Harmonic Inc (HLIT) 2003 Q1 法說會逐字稿

Welcome to the Harmonic Incorporated First Quarter 2003 Earnings Release 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 Thursday, April 24, 2003.

I'd now like to turn the conference over to Tony Ley, President, Chairman, and CEO of Harmonic Incorporated.

Please go ahead sir.

Thank you.

Good afternoon.

I am Tony Ley, President and CEO of Harmonic.

With me in our headquarters in Sunnyvale, California are Robin Dickson, 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 and digital head end systems for delivering video, voice and data over cable, satellite, and teleco networks.

Today we announced our results for the first quarter of 2003.

While we continue to reduce our operating costs and strengthen our technology leadership, capital spending remain slow worldwide and some of our major domestic cable customers move even more cautiously than expected in the first quarter.

Despite the current market uncertainty, we believe cable operators will need to continue their network, upgrade programs in order to keep pace with subscriber growth and the demand for the more digital video, high speed data video on demand and HDTV.

We are also seeing satellite operators renew their expansion into new market and extend their local channels and HDTV services.

Harmonic remains well positioned to capitalize on the long-term opportunities across a wide range of broadband markets.

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

Afterwards, I will discuss all the significant events, which have occurred during the quarter.

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 future financial performance of the company.

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

We refer you to the documents that the company files with the SEC, including our most recent 10-K and 10-Q 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.

Please note that on this call we will provide you with several financial metrics determined on a non-GAAP or pro forma basis.

These items together with the corresponding GAAP numbers and the reconciliation to GAAP are contained in today's press release, which we have posted on our website at www.harmonicinc.com and filed with the SEC on form 8-K.

We will also discuss historical financial and other information regarding our business and operations.

Some of this information is included in today's press release and the remainder of the information will be available in a recorded version of this call on our website.

Today, we announced our results for the quarter ending March 28, 2003.

For the quarter, we reported net sales of $37m compared to $39.3m for the fourth quarter of 2002.

Our CS division, which designs, manufactures, and markets digital head end systems had divisional net sales of $24m, up from $21m in the fourth quarter.

During the first quarter, we saw increased shipments to our satellite customers, including significant sales to the major domestic operators as well as a number of international customers.

Now that the proposed EchoStar - DirecTV merger is off, we saw the release of pent-up demand from both customers as they continue to fight their competitive battle with the cable industry.

Our BAN division which designs, manufactures, and markets fiber optic products had divisional net sales of $13m compared to $18.3m in the previous quarter.

The decrease in BAN sales was primarily due to unexpected delays in orders from certain customers and generally tight capital spending constraints, in the light of current conditions in the financial markets, and Wall Streets scrutiny of the cable industry in particular.

Even customers with the funding in place to carry out to their announced programs are being very rigorous about approving capital projects.

During the first quarter, our largest customers were Comcast, DirecTV, and EchoStar, representing 21%, 18%, and 14% of revenue respectively.

By industry sector, sales to our cable customers represented 54% of total revenue; sales to satellite customers represented 38%; the other is principally broadcast and telco customers represented 8%.

Domestic sales were approximately 73% of total sales for the first quarter compared to 70% in the fourth quarter.

Internationally this represents a sequential drop of close to $2m.

While Europe remains generally weak because of financial restructuring at many major operators, the European revenue was flat with Q4.

Most of the international shortfall was in Asia.

As we have discussed previously, the completion of the Comcast AT&T broadband merger continues to make us optimistic that Comcast will accelerate the process of upgrading AT&T systems and roll out more digital services, just as they have done successfully in many of their own systems.

Comcast remained our largest customer in Q1, and we expect them to remain so for the balance of 2003.

On the other hand, our business with Charter was down again sequentially, but even more so then we had expected.

For the first time in many quarters, Charter was not a 10% customer.

Finally, still in the cable sector, we also saw the anticipated slow start to this year's Video-on-Demand deployments but we do expect to see increasing sales of our NSG products as we move further into the year.

Non-GAAP gross margins in the first quarter were 30%, up on a sequential basis from 24% in the fourth quarter, mostly due to a more capable product mix and cost reductions resulting from streamlining management of our manufacturing organization during the fourth quarter.

I should point out that our non-GAAP gross profit excludes the amortization of intangibles and also excludes a benefit of $1.1m, resulting from products sold during the quarter, which have been reserved in prior periods as excess.

Non-GAAP operating expenses which also exclude the amortization of intangibles were $20.6m for the first quarter of 2003, down from $26.4m in the first quarter of '02 and down sequentially from $21.1m in the fourth quarter.

We remained committed to cost control and cost reduction efforts.

By the end of March, we further reduced our headcount to 566 down from 587 at the end of December.

Our non-GAAP loss for the quarter was $9.3m or 15 cents per share compared to a non-GAAP loss of $8.2m or 14 cents per share for the first quarter of '02.

Including non cash charges for the amortization of intangibles up $3.5m and a credit relating to the sale of previously reserved inventory of $1.1m, our GAAP net loss for the first quarter was $11.7m or 19 cents per share compared to $14m or 24 cents per share for the same period of '02.

Turning to the balance sheet we had cash - cash equivalence and short term investments of approximately $43.5m at the end of the first quarter compared to $49.2m at the end of the year.

Receivables were $29.4m at the end of March up from $25.4 at the end of December.

DSO's were 71 days compared to 58 days at the end of 2002.

The increase in DSO's reflect the usual sales pattern of Q1 with a quarter generally more back end loaded than the others.

We believe that we continue to do a very effective job of monitoring credit and collecting our receivables.

Inventory was $22.8m at the end of March down sequentially from $25.9m at the end of December.

And we are pleased with the continuing progress we are making in bringing inventories down.

Our capital spending was about $600,000 in the first quarter and we continue to expect that CAPEX for the year would be less than $5m.

With respect to the outlook we have described, in the last few months three key factors which will drive our business this year.

The first is the domestic satellite market.

There are Q1 results already show clearly that the DBS operators are spending again.

Secondly, we expect the benefit from Comcast planned up rates of the AT&T systems as well their [VOD] redeployments.

While the upgrading process is under way, we do see the Comcast approach is very thorough and we have not yet seen the rate of acceleration that we had expected to see by this time.

The third factor is continuing progress in customer restructurings and re-organizations, both domestically and internationally.

We continue to expect that these situations would be opportunities for us mostly in the second half of this year.

For the second quarter, we still have limited visibility over the precise timing of our customer plans and projects and an increasing tendency to see the shorter lead times, which makes forecasting particularly difficult.

For this reason we see a wide range of possible revenue outcomes varying from continuing slowness to potential acceleration on some fronts.

Therefore, this time we are providing a wider range of revenue possibilities for the second quarter from $38-$44m.

Our non-GAAP net loss is anticipated to be in the range of 12-16 cents per share and on a GAAP basis 18-22 cents per share.

That's all from me, Tony.

Thanks Robin.

In the domestic cable market, Comcast is by far our largest customer.

In the process of operating the systems required with AT&T broadband is continuing.

The stated Comcast objective includes improving the picture quality and rolling out video on demand services.

Harmonic's provides both fiber-optics for the HSP plant and then Narrowcast Services Gateway the NSG and insulated base band transport.

So the number of the Comcast systems and we anticipate that these activities will increase in the next few quarters.

As we know we've deployed our industry with most of the MSOs in United States.

And while the volumes were modest in the first quarter, we also expect shipments of this product line to accelerate later in this year.

In 2003 and beyond the number of subscribers of video on demand is expected to grow substantially and we believe our NSG product line will continue to be well placed to be successfully deployed for these services.

On the international front, many of our European cable customers continue to face spending business consolidations and financial restructuring issues.

However, we are seeing growing activity in some Asian markets, especially in China where we have been a supplier for long time.

Of course, we have been concerned by the SARS virus and it has affected our Hong Kong and Beijing offices, but we believe China will contribute significantly to our business in 2003.

I was at the China cablevision Beijing a few weeks ago and cable [inaudible] by the transition to [inaudible] television and the provisioning of broadband services.

In the satellite market, we're seeing the market start to comeback both here and abroad.

DirectTV and Echostar were both major customers for us in Q1 and we supplied additional [end] cables for many international customers who have [inaudible].

Now that the uncertainty of the structure of the industry has been removed, our satellite customers are back to the business to expanding coverage for local cities and increasing the number of channels and also starting to introduce more high definition channels.

We believe the arrival of Mr. Murdoch in the US full time market will command the attention of all types of operations and will increase the level of our competition and may indeed accelerate some capital spending.

We also continue to make progress in new markets the broadcast market remain very solid as TV stations continue the transition to digital television.

And in that regard we found a very high level of interest of the recent NAB exhibition, that's the National Association Of Broadcasters.

Not only are broadcasters sending to digital television, but they are making use of compression to transmit more standard channel and high definition channels and provide broadcast data services.

In the Telco arena, we continue to see growing worldwide interest in television evens and subsidy of DSL.

Most people believe this market will reverse itself by the new encoding standard [inaudible] 264, which should be ready for deployment next year.

We continue to develop cutting edge products based on open industry standards.

We recently introduced the industry's first digital service management solution.

Giving system operators the ability to control and monitor the digital video infrastructure at an aggregate level, rather than just controlling discrete pieces of hardware.

NMX Digital Service Manager represents a breakthrough in the way digital review of services are provisioned and managed.

It commits operates to easily assemble video and audio services into efficient digital transport.

The underlying encoding and multiplexing digital turn around and delivery equipment is reconfigured to manage by the software system.

As a result, NMX significantly improved operation efficiencies, maximizes band width and delivers the highest levels of service quality and availability.

We believe NMX will provide us with a significant committed advantage and help drive future sales of our head end system.

I can tell you that the initial customer feedback has been very positive.

In summary, the worldwide capital-spending environment remains extremely challenging and some of our major domestic cable customers moved more cautiously than expected in this first quarter.

Nevertheless, we continue to believe cable operators will need to upgrade their networks in order to keep pace with demands from more digital video, high speed data video demand and high definition channel.

We're also seeing satellite operators extend their local channel and HDTV services.

We continue to believe that the long-term opportunity to cause a wide range of broadband markets.

So this concludes the full part of our presentation and now Robin and I will be pleased to entertain any questions you may have.

Thank you.

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One moment please for our first question.

Our first question comes from Jason Ader with Thomas Weisel Partners.

Please proceed with your question.

Hi good afternoon.

I had a question on the third driver, which was some of the domestic guys in your opinion guys;

I am assuming that you are talking about in terms of the restructuring that's going on with some of those players.

Are you getting more or less comfortable with that prediction as we move through the year and specifically I guess with [Shlier] joining Adelphia with Charter assuming to have at least for now evaded chapter eleven?

Are you certain to see dollars flow at a faster rate from those two players and then just maybe some color on Europe?

I think in terms of Charter and Adelphia, as far we can tell them, you know, I am not sure we know much more than you do but the situation seems to be stabilizing very fast and I think we would expect to see them back in the business of rebuilding our systems or expanding them or whatever they have to do but not just yet, I think that's really a second half of the year before we would expect to see a lot of activity.

Still I would be surprised if things accelerate, but right now I think it's much later in the year.

As far as Europe is concerned, we are starting to see signs of life where previously there was none, it hasn't yet materialized into a significant business for us, but we can see a lot more activity and all things that you have to do before all this gets placed, which is negotiating and designing systems and that I think its fair to say activity level has picked up significantly.

And of course we have that translated into business for us later in the year.

Okay and then last question.

Comcast does business a lot differently then the old AT&T, I am sure you guys are finding out.

How has that affected your ability to manage your inventories, manage working capital in response to the shorter lead times that I believe Comcast is requiring?

I think Harmonic's has always been able to handle very fast turnarounds, as well as anybody and I believe that our most -- we think -- let me say it this way, I think Comcast is very well managed company and a pleasure to work with and they were a very big [gorilla] on the block and you have to move with their speed.

They want to move out from [inaudible] own, I think we are well equipped to deal with it, so we look forward to doing so.

And you still feel very confident in the ability to be a major player with this upgrade?

What's happening?

I certainly believe so, in the real world until you got the order you are never quite sure of anything, but I do believe that we have the right equipment, that we were highly regarded, that we provide I think the industry's best service and I think we are quite favorably regarded, time will tell.

Okay, good luck in the next quarter guys.

Thank you very much.

Thanks Jason.

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

Please proceed with your question.

Yes thank you.

I have a question or two on the revenue mix among the major customers.

You know you mentioned as far as Comcast goes, still a lack of a significant pick up, hosts the AT&T acquisition, and I was wondering if you are referring to the optical transmission or node area or in the area of NSG products for VOD.

Okay Greg.

I think the -- in terms when we look at the Comcast numbers, relative to last quarter and what we did in the more frequent quarter, that the ponder inside the business that we are doing in this time frame is on the BAN side of the host, majority of it, but that's a little misleading because as you probably remember we have been very successful with our NSG at Comcast and I believe that they like many other operators later this year are going to be turning on more VOD deployments and we certainly expect to be playing a major part in that.

So, it's a little misleading.

From a seasonal perspective, this is the time when we expect -- we expect them perhaps to be the greater part of it, and I think you know could we expect them perhaps to be the greater part of it and I think, you know, what we said earlier is true, we haven't quite seen the acceleration, on the other hand it's still pretty stable and Comcast remains our largest customer.

Right and if I could just ask you Robin to transpose this -- your answer now to Cablevision particularly in a post scientific Atlanta environment.

They have been any -- they have always been a very strong and loyal customer of yours and I am curious how they have been fairing recently both in the BAN area and in the CS conversion systems area?

Well I think Greg it would be difficult to claim that Cablevision has been a strong BAN customer for us.

I don't - I really make that -- to make that claim.

I think where we have been most active and most successful with Cablevision is in the broad range of our conversion systems products including not just the NSG but also with their encoders.

We -- frankly I don't think we expect Cablevision to be as significant this year but may be I should let Tony, add -- do you want to add some color to that.

I wouldn't expect Cablevision be quite as significant to us this year?

They could clearly have scientific Atlanta mix does change the dynamics.

No, I concur with Robin's position there.

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

Please continue with your questions.

Yes good afternoon.

Couple of questions if I might, first on international, can you split out Europe, Asia or Europe from the rest of the world, that's one.

Two in the broadcast world, can you talk about a couple of things, you know, you said there is a lot of interest but you know, have you moved beyond Sinclair, are you engaged with other broadcasters?

Can we expect some additional positions there in the market and then you mentioned the roll out of the H.264 technology and does that imply a new product development for you or are you well positioned in that market?

Then third can you comment on what the delay in the Time-Warner IPO might do to your outlook for the year?

I will deal with the first one, which is Europe and Asia.

I don't have the exact numbers at hand.

Europe as I indicated in my prepared part was fairly flat during the year and in absolute dollars, it was larger than Asia, which did fall off a bit in the first quarter.

I think some of that is sort of seasonal, particularly with Chinese new year in the middle, but Europe - I hesitate to say it's bottomed out because that's certainly one impression you could draw that we are -- we perhaps hit the bottom and Europe held up reasonably well and with some possible bearings for our optimism as Tony indicated coming out of some of the restructuring later in the year and then potentially two from Germany as things get going following the transactions there.

Asia is a little bit more of a mystery.

I think it's strong in some areas, weak in others, frankly I think our biggest fear at the moment is SARS and the impact that that may have, will have, is having on just business activity and travel and all the things that need to happen for business.

It is very, very hard to predict and to measure, but it will -- believe that it's not going to have some effect.

On the other part, on the other questions you mentioned.

We have a code of [inaudible] business now in this broadcast arena.

A lot of it is through third parities to smaller radio stations and just [inaudible] TV station and of course we don't to announce those.

We do have one big significant system of which we have the order and hoped to as is our way, we will announce this when we are ready to ship or it is being accepted when we expect to do that either towards the end of this quarter or sometime in the third quarter and that's type of -- I think you will find significant when we can talk about it.

But we have a pretty solid business supplying small groups across United States.

In terms of H.264, this is a tremendous change, we got from impact to 264 and then years to come and at the stand of this when we completed, Harmonic has played the role in the Standards Committee and we believe we are very far advanced compared with the most people in terms of understanding the algorithms and implementing products and we expect to -- we have shown simulations at the various exhibitions we have been at recently and created a lot of customer interest and we expect to see product at least for early use in systems for demonstration towards the end of this year.

Is this an opportunity for you to pick up market share?

You know, can you just place Harrison and [Hamburg] in that market as you indicated, you are very well positioned.

You are part of the standards development?

We would certainly hope so, but the way the world works is, this is a technology transition and some people get through it well and some people won't and we are helpless.

We have one of the people who will, but since this is big change, I think, it will be very foolish to make any prediction about who is going to come out how.

We are taking it very seriously and we will do everything we can to make sure that we do well.

I believe we have the right people and right infrastructure to proceed with those developments correctly.

It may be some time before you see significant sales outside green field sites.

If you are a telco entering in the business, you have no installed basis set tops and so you can move through these standards.

If you are current broadband supplier satellite or cable and you have set tops, you have an impact to install base and that presents a severe number of challenges if you want to change from one to another, which is pretty obvious and we will start things down in most existing systems.

So, it is going to be adopted rapidly.

We think in brand new systems up.

And my third question on the impact of the Time-Warner, IPO delay and then also, I see what -- I meant ask about is in conjunction with MEA activity.

Your relationship with the Murdoch organization and Sky, do you have a division in the market there, and do you think that if you don't, will that impact your position with DirectTV?

Well, I don't think we can comment on the Time-Warner or IPO.

I have no idea if that would effect or not.

No, I would or wouldn't.

In terms of the Murdoch relationship, we are not in the original systems United Kingdom, but we are in some of the other parts of the world and we would expect to continue doing business with those systems that we acquires if they are already built in.

We would expect our relationship to continue.

Okay.

Thank you very much.

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

Please proceed with your question.

Anthony and Robin can you hear me?

Yes.

I have a couple of questions here.

First of all, you said, Robin, that shortfall due to "unexpected delays in orders and tight capital spending" based on expected delays in orders, what were the reasons for them and from, you know, any particular direction of that?

Well I think there are a variety of things.

I think some of it is -- I mean just in general the customer basis is being very cautious and being very carefully as they said which is probably no surprise to you.

I man Wall-street is looking very carefully at the capital spending and cash flows of the cable companies in particular.

So, I think there is a general tightness out there if you like.

I think in some specific cases, some of the customers are being more thorough and more rigorous then they have ever been before in terms of releasing orders for spending.

I refer to shortening lead times.

I think that's a general phenomenon again.

There are number of things.

I mean -- we haven't said anything about it -- I mean even the worsened weather conditions late in March, the other companies have talked about, we tend not to think of those perhaps when I am sitting here in California.

But there are a number of factors like that, it is very hard to really put your finger on any one particular reason.

Alright, looking back, I'm looking in my model here and I note that the last quarter in which you were pro forma profitable was in that during 2000 quarter in which you closed the acquisition of DiviCom and looking at a broader pattern in your selling in your peer group, what I see is largely speaking the smaller companies aren't making money and Motorola and Scientific Atlanta -- in Motorola's case they have relevant division basically are making money.

How would you -- would you say that there is a scale problem?

I mean do you not, I mean, if you are doing you know sort of an infrastructure sales $100m a quarter it seems like you can make money even in these poor conditions if you are doing somewhere south of $50m a quarter.

It looks like you are not making money.

I mean, are you looking at the scale as a significant component of success going forward or--?

It's a very good question.

I don't think you have been compared small companies with DSA's and [inaudible] others because of the set top piece of the equation which is pretty significant.

It will be very interesting if you could break out how those guys are doing in our sectors;

I suspect not prudently, but who knows; we don't know.

Actually, it is indeed a problem and I think we are working on it.

There is still in this industry overcapacity and somewhere or other that capacity has to get inline with demand before everybody makes money again and I think you are going to see more consolidation, more change as we go forward.

We ourselves, of course, are working on a plan to make sure we get back to profitability and believe we will do so.

And it just follows up on that.

I mean, right now, this quarter you had fixed expense structure of $20.6m.

As we exit this year 2003, where do you think that level is going to be -- is it going to be a bit south of 20m to anticipate no improvement in the business or are you going to be still at or you know around or above the $20m a quarter?

I think [inaudible] from the financial perspective -- I mean what -- our desire is to run the company as close as possible the cash break even and I'd acknowledge if we weren't quite there in Q1.

So I think the answer to your question really depends on whether the revenue trends develop as we still believe they will in the rest of the year.

We pointed to, I guess, the three factors I described earlier -- I think the satellite piece is already underway.

I think the upgrade part driven mostly by Comcast is certainly in progress.

The third one is yet to happen.

If these things continue to develop and supported of course by continuing redeployments -- So these things continue to develop then I think we will get our revenue to the point where the company starts to look much closer to break even perhaps not only in the cash basis but the P&L.

If that does not happen then I think clearly we have to look at different alternatives.

So that may not -- that may sound like non answer but it's where it is; it's a day by day -- let us see how things develop and we will act appropriately as we've done in the past.

If you still looking at cash break even on $50m?

Yes, I think -- yes more around that number, yes.

Okay, on gross margins, finally, for any price pressure issue -- I mean where -- are you assuming that you are going to have revenues in the -- somewhere in the low 40s give or take here for couple of quarter or so.

I mean do you see gross margins remaining flat or are you finding ways to -- you got a better gross margin at a somewhat flattish although slightly growing perhaps revenue level.

Well we certainly made some pretty significant improvement in the first quarter.

I think the first I thing say I don't expect to repeat that kind of performance going from, you know, on the GAAP number -- from 24% to 30% but you mentioned pricing pressure there is no question again going back to what Tony said about some amount of over capacity if you like in the industry but the customer to have significant pricing cost and there is no question that this pressure on prices is pretty much across the board.

At the same time, you know, we are exercising our ability to bring down material cost from products we buy through our subcontractors as well as doing what we can to take cost side of our internal operations and its kind of -- bit of a treadmill if you like but we think we are having some success in that and -- what I'd say is that I wouldn't expect to see the same kind of improvement in second quarter but we are -- that's certainly the path we are going down and it is to make our own cost reductions both on material and our internal costs quicker than on the top line.

Okay.

Finally just on the sister product of the [industry] I guess you [BNG] unless I forget my letters.

And any commentary on the [BNG] and its progress.

I think it is going along as we predicted.

You know one version of it, which we announced last December and we are happy to say that that's completely the first we will try, we are one of the major [MSOs] and other thing, we are glad that people are pretty happy with the outcome and we will see the [BMG] as the base for our line of products, its increased passage and our applications and we are very pleased with what we are doing there.

How may systems and trials or whatever you want to look at it of passage are you in and one format or another, I mean - is this in the many systems up and running or what's the story there?

Unidentified Speaker: There was one significant trial with one major [MSOs] is complete and I believe this is second one but I am not too sure about that.

One that we have is a major one successfully completed.

Okay.

Thank you.

Our next question comes from the line of Dennis Gallagher (ph.) with SoundView Technology Group, please proceed with your question.

Good afternoon.

I just wanted to ask about the pickup you saw in satellites, basically asking about how sustainable that is and are there any signs that beyond adding channels and - you know in HDTV; is there any replacement cycle going on those, you know, at the majors - you know DBS providers?

I think the answer to that is yes, I suppose, one of the games that goes on in satellite is once you go up to satellite up there, it's hard to add more channels and if you have only got to -- the choices are; you put up another satellite which is very expensive or you improve the compression efficiency of being [inaudible] and therefore pack more channels into the existing satellite.

It does seem that the business model of the satellite company is such that they have more channels; they can offer more services and make more money.

They are also increasing as probably the subscriber based [classification];

I think we are now $21m.

In this context where they are doing quite well and I believe they can make more money by adding more alternative channels where the garbage is always on to improve the recording efficiency and the picture quality and we play a role in that.

So, we see this is not for the ongoing activity for a very long time to come.

We almost think and haven't [inaudible] but our experiences [inaudible] that continually works on upgrades has improved and people though back up facilities because of course they are being concerned about the security in these systems, it is certainly an ongoing activity in satellite worldwide.

Okay.

Thank you.

Ladies and gentleman, as a reminder to register for a question please press the "1" followed by the "4" on your telephone.

Our next question comes from the line of April Horace with Janco Partners Inc.

Please proceed with your question.

Yes, quick question was regarding to the guidance, the swing in the guidance; would you attribute that more to the bank group versus the CS; can you provide any color with respect to that?

Hi April; no I think it's across the board.

It really has more to do with the customers than it does with a particular product line.

So I think it's applicable to network upgrades just as much as it is to say DOD deployments or the likes.

I wouldn't want to attribute it to any one division or the other; some of the two is just lingering uncertainty body in the natural environment, particularly in Asia.

So, it's more customer and market driven ad market driven than it is a particular product group.

Okay and then with respect to Murdoch in the Direct TV transaction; you know with the merger it held up lot of Direct TV and dishes CAPEX; do you see in, I guess I am little confused as to how Murdoch could increase the comp and accelerate spending in light of the fact that they could take a year for that transaction to be approved, do you see a potential slow down with Direct TV because of the Murdoch deal now?

No I don't.

First I think that Direct TV has been sold on the capital front for right-on-time and there are indications they are getting reactive.

And secondly in my reference that to Murdoch; competitive environment has really meaning the effect of arriving on the general broadband seat as a competitor.

He is a fearsome competitor in the way he handles contents and markets the products, and his arrival will put, I think, a great deal of more pressure upon the cable operators, which - so when you have more competition, the way out is to of course improve your service offerings in the case of cable as an interactive services because satellites, it's more channels and best quality, and I think it just generally heats up the whole competitive environment, I don't know.

That's speculation on my part but having seeing what goes on in other parts of the world I think it is very likely.

Okay.

Alright thanks.

Our next question comes from the line of Larry Harris with H.C. Wainwright.

Please proceed with your questions.

Yes, thank you.

With respect to the increase demand that you expect for the NSG; do you think we could see an increased demand beginning in the June quarter or is it more likely to occur in the second half of the calendar year?

I am very hopeful that it will increase in the second quarter.

In fact I am pretty sure it will increase in the second quarter.

Sir, I gathered by implication that the sales of the NSG were less than 10% of total revenues in the March quarter.

No Larry, not necessarily -- and I guess I wouldn't necessarily imply that.

There is no question though that the DOD deployments in the first quarter were relatively low.

In fact the revenues that we recognized in the first quarter, some of that came from deployments late last year where we didn't complete [inaudible] insulation from the early part of this year.

So that would, kind of, anticipated predictable cycle of the way it is.

Most of the NSGs that you're providing or anticipate providing of being accompanied by the GIGALight product or is there any sense you can provide in terms of the percentage of NSGs that are accompanied by the transport.

It's a big factory.

Sometimes we get the transport, sometimes the customers got his own views on particular type of transport he likes other than now and its mixed but we do that -- it is quite a significant pull through of the GIGALight with the industry.

Great, and with the respective gross margins in the band and the convergent systems divisions; we did see a mix shift this quarter in terms of revenues.

The gross margins in those divisions are significantly different?

Is one right now higher than the other;

CS for example higher?

Yes, generally the CS margins do run higher than the elements, one of the major elements in the gross margin and the product mix.

I see.

But as you said earlier, you don't anticipate the same rate of increase in gross margin in the June quarter that we saw in the March period?

No, I don't think we should anticipate that.

That would be difficult to claim that.

I mean, as I said earlier, we are working very hard on this, on the cost side of things, both with materials as well as their own labor and overhead costs, but it's -- no I wouldn't expect that it is a tough business environment and a tough pricing environment.

Alright, well thank you.

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

Please proceed with your questions.

Hi, Tony and Robin, couple of questions.

First on the NSG; did you say that it was -- a percent of sales or how big it was?

I missed part of the call. [inaudible] 10% of your sales this quarter?

No, I don't have the number on hand; my guess would be is probably around that but not any significantly -- certainly not significantly more.

Okay fair enough, and then on the DBS side; domestically, you said that the productivity in EchoStar reached in total about 32% of sales.

That's right.

Going forward I mean, how do you see that trending?

Is this a pop you are going to see that you never seen [inaudible] in that market, next couple of quarters or just something may be this quarter along or how much long do you think this will last?

Well, I think what --I guess I will refer you to what they have said publicly, which is that they have they have planned in both cases to continue to rollout local channels and also to increase channel capacity in general.

We haven't said much about HD, but I think and this is not only true in the satellite world but we have seen announcements like ESPN recently with more and more HD sports programming, that we think is going to drive channel counts and bandwidth requirements in general.

So as well as local channels in the case of satellite, I think for all of our customers in the satellite and cable industry were and our broadcasters too.

We do see some gathering momentum on HD, as well.

So I think the family business is inherently a little bit lumpy but it seems to have the same -- there is some pent up demand and they have both announced plans that will be executed over the course of this year.

And then, a question on the third languages, Comcast, AT&T; it's interesting that on their last conference call, Comcast said that their upgrading is going very well at AT&T broadband, and then we listened to your competitors and yourself, hear about Comcast initially did -- they were high percentage for many of you vendors but I don't really see anything very well.

It appears this anything you comment on as far as the disconnect between Comcast and what you guys are saying?

I don't see any disconnect, I imagine the upgrades have started, I think, very well.

And we believe they can do a lot more.

So I think that statement, in what we've seen as I said Comcast is a very well managed company and when they do something, they do seem to execute very well indeed.

So those statements are correct.

So would you expect that in the June quarter though their gross dollar level will be higher than the first quarter just based on seasonality?

From what we can see the activity, we would believe that -- I mean they should answer that question but from the activity we see going on, we strongly suspect that for vendors the second quarter will be much better than the first.

Okay.

Then, really quick.

With the pricing pressure seen on transfer cost stood, the deployment of either of your systems [one of the] couple of private commitments in the market as well.

Is that business you probably think will good new sales coming through this year?

Is going to be as profitable as it used to be in the past?

Well part of it goes up and down but you are having double dominant position.

I do not if their position is strong but we got a strong position in this market.

We intend to stay there.

We are fully aware that is going to be a considerable number of competitors coming in and to hold that position there, we have to continually work at the next generation and the one that follows to improve the performance and in particular to drive the manufacturing cost by redesign right down that we are fully committed to.

It's a way we have had to operate in our original cable business and band, and we're very accustomed to it.

So we have a big activity going to insure that we remain at the front of this business and that we can our costs in line with the likely pressure in the market.

That's a major activity for us.

And as far as the bottom-line, I would expect to see better and you've have given your sales guidance, I would expect it a little bit higher or better net loss than you're showing.

Is there anything that we can at as far as OPEX that may turn up a little bit or I heard the comments in the gross margins, I mean, is there anything else there?

Yeah.

I think I just want to be cautious on the margins in particular and also on the operating expenses.

I mean if the year does play out as we still believe with revenue stronger in the second and third quarters then we have to be very careful in the expense side that we are able to appropriately support the level of business and sorry to say we are -- we just want to be very careful both in the way we run the business and the way we predicted.

I can't -- other than maybe a particular level of caution on gross margins, there are no real significant differences in our expectations for Q2 versus Q1, as far as, cost structure and the like are concerned.

Okay.

Thanks for your answers.

Thank you.

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

Please proceed with your question.

Yes.

Just a quick follow up.

If you could just address the question of shortening lead times, how it pertains to DirecTV and EchoStar, vis-à-vis the MSO's?

I think it is more of a phenomenon, I think perhaps in the cable industry -- yeah I am not quite sure how to.

Well, I would agree to that.

I think EchoStar, DirectTV and the other satellite people -- I don't think that way about their business has changed at all.

I think it's in cable industry that we really see that's the [inaudible] [times] have shortened between the decisions to [inaudible] when he has to deliver that first of definitely assured.

In satellite, we think its very much business as usual.

I guess another way to phrase the question is your visibility a little better right now in the direct broadcasting area than it is in the MSO area?

When you set it all up I wouldn't say there is awful lot to choose between the two.

In general, its -- satellite has always been on the pretty short fuse and cable has got lot, lot shorter recently.

Okay got it, thank you.

At this time, we have no questions.

Please proceed with your closing remarks, sir.Please proceed with your closing remarks or any comments.

Thank you everybody, thank you very much for participating in today's conference call and we look forward to speaking to you again in the quarter.

Good day.

Ladies and gentlemen that does conclude your conference call for today.

We thank you for your participation and I ask that you please disconnect the line.