Harmonic Inc (HLIT) 2003 Q2 法說會逐字稿

Welcome to the Harmonic Incorporated quarterly Conference Call.

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

Afterwards we will conduct a question-and-answer session.

After that please press the 1 followed by a 4 on your telephone.

As a reminder this conference is being recorded Thursday July 17, 2003.

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

Please go ahead.

Good afternoon.

I'm 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 spokesman.

Thank you for joining us.

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

Today, we announce our results for the second quarter of 2003.

Although our customers remain generally cautious about capital commitments, we are pleased with our sequential improvement in revenue and gross margins, sustained focus on expense control, and continued development and introduction of exciting new products.

We are seeing targeted expenditures in areas such as Video-on-Demand in cable, and local channels in the local channel services in the satellite market.

While the market environment is still challenging, Harmonic remains strongly positioned to address the intensifying competitive pressure for our cable, satellite and telco customers, services including Video-on-Demand high definition video and high speed data services.

So as is our custom Robin will now review the financial results.

After that I'll discuss other significant events that have occurred during this 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 the future financial performance of the company.

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

We refer to you 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 financial metrics determined on a non GAAP or pro forma basis.

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

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

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

Today, we announced our results for the quarter ending June 27th, 2003.

For the quarter we reported net sales of $41.7 million, up from $37 million in the first quarter of 2003.

Our CS division, which designs, manufactures and markets digital head end systems, had divisional net sales of $27.1 million, up from $24 million in the first quarter.

During the second quarter, we saw increased shipments to our cable customers, particularly sales of our NSG products for Video-on-Demand applications.

Our BAN division, which designs, manufactures and markets fiberoptic products, had divisional net sales of $14.6 million up from $13 million in the previous quarter.

This growth in BAN sales was due to increased shipments to both domestic and international cable operators.

During the second quarter, Comcast was our largest customer represent representing 37% of total sales.

We believe this reflects Comcast's execution of their plan for network upgrades and new services such as Video-on-Demand as well as our strong position as an important supplier to them.

EchoStar and DirecTV were also significant customers during the quarter as they continue to introduce local channels and new markets and address new services such as high definition television.

By market segment, sales in the quarter to our cable customers represented 75% of revenue.

Sales to satellite customers represented 20%, and others, including broadcast and telco customers represented 5%.

Our domestic sales were 73% of total sales for the second quarter of 2003, the same mix as in same mix as in the first quarter.

While Europe remains generally weak because of continued financial restructuring by many of the major operators, we saw some higher spending in parts of Asia.

Although we suffered some disruption of business activity in the second quarter because of SARS, our revenue in Asia was actually higher than in Q1.

Both Korea and China were strong contributors during the second quarter.

Gross margins on a non GAAP basis were 32% in the second quarter.

Up on a sequential basis from 30% in Q1.

Mostly due to volume growth and cost reductions.

While we are seeing significant pricing pressure in many product areas, we are also achieving significant cost reductions from our suppliers and in our own operations.

I should also point out that our non GAAP gross profit excludes the benefit from the sale of previously reserved inventory of $1 million, as well with the amortization of intangible assets.

Non GAAP operating expenses were $20.2 million for the second quarter of 2003.

Down from $25.1 million in the second quarter of 2002, and down sequentially from $20.6 million in the first quarter.

We remain committed to our cost control and cost reduction efforts.

By the end of June we had further reduced our head count to 559, I'm sorry 567 at the end of March and 587 at the end of December.

These non GAAP expenses exclude a charge of $2.7 million or approximately 4 cents mer share from a settlement of litigation with Perr and telephone supply in Tennessee described in a separate press release we issued today.

The settlement follows summary judgment made against us under a Tennessee statute relating to retailers and suppliers.

Our contract which contained very limited rights of product return was essentially set aside in favor of a Tennessee statute which gives much broader rights to distributors.

Although we are very disappointed about the outcome we believe that the negotiated settlement was in our best interests particularly in view of the court's decision on summary judgment.

The litigation settlement the amortization of intangibles of the credit for inventory, the non-GAAP loss for the quarter was $6.6 million or 11 cents per share compared to a non-GAAP loss of $5.2 million or 9 cents per share for the second quarter of 2002.

The GAAP net loss for the second quarter of '03 was $11.7 million or 19 cents per share compared to $11.1 million or 19 cents per share for the same period of 2002.

The reconciliation between the GAAP and non-GAAP loss is provided in today's press release.

Turning to the balance sheet our receivables increased by more than anticipates and our days sales outstanding rose shortly from Q1.

We saw a firmer tone of business emerging in May and June but this led to a quite back end loaded quarter.

As a result our receivables increased to $34.8 million at the end of June up from $29.4 million at the end of March and days sales outstanding were 76 days compared to 71 days at the end of March.

In significant part due to the higher receivables, our cash declined in the quarter to $36.3 million.

Inventory was $21.6 million at the end of June down from $22.8 million at the end of March, and we're pleased at the progress we have made in bringing inventories down.

Our capital spending in Q2 was about $900,000.

And about $1.5 million year to date.

We continue to expect that our capital spending for the year will be less than $5 million.

With respect to the second half outlook we're seeing some positive developments in the necessary particular cable sector.

Comcast is upgrading the AT&T Broadband system and aggressively rolling out Video-on-Demand and other services.

We saw resumption of services from Adelphia, when they were able to access their better financing Other operators such as RCN beginning to spend again.

In addition, we are encouraged that Charter recently announced plans to refinance a portion of their debt.

At the same time, the domestic satellite market, while it tends to be lumpy quarter to quarter, certainly remains stronger than last year as both EchoStar and DirecTV continue to add local markets and address HDTV requirements.

As a result we expect to see revenue growth in the third quarter and to further reduce our non-GAAP loss.

We expect third quarter revenue to be in the range of $42 to $46 million with our non-GAAP net loss anticipated to be in the range of eight to 11 cents per share.

On a GAAP basis, which includes amortization of intangibles we expect a Q3 net loss of 14 to 17 cents per share.

That's all for me.

Tony?

Thanks Robin.

In the domestic cable market, our business is being driven in large part by the growing interest in Video-on-Demand and high definition TV.

According to a recent survey by the American Cable, association, cable operators believe the deployment of services is vital for them to stay competitive and viable.

More than one-half of the ACA members are now providing digital cable and high speed Internet service, with most of the other half set to launch those services in the near term. 89% plan to launch HDTV, 81% will roll out VOD, and 72% will launch services for personal digital video recorders.

The survey found that even small cable operators are eager to roll out offerings like Video-on-Demand and HDTV but they are facing of course constraints on their financial resources.

During the second quarter, we announced that Insight Communications has deployed our Video-on-Demand to upgrade and expand its services.

Insight's deployment is based on a narrow cast service (ph), gigabit ethernet transport that enables a seamless platform to a highly cable open standard spaced environment.

Nearly 80% of Insight's digital customers are now VOD enabled.

Our approach makes it possible for future expansions to be accomplished while providing complete continuity of service.

On the international front many of our European cable customers continue to face financial restructuring issues.

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

We remain very encouraged by the level of activity in the industry, and by the amount of support of the Chinese government is providing for the transition to digital television and the provisioning of core BAN services.

In the sat light market, we have seen the market improve this year, both here and abroad.

As in Q1, DirecTV and EchoStar were both major customers, for us in Q2, and we supplied additional encoders for international customers who have Harmonic head ends.

During the second quarter, we announced that our encoders and statistical multiplexing systems have been further deployed by DirecTV to upgrade one of its broadcast facilities as well as expand its local market coverage.

Our deployments with DirecTV, EchoStar and other satellite broadcasters around the world testify to our leadership in digital video technology for real time MPEG-2 compression.

We are engaged in much discussion with our key satellite customers, concerning the introduction of new technology such as H 264 now under development.

In the Telco Arena we continue to see growing worldwide interest in digital video.

As an example of what's going on, Telewest Broadband in the U.K. has launched a promotion and British Telecom, Telewest is providing 12 months of free TV for its customers and Telewest unlimited calling plan is promising to be T's unlimited calling plans by 2 pounds 50 every month.

We believe the competitive pressure is building for the telcos for video voice and data services in order to keep pace.

Our product capability enables telcos to provide TV over DSL and we are also positioned to participate in encoding standards H 264 which will be ready for deployment next year.

While the initial application of H 264 will be in green field situations such as the telcos the growing interest in high definition may force its adoption in more mature markets earlier than anticipated.

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

This year, we introduced industry's first digital service management solution, the control and monitor digital video infrastructure at an aggregate level rather than just controlling the distinct pieces of hardware.

During the second quarter we announced that Amamex digital service manager has been enhanced for providing capabilities for cable operators using our NSG edge guys.

In this application the Amamex is able to deliver both real time information on network status and also the statistics of utilization.

During the quarter, we received industry recognition for our leadership in open standards scalable architecture.

Multichannel news magazine specifically sited our VOD delivery solution for making it feasible and practical for operators to deliver value added on demand services which include movies on demand, television on demand and services for network personal video recorders.

Multichannel news also cited our leadership in providing HDTV solutions with our MV 400 encoders and VNG digital turn around (inaudible).

Furthermore, Cable and Satellite international magazine recently named us as the winner of their biggest contributor to the future of content delivery award for our IP cast solution based on our combination of combination of our NSG and our gigabit ethernet solution.

We are very pleased with this industry recognition for our pioneering technology.

In summary the worldwide capital spend of environment remains challenging.

We're pleased with our sequential revenue growth, improved operating efficiencies and continued introduction of new products.

We continue to believe cable operators will need to upgrade their networks in order to keep pace with the demand for more digital video, high-speed data Video-on-Demand and high definition channels.

And we're seeing satellite operators extend their local channels and high definition services.

Over the long run, we remain strongly positioned to help our cable, satellite and telco customers to address the competitive need for combination of digital video, voice and data services.

So 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.

The first question comes from the line of Daniel Ernst with Rodman Renshaw.

Please proceed with your question.

Good afternoon, Robin, couple of questions, maybe just two.

What is, you gave you know positive guidance for the next sequential quarter.

But you're looking at the second half of '03 being very strong, with DirecTV upgrades and I believe EchoStar upgrades for local capacity, DirecTV in particular, so they're going to add 40 of the 50 local markets in the second half of the year.

So do you think that the hockey stick they're projecting? to spending is not reflected in your own guidance?

And then the second question is, you know, where are you with the broadcasters in their deployment of HD and digital television?

OK, then with respect to first question, yeah, I think it's certainly true to say that we have seen in the second quarter a strengthening tone and we're optimistic that we'll see some more of that in the second half of the year.

But at the same time, this remains still a very -- a very challenging economic environment, and the capital markets are still -- let's say just still somewhat volatile.

And so you know, we have to -- we have to weigh the overall macroeconomic situation against what we're seeing for our customers, and expect that there will be deferrals and push-outs along the way.

So we've tried to take a balance approach.

We certainly agree the outlook was better than it was six to nine months ago but at the same time it is tempered by the fact that at least in our view the economy is not out of the woods yet.

OK, and the broadcast market.

We have a business that is quite solid and fairly steady.

It's not spectacular, but we made a lot of progress with a lot of -- number of broadcasting station, the BBS systems and others we announced like Paxton and expect to have more announcements in the future.

That's a good solid based business for us.

OK.

And then one follow-up if I may.

Margins were up a point and a half sequentially, is that just for this quarter, or do you think you can maintain the low 30s or go higher from here or -

Our guidance assumes some modest, continuing modest improvement in gross margins.

It's a tough environment, as I said in the earlier part.

There is -- there is certainly some significant pricing pressure in different product lines, and so we are -- we're certainly feeling some pain from that.

At the same time, we're working our own suppliers very hard and our own internal costs very hard and so far in terms of the margin improvement, we're slowly winning that battle.

But it's a tough battle.

So while we're optimistic again, it's tempered by some of the reality of existing situation.

OK, fair enough, thank you.

Next question will come from the line of Maurice McKenzie from Friedman Billings Ramsey.

Good afternoon, Tony and Robin.

On the balance sheet there's a liability for roughly $21 million in taxes related to the CQ merger.

Can you discuss that balance what it actually comes do and what's your plan for dealing with it is.

OK.

Well, the first question is very easy to answer.

The breakdown is as follows.

Comcast was 37%, period.

There were no other 10% customers although a couple came pretty close.

On the taxes, this is a somewhat complicated topic, but when we acquired DiviCom, and its parents company, CQ Microsystems in 2000, we inherited the responsibility to pay all of the taxes that were then due by CQ, that included principally the taxed from the profit of spinning off CQ by the semiconductor division.

There were approximately $350 million due in taxes of which about $330 million have been paid.

And that leaves most of which were paid at the time in 2000-21, leaving a balance of about $20 million.

The $20 million is comprised of a number of obligations, in some cases specific obligations, in some cases estimates of taxes due to a variety of authorities most of them outside the United States.

It's very hard to predict when that will become due.

We've classified it for accounting purposes as a current liability, taking a conservative position that it would all be paid out within the next 12 months.

But as you can tell it is now three years after the merger and we still haven't paid any of that.

So as I say it's very difficult to tell.

It's comprised of a series of different amounts.

So it certainly will not go out in one lump sum.

At the end of the day when these global are either settled or payment is made, if there is any balance left over, it is repayable to LXI Logic (ph), which now owns the semiconductor division of CQ.

So we don't benefit from any of the 20.8.

We will pay it either to tax lorts or LXI in due course.

At the same time our liability is capped any excess of the liability is due to LXI.

There is a full description of it in our S.E.C. filings but that's -- that's as simply as I can put it in two or three minutes.

Robin, Thank you very much, I appreciate it.

Once again Ladies and Gentlemen to register a question please press the 1 followed by the 4 on your telephone.

The next question will come from the line of Steven Camman from CIBC World Markets.

Please proceed with your questions.

Hi folks, couple of questions price pressure you said Ted and Tod, which product specifically7?

Lets see, it's -- I would say it's pretty well across the board.

The -- in all our industry system capacity and competition is severe, it results in pricing pressure.

We've learned to live with it.

And we learn how to deal with it but it's there all the time and we have a continuous and ongoing program to reduce manufacturing costs and other costs so that we can stay in line with it.

Makes sense.

Any estimates for cash burn for the next quarter?

No, I'm not prepared to put out a hard number.

I think it is -- it's reasonable to expect there will be a cash burn.

But we are predicting a more modest loss, and that should certainly have a positive effect.

I would hope that the - also that the back-end loading of the quarter is not as acute as we saw in Q2.

It is somewhat unusual to see that in Q2 but it was just the way the business developed this year that really took the cable operators in particular a while to get going this year.

And it wasn't really until midway through the second quarter that we saw, at least, some acceleration in the activity.

Makes some sense.

And then two other questions, the $2.8 million settlement is that cash and has that already been taken out of the cash balance?

It is -- yeah, we are due to pay $2.8 million in cash.

No, it has not. $1 million is payable next week, the remainder is payable in January of next year.

January '04.

And then the previous question regarding the tax, is that -- is that restricted cash and again is that reflected in the balance sheet, is that reserve, and that 21 million in cash if and when it is paid will that come out of cash?

There are no restrictions whatsoever so the funds are available to us, but the fund are on --you know are in our cash balance.

So when we pay any or all of that liability, it will come out of the cash balance.

But it's not restricted in any way.

Thanks very much.

Next question will come from the line of April Horace with Janco.

Please proceed with your question.

It's actually Eric Buck with Janco.

Earlier in the year you guys were pretty optimistic that you would have a pretty strong ramp the second half of the year particularly out of the satellite side of the business and while you're expecting some up revenues, it doesn't seem as aggressive.

Is it because it can't happen now or is there not the visibility now at this point to be as confident about a second-half ramp up?

First of all welcome back.

Secondly, I don't think we ever pointed to a steep ramp in the second half.

I think certainly some analysts models reflected a steep increase based on optimism about some of the things you've mentioned.

But our own guidance very specifically has been quarter by quarter, and that is a result of what you said, visibility still remains fairly limited while the underlying tone is certainly better.

Again, we are still living in fairly volatile markets, and you know, the visibility is just not what we'd like it to be.

OK.

And can you elaborate a little bit more in terms of Adelphia's return to the marketplace in terms of you know how extensive that is and whether it looks like it has any legs to it or whether this is just a one-time fill in the holes type of thing, and kind of same on Charter although I know they haven't jet started to reorder significantly, what the visibility is there.

Well, with respect to Adelphia, the business we've done with them through the first - since the bankruptcy and through the first quarter was minimal.

It certainly -- we certainly saw a bit more business in the second quarter but I wouldn't characterize it as significant at this point.

I mean, it certainly wasn't above 5% of revenues or anything like that.

But it was a start.

And I think the fact that they have access now to the debtor in possession financing, and certainly looking at listening to what they say, the people now running Adelphia, it does seem as if they are acutely aware that there is work to be done in some of their major systems for all the reasons that other people are doing work as well.

So we're optimistic it's certainly leading to bigger numbers.

But not, you know, at this point it's still early days.

It's hard to say on Charter.

I don't know.

We certainly could believe that the second half might be stronger there.

Their announced refinancing plans are certainly encouraging, seem to encourage the market too.

But as you say, it's early days yet.

OK, great, thank you.

As a remainder, ladies and gentlemen, to register a question please press the 1 followed by the 4 on your telephone.

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Please continue.

Thank everybody for participating in today's conference call.

We look forward to speaking to you again next quarter.

Thank you, and good-bye.

Ladies and gentlemen that does conclude your Conference Call for Today.

We thank you for your participation and ask that you please disconnect your lines.