Harmonic Inc (HLIT) 2003 Q4 法說會逐字稿

Welcome to Harmonic Inc. fourth quarter earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Thursday, January 22, 2004.

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

Please go ahead, sir.

Good afternoon.

I'm Tony Ley, President and CEO of Harmonic.

With me in our headquarters in Sunnyvale, California are Robin Dickson, our Chief Financial Officer; and Michael Newman, our investor relations spokesman.

Thank you for joining us.

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

Today we announced our results for the fourth quarter and full-year of 2003.

We are pleased with our continued revenue growth and achieving profitability in the fourth quarter.

Our business continued to be driven by the intensifying competition between network operators.

We remain focused on expense control and on improving our operating efficiencies.

We're very pleased with the completion of our public offering during the quarter, which provides us with a strong foundation for future growth.

So, as is our custom, Robin will now review the financial results, and afterwards I will discuss significant events that 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 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 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 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 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 included in today's press release and the remainder will be available in the recorded version of this call on our website.

Today we announced our results for the quarter and year ended December 31, 2003.

For the quarter we reported net sales of 56.3 million, up 19 percent from 47.3 million in the third quarter and compared to 39.3 million in the fourth quarter of 2002.

For the full calendar year 2003 we had net sales of 182.3 million compared to 186.6 million for 2002.

Our Convergent Systems, which designs, manufactures and markets digital headend systems, had divisional net sales of 33.2 million, up 14 percent from 29 million in the previous quarter.

Our Broadband Access Networks division, which designs, manufactures and markets fiber optic products, had divisional net sales of 23.1 million, up 26 percent from 18.3 million in the previous quarter.

During the fourth quarter our largest customer was again Comcast, representing 31 percent of our total sales.

We're supporting Comcast's ongoing video on demand rollout with our Narrowcast Services Gateway -- or NSG product -- as well as supplying transmitters and nodes for optimal network upgrades.

At the same time we are pleased with the increasing diversity of our customer base.

In the fourth quarter Charter was our next largest customer at 11 percent of the sales.

This was due principally to our major role in their Long Beach digital headend project, which Tony will talk more about later.

Cox and Adelphia were also strong in the quarter.

However, please bear in mind that our strong bookings and revenue may have been at least partly due to budget flushing by some customers at the end of the quarter.

Our direct broadcast satellite customers continued the introduction of local channels to new markets and are now beginning to address the very significant bandwidth requirements of new services, in particular high-definition television.

We expect to see growth in our satellite business in 2004.

By market segment sales to our cable customers represented 78 percent of total revenue in the quarter; sales to satellite 10 percent; and other sales, principally to broadcast and telco customers, represented 12 percent.

Domestic sales were 70 percent of total sales for the fourth quarter of 2003 compared to 71 percent in the previous quarter.

Although Europe remains generally weak because of continued financial restructurings by many of the major operators, we are seeing signs of potential improvement in these markets.

We had our best quarter for some time in Latin America.

And in Asia, Japan, China and Korea, we are again leading contributors.

For the (technical difficulty) China generated more revenue than any country outside of the United States.

Gross margins on a non-GAAP basis were 40 percent in the fourth quarter, up on a sequential basis from 34 percent, mostly due to volume growth and the success of new products, such as our third generation NSG, which shipped in volume in fourth quarter.

In fact, the fourth quarter was our best quarter this year for NSG sales, where our competitive position remains strong and our installed base continues to grow.

We're also starting to realize the cost benefits of new contract manufacturing agreements which were recently put in place.

We are pleased to have reached this 40 percent gross margin milestone, and over the longer-term we will work towards continuing gross margin improvement in association with growing revenue levels and the benefits from our contract manufacturing agreements.

Non-GAAP operating expenses were 21.8 million in the fourth quarter of '03, up from 21.1 million in the fourth quarter of '02 and on a sequential basis from 25.7 million in the third quarter.

The sequential increase primarily reflects a longer -- almost 14 week -- fourth quarter, as well as the impact of variable sales expenses due to higher revenues.

We remained committed to cost control and at the end of December our headcount was 557, down 1 from the end of September and down from 587 a year ago.

We're very pleased to have reached profitability in the fourth quarter.

Our non-GAAP net income for the fourth quarter was $1.2 million or 2 cents per share compared to a non-GAAP net loss of 11.5 million or 19 cents per share for the same period of 2002.

And please note that we have excluded two positive items from these non-GAAP results.

In the fourth quarter we sold all our claims against the pre-bankruptcy Adelphia, and consequently reversed $2.2 million of bad debt reserves.

Separately, we had the benefit of 1.4 million from selling inventory that had previously been reserved as excess.

As a result, the GAAP net income, which includes these benefits as well as a charge for the amortization of intangibles, was $1.4 million or also 2 cents per share for the fourth quarter compared to a net loss of 13.8 million or 23 cents per share for the same period of '02.

And once again, a reconciliation between GAAP and non-GAAP results is in our press release and in our 8-K filing.

Turning to the balance sheet, our receivables increased, mainly due to higher revenues, to 38.5 million at the end of December compared to 32.2 million in September.

DSOs were 62 days in December compared to 61 days at the end of September.

Inventory of 22.4 million was up only slightly from 21.2 million at the end of September.

Our capital spending was approximately 1.2 million in the fourth quarter and 3.5 million for the year.

We expect our capital expenditures for 2004 to be about $5 million.

Our cash position is much improved because of our public offering, but also our positive earnings and cash flow in Q4.

At the end of 2003 we had cash, cash equivalents and short-term investments of 112.6 million compared to 34.3 million at the end of September.

We raised net proceeds of approximately $71 million in our public offering of 10.35 million shares.

We also generated approximately $8 million from operations in the fourth quarter, including the proceeds from the sale of the Adelphia claims.

As many of you are aware, we have various tax liabilities remaining from our acquisition of DiviCom in 2000.

We made no payments in Q4, but we do expect that several million dollars may become payable in the second quarter.

There will be no impact on our tax provision or earnings as a result of any of these payments.

With respect to the outlook for the year we're seeing positive developments.

In the first quarter, though, we expect to see the typical seasonal slowdown caused by winter weather, the restart of the capital budgeting cycle, and possibly some impact from fourth quarter budget flushing.

We expect first quarter revenue to be in a range of 50 to 54 million with a non-GAAP net loss in a range of 3 cents to breakeven.

On a GAAP basis, including the amortization of intangibles, we expect a net loss of eight cents to five cents per share.

These per-share numbers are based on the current outstanding share count of approximately 71.2 million following our public offering.

Beyond Q1 we expect to resume revenue growth and be profitable again in Q2.

That's all for me.

Tony?

Thanks Robin.

We're encouraged with the capital spending by many of our customers in both the fiber-optic and digital sides of our business and we believe this is the result of the intensifying competition between the cable, satellite and telco companies.

In the domestic cable market our business is being driven by the growing interest in our solutions for video on demand, high-definition TV and IP-based services.

Just last week Charter Communications announced activation of the first all-digital service in United States in its Long Beach, California system.

Charter's new service is based on our MV50 encoders and DiviTrackXE statistical multiplexers.

The compression capabilities of our digital headend make it possible for Charter to provision multiple standard and high-definition channels in the bandwidth normally occupied by a single analog channel.

Converting to digital recovers precious service carrying capacity that can be used to provide more high-definition television, as well as targeted services, including video on demand and specialized subscription packages.

We believe this conversion of analog channels to digital is a significant advance for the cable industry and we expect many of our customers to follow the Charter lead.

At the same time a number of our domestic cable customers are increasing their deployments of our fiber-optic technology.

Consolidation of headends continues with our new MAXLink systems that greatly increase transmission distances and signal quality.

In addition, many cable operators are further segmenting neighborhood optical nodes in order to meet the bandwidth demand for interactive services and especially for the rollout of the triple play of video, voice and data.

Our cable customers worldwide are very excited about our new products.

We announced and delivered our NSG9116 for video on demand.

It's the third generation of this industry-leading product line.

We also introduced our new line digital video encoders for high-definition TV and other services that require further bit rate reductions.

Our new MV100 encoder optimizes today's MPEG-2 compression and lays the groundwork for implementing the new compression standards H264 Windows Media 9.

As we discussed before, we believe these new compression techniques should eventually reduce the bit rate by a factor of two, equivalent to doubling the bandwidth of the world's infrastructure for TV transmission.

This capability is needed for a number of converging trends -- the advent of high-definition TV, which of course is a real bandwidth hog; the competitive need for telcos to transmit video; and the fact that existing operators can make more money and better retain their subscribers by offering more channels and advanced services.

We believe that our leadership in encoders and inch (ph) devices is helping to set the pace of change in digital video.

In the satellite market we announced that SKY Perfect Communications, Japan's leading digital multi-channel satellite broadcasting company with 3 million subscribers, is upgrading its video infrastructure with Harmonic digital headend systems.

Our MPEG-2 encoders and statistical multiplexers are expected to significantly increase the capacity of SKY Perfect's that existing satellites while improving picture quality.

SKY Perfect will also use our NMX Digital Service Manager to maximize service availability and simplify the operation of its geographically distributed video infrastructure.

This system is scheduled to be fully operational in January of 2005.

Our deployments with SKY Perfect, DirecTV, EchoStar and other satellite broadcasters around the world testify to our leadership in digital video technology.

We are now engaged in discussions with our key satellite customers about the development and introduction of the new compression standards.

In the telco arena we see growing worldwide interest in digital video.

Our encoders currently enable telcos to provide television over DSL.

This week we announced that the Video Networks Limited in the United Kingdom is deploying our MV100 real-time encoder to add broadcast and on demand television to its home choice DSL service and expand its geographical reach.

The MV100 encoder will allow VNL to offer a full complement of broadcast television channels, as well as time-shifted TV, high-speed Internet and video on demand services.

VNL service is expected to be fully operational by mid-2004, and is the first announcement by an operator of a planned deployment of the advanced encoding standard H264 on our MV100 encoders.

We believe this announcement is a strong point into the future.

Over the long-term deployments by telcos will offer significant opportunities for Harmonic's digital headends, as well as for our fiber-optics in applications such as fiber-to-the-premises.

So in summary, we're pleased with our performance in the fourth quarter.

Again, we see intensifying competition driving our business.

Cable and satellite operators want to offer more channels of digital video, new interactive services and high-definition TV.

Major telco operators also want to offer digital television services in order to stay competitive.

We're very pleased about the continuing success of our new products, our development work with the new compression technology and the growing recognition of our capabilities across different markets.

During the quarter we continued to focus on expense control and improving our operating efficiencies and we completed our very successful public offering.

We believe Harmonic is strongly positioned to help address the competitive challenges of our cable, satellite and telco customers.

We're excited about our opportunities in 2004 and beyond.

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

(OPERATOR INSTRUCTIONS) Alan Bezoza, Friedman, Billings, Ramsey.

Congratulations Robin and Tony.

It's Maurice for Alan.

The first question I have is where do you see the really end market mix trending between satellite and cable as we go into 2004, particularly in light of Rupert Murdoch's takeover of DirecTV and pushing local into local?

And based on that, where do you see overall margins for the Company trending?

An excellent question.

First, I think the arrival of Murdoch into broadband of America will definitely stir things up a little.

He is a formidable competitor.

I think what it means for Harmonic is our satellite business will grow, but likewise the threat from satellite on cable is -- and the way I try to describe -- are forcing the cable to invest more heavily and move more quickly to digital video than they might otherwise expect.

We figure the arrival is going to be good and we expect both segments of our business to grow, probably in proportion.

I'm sorry, the question on margins?

The question on margins, we have hit what I have described before as our intermediate target of getting margins up to 40 percent -- gross margin.

I've also said in the past I see no reason why the company can't get itself back towards the mid-40s where we have been in the past, and that is our next target.

I don't promise that in the next quarter or two, but I do believe we're capable of further expanding gross margins over the next several quarters.

I think we will do it in our traditional way.

Usually what when we introduce new products we make a great effort to get the performance up and the costs down, and Robin mentioned before that we have substantially altered our sub-contract manufacturing and we expect that to go on improving the situation.

Just one final question.

In terms of operating expenses, what level do see those at?

Do you see them staying at sort of the 20 to 21 level or trending up a little higher?

We're trying to keep them relatively flat.

One of the ways to expand operating margins -- which of course is probably your next question, -- is to do what we said we can do on gross margins and try to keep operating expenses (indiscernible).

To some extent, clearly, that's going to be a factor of the type of revenue growth we see in and pressure that puts on the company, but it's very much our goal to keep them right down there, as you suggest, in the very low 20s -- in the 20 to 22 range, let's say.

Great, and congratulations again.

Nikos Theodosopoulos, UBS.

Just a couple of questions.

Robin, you mentioned a tax payment in the second quarter.

Can you kind of estimate that?

And then on the customer breakdown, in the last couple of quarters we've seen the satellite percentage in absolute dollars kind of decline and to flatten out; can you talk about why that's happening, given the success of the new products within of the cable segment?

Why aren't we seeing them penetrate as rapidly on the satellite side?

Let me deal with the tax payments first, and then I will turn the other question over to Tony.

As we have said before, the tax payments are -- it's not one payment but it's a number of payments to a number of different tax authorities around the world.

So even trying to estimate timing and numbers is inexact.

Our best guess at this point -- when I said several million dollars, I'm probably thinking $45 million perhaps in the second quarter; potentially more, but as you have seen this is a very slow-moving area.

We certainly don't expect to pay anything in Q1.

And that's really our best guess at this time -- around five some time before the end of June.

To answer the question on satellite, first of all, this is a very lumpy business.

Domestically, of course, the rollout of local channels continues and we participate in that and we will continue to do so.

And there are some big lumps, as people build backup systems or reconfigure a headend or whatever.

So we expect that business to show some quite bright bits and pieces during the year, and of course we have the SKY Perfect system which is one of the biggest contracts outside the United States we've ever seen as a company, which will of course have an impact on revenues in the second half.

So I think we will have a stronger picture in satellite this year, and I would say it was down the last couple of quarters just because of the lumps.

Thanks.

April Horace, Janco Partners.

This is Mike Servas for April.

Just a few questions, just to get a little more color into a couple of points.

First, regarding your largest customers, you mentioned Comcast and Charter and Cox and Adelphia as strong in the quarter.

Can you put a percentage on Cox's and Adelphia's contribution to the topline?

No, we'd prefer just to break out the 10 percent customers, so Comcast 31;

Charter 11;

Cox and Adelphia were next and you can assume that they were in the 5 to 10 percent band but that is as far as I'd like to go.

Thanks.

Then the second part, regarding your work with Charter in Long Beach and that project, did you book all those revenues in fourth quarter or do you see further contributions to Q1?

No, we recorded all the revenue in Q4.

The system was installed, delivered and up and running.

And we recorded that in Q4.

Thank you very much.

Daniel Ernst, Rodman & Renshaw.

Despite the general trend of your analysts not to say congratulations, congratulations for hitting the positive EPS targets.

I think that will be well appreciated in the market.

We appreciate your kinds kind words.

It seems a long time.

Thank you.

Three questions.

Back in September at IBC you announced support for Windows Media 9; you mentioned it again on the call today.

Actually the week before last Bill Gates renamed it Windows Media Video High-Definition.

Could you talk about when there might be product for that?

As I understand it there's a couple of guys (indiscernible) decoding for set-top boxes already.

When we will see some deployments of that and what your competitive position is in that?

Second, despite the fact that you had your best quarter yet for NSG and VoD, a lot of the cable MSOs have been talking big about rolling out kind of TiVo like DVRs.

Do you think that might impact their spending on VoD, given that they do have somewhat finite capital budgets?

And third question, if I might -- Murdoch has been talking a lot about shaking things up at DirecTV.

Is there any risk of that customer -- when News Corp. takes over?

Thank you for the questions.

Let's see Windows Media 9, we indeed have announced we're working on it, of course, as we are on the H264.

And I would expect to see Windows Media 9 some time in the late second half of this year for availability.

And as you point out, it's not just our side of it.

There is no point in our rushing if the set-tops and not available.

And it's fair to say the market is still trying to decide which is the right way to go.

Of course we're doing both and I'm sure both will be deployed, but it's not clear whether one will be dominant over the other.

As far as the video on demand is concerned, I think you're going to see both systems -- the recorders in your house and the VoD systems.

And I'm sure the jury is out which way it is all going to go eventually, but it's pretty clear that our customers are going to go on investing in video on demand of the sort (indiscernible) and for a very long tome to come looking forward.

And we are very pleased with that business.

As far as the Murdoch takeover of DirecTV is concerned, of course it does risk an unknown.

But I believe we will hang on to our account if we continue to do a very good job servicing it, as we have done in the past.

But in this day and age you can take nothing for granted.

Of course, we value that customer very much and we will be doing everything in our capability to keep them happy with us and our products.

Fair enough.

Thank you.

(OPERATOR INSTRUCTIONS) Anton Wahlman, Needham & Co.

It's Brian for Anton.

Just a couple of quick questions.

You mentioned budget flushing on the part of a few customers.

Is this comparable to saying essentially that orders that would have come in the first quarter of '04 got pulled into the December quarter?

And just a little bit deeper on that, can you talk a little about which category of customer, i.e. either cable or satellite, would be more responsible for that type of activity?

I don't want to overstate it, and quite honestly it's quite hard to quantify.

We don't think it's a big impact, although there were a couple of situations where we got a strong impression that customers were trying to make the most of the '03 capital budgets and may have pulled equipment forward.

We don't think it's a huge effect.

I think it was mostly in the cable sector and limited really to a few situations.

But I got the sense that there was some of that going on.

You mentioned a little bit about video over DSL in telcos.

Was there any contribution in the fourth quarter?

I think last quarter you had a little bit, but it wasn't hugely meaningful.

I get the feeling that most of that is for this year.

I think that's right, Brian.

We did have some telco business in the fourth quarter, but not a lot of it.

There was some, but not a lot was from new video over DSL applications.

I think with the one-way announced in the UK, and I think we're seeing some other interest in Europe as well, I would expect to see that more important this year.

But it's still early stage and still a relatively small number of customers at this point.

Thanks.

Last question is on Adelphia.

Are you still seeing mostly band business or getting any meaningful encoder orders?

It's mostly band business at this point.

That's it for me.

Thanks.

(OPERATOR INSTRUCTIONS) Mr. Ley, there are no further questions at this time.

I will now turn the call back over to you.

Please continue with your presentation or closing remarks.

Thank you everybody for participating in today's conference call and we very much 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.