, and a more positive outlook for 2003.

During 2002, we continued to roll out new product, extend our worldwide customer base, reduce operating costs and maintain our financial foundation.

We believe we'll hold our position for the future, and of course we're decidedly more optimistic about the state of the domestic market in the coming year.

This concludes the formal part of our presentation.

Robin and I will be pleased to entertain any questions you may have.

Thank you.

Ladies and gentlemen, if you would like to register a question, please press the "1," followed by the "4," on your telephone.

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One moment please for the first question.

Our first question comes from the line of Anton Wahlman, with Needham and Company.

Please go ahead with your question.

Hey, Tony and Robin.

Can you hear me?

Yes.

A couple of things.

First of all, could you discuss this a little bit?

You said Comcast has started their earliest phases of dealing with the AT and T properties.

Could you discuss whether they're deploying what you'd consider a conventional architecture?

Or are they trying new tricks, basically?

Are they doing anything that's new or different?

Or is this kind of old bread-and-butter?

I think for the detailed architecture questions Anton, I really think you should refer those to Comcast.

But what I can tell you from what we've seen of the way they're going about the networks, the present Harmonic product line fits in very well with everything that they're doing.

Okay.

On the encoding side of the business, encoding for cable, clearly you did the cable vision network.

But would you say that there's any meaningful number of other cable operators, as well, doing essential deployment kind of a Scientific Atlanta, Motorola type network that does enhance during coding, using the [15] coders, as well?

Or is that phenomenon not particularly widespread?

How would you characterize that?

I think it's a case of the use of more encoding within the network growing.

We've found that several of these rather large [MSO]s are finding that they're running out of [forward] bandwidth.

Of course, one way of solving this problem is to compress.

We can put a very high number of digital channels now in the place of one analogue channel.

I can tell you that there's more interest in this, and we would expect supplying encoders to various cable operators for this and for local channel encoding and so on during 2003.

All right.

Robin, what was D and A, respectively, this quarter?

I don't have a hard number, Anton.

I believe it's around $3.5 million on depreciation and amortization.

That's not the goodwill or intangible amortization, which happens to be a similar number.

The depreciation on equipment and so forth, I believe is about $3.5 million.

Okay.

All right.

Thank you.

Our next question comes from the line of [Alan Bezoza] with CIBC World Markets.

Please go ahead with your question.

Hi Tony, hi Robin.

A couple questions.

First, with respect to Direct TV and the 50 additional markets that they've recently discussed.

Have you seen any orders for that, yet?

What is your feeling?

This may be kind of off-the-cuff.

But what is your gut feeling regarding some of the policy on [liberty and news core]?

If they do go after Direct TV and/or EquiStar, is there a potential for another slowdown to result?

I will deal with the first part of the question on the numbers.

I don't want to discuss individual situations in detail, but I would bind it to one number I did put out during the course of my words, which was that our satellite business in Q4 was 25% of revenue, which compared to 11% in Q3.

I think I'd take from that, while there still is somewhat of an international business going on at the same time, in that sense things are already starting to move on the DBS front.

But again, I don't want to discuss individual orders from customers at that level of detail.

On the other bits with the [inaudible], I do think it's a bit early in the day to speculate on that.

This is newspaper stuff today, and who knows if everything is really happening, or not?

I've no idea, myself.

You don't see any [significant]--?

I think it's a case of wait-and-see.

Whatever happens, the real driver is very much the competitive world we're in between the desire to [lock] up subscribers between cable and satellite.

Even Telco, now.

I think those forces will be there-whoever owns these systems.

For AT and T Comcast, it was 23% of sales as a combined entity?

That's if it were combined at the beginning of the quarter, which of course as we know is not the case.

I think the merger was completed around November 19th.

But looking at them as a combined entity for the whole quarter, yes, they represented 23% of revenue.

Can you tell from your sales what the representative number was from AT and T broadband, specifically?

I don't want to break it out, but it was certainly higher.

We saw good activity from both sides of the Comcast AT and T merger throughout the quarter.

The old AT and T itself was starting to come on perhaps more strongly than in the earlier part of the year.

Right.

Then lastly, on your gross margin.

You did talk a little bit about it in respect to [an unfavorable] mix in the quarter.

Could you put a little bit more detail into that and where the mix had shifted?

Also, have you seen any pricing pressures?

Now that maybe AT and T is coming back with some ordering, is there any getting beat up on pricing there?

Or maybe on the NSG side with some of the private companies that are providing IP transport?

On the margins, generally in terms of the product mix, as you probably saw from our numbers, our band had somewhat of a higher share of revenue in Q4 than in Q3.

As a general rule, our band products tend to be of somewhat lower margin than Convergent systems.

That's not true across the board, but that was really the major factor.

To shift towards more of the band-type products.

I'll let Tony address the pricing question in whatever detail he likes.

But pricing pressure is nothing new; it's always an element of business with large customers.

I think that's the point.

Obviously, being in a depressed market doesn't help pricing, either.

It's a reality.

The pressure's going to be there on prices for some time to come.

This is a world we've gotten very used to living in.

But no irrationality that we've [shortly] seen of [NTEC].

No; you'll get noises and things, but in terms of serious deployment, the operators are very careful about what they really buy.

Okay.

I appreciate it, guys.

Thanks.

Our next question comes from the line of Greg Mesniaeff, with Friedman, Billings, Ramsey.

Please go ahead with your question.

Yes.

Hi, guys.

Just two quick questions.

You mentioned Comcast together with AT and T being a 23% in Q4.

What were they in Q3, if you just have that number handy?

In Q3, Comcast no a stand-alone basis was 12%, and AT and T was less than 10%.

We didn't disclose the specific number of AT and T in Q3, Greg, because it was under 10%.

We don't generally do that.

But Comcast's 12 and AT and T's less than 10 in Q3.

Gotcha.

Also, regarding the Sony Passage System.

Could you give us a little more color, if that's even possible, what kind of an opportunity that could translate into, assuming that some of the MSOs adopt the Passage system?

I think it's a good question.

It's probably quite a reasonable opportunity in the sense that you need a lot of these products we call our Broadcast Network Gateway.

The BNG.

You need to put these in the huts, wherever you're transmitting this thing.

It's too early to put numbers to it, but it would be a significant item in our product lineup, in terms of revenue, where several of the major operators to deploy this technology.

Right.

Thank you very much.

Thank you, Greg.

Our next question comes from the line of [Dennis Gallagher] with SoundView Technology Group.

Please go ahead with your question.

Hi, guys; good quarter.

Thanks.

I guess all of my questions have been asked except one.

You talked about the pause of [DOD].

At this point in the quarter, do you sense that there's going to be any easement during the March quarter?

Do you have any visibility at all out through the year?

I think there are two ways of looking at this.

We're very confident about the whole year.

There's going to be quite a lot of deployment within the domestic market [inaudible] during this year.

That is for sure.

We're pretty confident about the first two quarters.

We don't see a lot happening until toward the end of the first quarter, so there's a timing issue, here.

But we're very confident about significant revenues during the first six months-very comfortable.

Thanks.

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

Please go ahead with your question.

Yes.

Good afternoon.

Thank you.

A follow-up question on margins and then a question about the linearity of the Comcast upgrade.

On the margin side, you mentioned that some of the streamlining efforts you've been making in cutting headcounts and improving process will yield some impact on margins.

Could you give us an idea of the scale...i.e...if you fix the product mix and fix the pricing, what you could do with streamlining?

We've been cutting costs on a fairly regular basis.

We pointed to what we'd been doing in Q4.

That's not the only piece.

There are a lot of moving parts to it.

I'm hopeful that we can start in Q1 to see improvements in margins.

I think the product mix will change, also, in Q1.

But I'm hopeful we can see some kind of improvement that could be several points.

So the 24 we reported, I would hope would be in the high 20s and perhaps approaching 30.

I think these kinds of numbers are possible.

That would be, of course, assuming that we had some modest revenue increase, which we talked about.

So it's not likely to cross above the 30s this year unless the market significantly changes?

I think the answer is not at these kinds of volumes.

I think our prognosis at this point is, as we pointed to sequential revenue increases in Q1 and Q2, we certainly do look to those to improve gross margins.

There has to be a volume impact, as well.

When you think about it, remember, for us, additionally Q1 has been very slow for Harmonic.

Right.

Given that, moving onto my second question, thinking about the linearity of the Comcast upgrading and throw in there the Direct TV upgrade to local channels and to HD.

Is more of this weighted toward the end of the year, as is typical of the warmer months for cable?

Or is a lot of this spending happening earlier in the year?

It's a surprisingly hard question to answer.

We do get the impression that the people who're going to spend money are in a hurry to spend it, wherever we look.

The reality is, it takes them much longer to get organized and ready for it than you might think.

It's somewhere between these two extremes.

At this stage, I'd think it's going to follow a normal year.

It will start fairly slowly and should be, if things workout, in much better shape by the middle of the year.

But there are many unknowns between now and then.

This is true.

I hope that that forecast is accurate.

The last question on the satellite business being 23-25% of sales.

Not all of it was Direct TV.

What percentage was actually?

Is EchoStar in that number?

Could you give us an idea about how the rest of this looks?

Direct TV is pretty clear about what they want to do.

But we have heard from others

Again, we don't like to break out those customers less than 10%.

Direct TV, EchoStar and a number of others are very steady customers of ours, and they were all to some extent part of that mix.

Again, beyond that, I don't want to get into specific details on individual customers.

Okay.

Thanks, Anthony.

Our next question comes from the line of Lawrence Harris with HC [Wainwright].

Please go ahead with your question.

Yes, thank you.

I was wondering if you could provide some commentary regarding operating expenses and what they might look like during Q1.

You mentioned there was a change in employment and I guess about $400,000 in severance in Q4.

Will we see perhaps some sequential improvement in operating expenses?

Yes.

I believe so, Larry.

My thinking on the 12-16% net loss number-we did factor in some continuing reduction in operating expenses.

We reported 21.1% or 21.2%.

I'd expect to see certainly below 21%-perhaps approaching 20%.

Somewhere in that range.

Is there some way you could size up the SoftBank opportunity in Japan.

It was mentioned that it was launched at the end of the year.

Were some revenues recognized in 2002?

Is it similar in terms of the size, say, for a cable hut one?

Or is it a different type of project?

Any thoughts on that.

It is a somewhat different type of application.

As to the timing, much of the revenue was already recognized in earlier quarters-in 2002.

We made the announcement only when the operator was ready to launch service.

So the revenue has virtually all been recognized.

I think it's significant not so much to its absolute dollar potential, but just the customer-the geography and so forth.

I see.

Finally, there was not much discussion on the call regarding the Ethernet product that would provide service to the home or to the business.

Is that product the fast Ethernet product-the gigabit Ethernet-is that still in trials?

Yes.

And trials have been very successful.

I think we're just a little bit delayed at the moment, in that the technical people are playing with it and having a trial for it to find if it does what it's supposed to.

The business guys are working on cases of who-in a cable company?

Is it the data people?

Is it the network people?

Who's going to deploy it and run the business services?

We think this is really it.

When the industry wakes up to the fact that it's possible, and we see deployment, rather later than we would have wished-toward the end of the year domestically, rather than at the beginning of the year.

On the other hand, there are significant upsides when we go into Asia, in particular.

There, it does resonate with a number of activities that are going on, there.

We would expect to see some demand initially.

Very good.

Thank you.

Our next question comes from the line of [Eric Buck with Tapetan Advisors].

Please go ahead with your question.

Thank you.

It's [Tapetan Advisors] Two questions, I have.

First, just to clarify.

You talked about the satellite business being up 25%.

Obviously that's all in the Convergent systems area.

Sorry.

It was 25% of revenue versus 11%; so up substantially.

The Convergent systems revenues themselves were down.

That's all related to VOD softness?

Yes, [Eric].

That's right, for the most part.

It was 25% of total revenue in [ADS].

Yes, I think that's what we saw.

We described earlier, the pause in VOD deployments by most of the large operators as they got their equipment they'd bought earlier in 2002 up and running, and in service with customers.

Does that reflect any change in terms of what their simultaneous use is, and what the reality of it is, relative to their simultaneous use assumptions?

Or was there a need for front-end loading ahead of the real demand out there?

I think it was a case of they'd put in significant amounts and they'd been finding out how to run this business.

They established the content, found out how to sell it to consumers, and so forth.

This is exactly the typical marks and curves where you have you've got this initial great deployment and everybody stands back to see what happens-which is where we are, now.

Of course, we also are involved with a number of customers with their plans for this year.

We see it all taking off, as I'd said, pretty heavily once we get toward the end of Q1.

There's no question that video-on-demand is a success.

There's equally no question that our NSG product is playing a very major role in these rollouts.

Yes.

My second question is drilling in a little more on the Comcast and the pickup in spending that might occur - is it occurring related to the AT and T acquisition?

Comcast has indicated that they're going to spend $2 billion upgrading the AT and T properties over a two-year timeframe.

Yet when you look back at what AT and T itself was spending the last couple of quarters, their total spending was $1 billion, and they were allocating something on the order of $400-500 million a quarter to upgrade.

So it doesn't really sound like that would be a significant increase, looking at what Comcast has said they were going to spend, versus what AT and T already was spending.

How do you interpret those numbers?

We may well be right with the numbers, but [inaudible] on half or whatever.

These are very large numbers, comparatively.

They're actually procuring our piece of the business, which is the fiber-optics.

So the thought of one-to-one correlation by any means between [inaudible].

In fact, it really depends upon what stage of the cycle you're at.

From what we know-at least, from what we can see-there'll be significant spending by Comcast, in terms of storing fiber-optic equipment into their planter over the course of the next two years.

So you're seeing it as picking up share within the overall dollars being spent.

I'd say if that was all right, then the share going to fiber-optics is definitely increasing over the last year or two, compared to last year.

Great.

Thanks.

Ladies and gentlemen, as a reminder, to register for a question, press the "14".

Our next question comes from the line of [Alan Bezoza] with CIBC World Markets.

Yes.

I have two questions.

First, on the NSG server.

Is there an opportunity for you to kind of retrofit some of the previous deployments by AOL that are not using Ethernet transport?

In other words, some of the [DBBASI] transport they've already deployed that could now be upgraded to IP.

My second question is, given the cost-cutting mechanism that you've put into place over the last year or so, where do you see it in your break-even sales level at this point?

To deal with the first question, if you've got an ASI transport, it can of course be changed to an IP transport.

If you've already paid for the ASI transport, you [inaudible] to do so.

That's another matter; because it works just fine.

You wouldn't necessarily change just to put [inaudible] technology.

If it's actually up and running, working and paid for.

But I don't see anything of that sort.

So if it ain't broke, don't fix it, basically.

Well, everybody's different.

I wouldn't see a compulsive need to go do that.

No.

The second question was on break-even.

I think from this point, Alan, we see it as somewhere P&L breaks north of $50 million, in maybe a $50-55 million range.

Really quite a bit below that, we can be cash break-even, because there are still significant amounts of depreciation.

When someone asks $3-3.5 million a quarter.

The answer to your questions, however, is above 50.

We do continue cost-cutting activity.

We've brought down operating expenses I think every quarter since the beginning of 2001, on a pro forma basis.

I think similarly with headcounts, we just continue to work at it.

How about on the cash levels?

Working capital's been a huge driver in maintaining cash levels.

Do you think there's more speed with working capital, do you think there's more to squeeze out of working capital, or are we going to start to see further declines in cash levels as some of these new customers ramp up again.

I think there are still some things that we can do to even more efficiently use working capital.

Particularly in the inventory area.

So I'm still optimistic.

Yes, we've got receivables still in very good shape.

There's always some more we can do there.

But we're working very hard on it.

I think it's still a very fertile area.

Okay.

Great.

Thank you.

There are no further questions at this time.

Please continue with your presentation or any closing remarks you might have.

Thank you.

Thank you all for participating in today's conference call.

We look forward to speaking to 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 lines.