Harmonic Inc (HLIT) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Harmonic Incorporated first quarter 2004 conference call.

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

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

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

As a reminder this conference is being recorded Thursday, April 22, 2004.

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

Please go ahead sir.

Thank you.

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 all for joining us.

As most of you know, Harmonic designs, manufacturers 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 first quarter of 2004.

We're pleased with our strong sales improvement in the first quarter, especially as this is the first quarter -- as this is the quarter that is usually our slowest in the year.

The intensifying competition between cable and satellite operators to capture and retain subscribers is accelerating the rollouts of the new services such as digital video, HDTV and the interactive services for VOD and data.

All this is increasing the demand for more bandwidth and better bandwidth management.

And although timing with some of the larger he deployments in cable and satellite is difficult to predict, the trend is well underway and even the telcos are ,today, a step closer to offering full digital video services.

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

Afterwards, I'll discuss significant events that occurred during the quarter.

Robin.

Thank you Tony and good afternoon everyone.

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

We 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 filed with the SEC, including out most recent 10-K report.

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

Please note also 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 earnings 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 statistical 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 ended April 2, 2004.

For the quarter, we reported net sales of $55.1 million, up 49% from $37 million in the first quarter of 2003, and down only slightly from $56.3 million in the fourth quarter of 2003.

Our Convergent Systems Division, which designs, manufacturers and markets digital headend systems had divisional net sales of $35.8 million in the first quarter of 2004, up from $24 million in the same period of 2003.

Our Broadband Access Networks Division, which designs, manufactures, and markets fiber optic products had divisional net sales of $19.3 million in the first quarter of 2004, up from $13 million in the same period of 2003.

On a sequential basis, convergent systems was up by $2.6 million in the quarter while band fell $3.8 million from Q4; in line with the normal seasonal patterns.

During the first quarter, our largest customers were Comcast, EchoStar and Cox, to whom sales respected 14, 14, and 13% of total sales respectively.

Although sales to Comcast were down from recent quarters, we attribute this to normal seasonality.

We anticipate a larger relative contribution in Q2 and the second half, expecting to repeat the quarterly pattern we saw in 2003.

By market segment sales to our cable customers represented 66% of total revenue in the quarter.

Satellite customers represented 22% and other market segments, including broadcast and telco represented 12%.

While in the longer term we expect that telco customers will be the principal drivers of growth in the other segment, we saw Q1revenue from a resurgence in MMDS video systems.

This segment has been quiet in the last few quarters but is benefiting from improvements in technology coupled with our attractive package of encoding solutions.

These MMDS applications can be quickly and relatively inexpensively deployed and are particularly suited for countries where wired infrastructure is not well developed.

This is one reason why international sales represented 33% of total sales in the first quarter, up from 30% in the fourth quarter of '03.

But it was also due to improvements in Europe, perhaps indicating that the lengthy period of financial restructuring by major operators there may be nearing its end.

On a sequential basis, we had higher sales in Canada and rest of the Americas during the first quarter, with Asia relatively flat; perhaps because of the seasonal affect of Chinese New Year.

Going forward we continue to see Asia as a region of significant opportunity for Harmonic; especially in China, Japan, and Korea.

Gross margins on a non-GAAP basis were 41% in the first quarter.

In spite of slightly lower volume we saw a small sequential improvement from 40% in the first quarter of 2003 and a major improvement from 30% in the first quarter of '03.

This reflects the continuing success of our new products, where our competitive remains strong and are installed base continues to grow.

We also saw cost benefits from our new contract manufacturing arrangements.

Non-GAAP operating expenses were $22.8 million for the first quarter of '04, up on a sequential basis from $21.8 million in the fourth quarter.

The sequential increase primarily reflects a longer than normal quarter and no season shutdown as we had in Q4, plus some very modest hiring.

At the end of March, we had 562 employees, up 5 from the end of December and the first headcount increase in a very long time.

We are prepared to hire selectively for key programs as long as business conditions permit.

We're very pleased to have achieved break even non-GAAP results in the first quarter, again given that it's typically our slowest quarter.

Our non-GAAP net income for the first quarter of '04 was $0.2 million or zero cents per share.

This compares to a non-GAAP net loss of $9.3 million or 15 cents per share for the same period of 2003.

Please note that we have excluded from the non-GAAP results a benefit of $700,000 related to the sale of previously reserved inventory, as well as non-cash accounting charges for the amortization of intangibles .

As a result, the GAAP net loss, with includes these two items was $2.6 million or four cents per share for the first quarter, compared to a net loss of $11.7 million or 19 cents per share for the same period 2003.

Again, I'd remind you that a reconciliation between GAAP and non-GAAP is in our press release and in our 8-K filing with the SEC.

Turning to the balance sheet, our receivables were down to $32.4 million at the end of Q1 compared to $38.5 million at the end of last year.

We're very pleased with this result with DSO down to 53 days from 62 at the end of December and this was, in part, due to the fact that Q1 was perhaps more linear than our normal first quarter.

Inventory was $28.3 million at the end of Q1, up from $22.4 million at the end of December, as we are preparing to meet anticipated demand later in the year.

Although the exact timing of larger projects is always difficult to predict.

Our capital spending was approximately $1.7 million in Q1 and we expect capex for the full year to be around $5 million.

Our cash position remains strong.

We had cash, cash equivalents and short-term investments of $108.4 million at the end of the first quarter compared to $112.6 million at the end of 2003.

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

We made virtually no payments in the first quarter, but we have just made payments of $4.8 million earlier this month.

The timing of the remaining payments is still very uncertain, but we expect to payout the balance of these liabilities gradually over the next one to two years.

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

Now with respect to the outlook, we see underlying strength in our business compared to this time last year.

The Q1 year-over-year comparisons are proof of that.

Our band business looks very solid, as domestic operators continue to make targeted improvements to their networks for new services and additional traffic; including telephony and business services.

In Convergent Systems, which is driven more by larger projects, there are equally important drivers of our business such as high-definition and video on demand.

In Convergent there is always less certainty about the timing of revenue on these larger projects, both where we already have the contracts and where we are anticipating new contracts.

Some of this will fall into Q2, some may deliver revenue only in the second half.

So, as a result, our Q2 revenue guidance at this point will have to be in a relatively wide range from $54 million to $60 million, with non-GAAP net income in a range of a penny net loss to income of 3 cents; on a GAAP basis, including the amortization of intangibles, we would expect a net loss of 6 cents to 2 cents per share.

That's all for me.

Tony.

Thanks Robin.

As we move into 2004, we're delighted to see that many of the industry trends we anticipated in our planning several years ago are beginning to materialize.

This intensifying competition between the cable, satellite and telco operators drives both the fiber optic and digital video sides of our business.

In the domestic cable market, our business is being driven by the ongoing rollouts of more digital channels, video on demand, high-definition TV, and IP based services.

We're currently involved with multi deployments of VOD with most of the major domestic operators.

Yesterday, we were able to announce that Cox is deploying our industry for NSG for VOD in a number of markets and, in fact, all of the major domestic MSOs have now installed our NSGs.

While the timing for some of these large and complex deployments remains difficult to predict, consumers are enthusiastically taking up new services such as VOD and HD.

As an illustration, analyst estimate by the end of this year, the number of households in the U.S. with high-definition television will exceed 10 million.

Forecasters are also upgrading their technology to keep up with the demand for the advanced digital services such as HDTV.

This week, we announced that the Sinclair Broadcast Group is using our new MV450 encoders to bring high-definition television to millions of households throughout the United States.

Sinclair is one of the largest television broadcast groups with 62 stations in 39 markets that encompass nearly a quarter of the countries households.

Sinclair is standardizing on the MV450 to deliver the full high-definition experience in parallel with standard definition programming.

By the end of this year, most of Sinclair's stations will be transmitting Harmonic based HD services.

The demand for more digital channels, more bandwidth intensive HD channels and VOD and IP services, as well as continued overall subscriber growth; continues to drive the need to create more bandwidth.

One of the most effective ways to do this is by converting the analog channels to digital.

Following our deployment of an all digital system at Charter, there is much activity with our cable customers in this area.

In addition, domestic cable operators are seeking ways to increase their services to businesses.

As a result, more of our domestic cable customers are increasing their deployments of our fiber optic technology.

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

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

This is, of course, the ideal application for our scalable mode.

We also continue to drive new products specifically to support our international customers.

During the first quarter we announced an extension of our industry leading broadcast network gateway family of compact multi-function etch devices to support SDH networks.

The new BNG solution allows cable operators to make use of their existing long-haul networks to provision, manage, and extend a secure multi-channel digital television service.

Our new BNG systems are well-suited to the needs of rapidly growing cable television markets such as in China and India.

Also very pleased by the growing interest in VOD and HDTV amongst our international customers.

During the first quarter, we announced the Hefei broadcast and tv broadband network which serves 300,000 subscribers.

It has deployed our industry-leading Narrowcast Services Gateway for the first cable-based VOD service in China.

We continue to extend our marketing presence worldwide, particularly in Asia.

In the first quarter we participated in the CCBN trade show in Beijing and our first major trade event in India.

This week we are participating in the NAB show in Las Vegas, which attracts the entire video supply chain from content originators to broadcasters to cable and satellite network operators and to end users.

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

Our satellite customers continue to execute their plans to offer more high-definition and local channels.

We're also engaged in discussions with our key satellite customers about the development and introduction of the new compression standards.

We have been demonstrating these new encoding standards to them both H264 and WM9 at the NAB conference all this week.

In the telco arena we continue to work with operators to explore how they can best offer a competitive array of quality digital video services in the coming years.

Our encoders are currently deployed by telcos to provide television over DSL in the U.K, Japan and Canada.

We also continue to work with telco operators on future deployments of the advanced encoding standards.

We're actively engaged on the video transmission side of the fibers of the premises FTTP projects and expect to see revenue towards the end of the year.

Over the long-term, we believe the telco market will provide significant opportunities for our digital headends, in addition to our fiber optic products.

So in summary, we're pleased with our results in the first quarter.

We continue to see intensifying competition between cable and satellite operators to offer more channels of digital video and advanced services which continues to drive the insatiable need for both more bandwidth capacity and better bandwidth management.

Major telco operators also plan to offer digital video services in order to stay competitive.

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

We believe Harmonic is strongly positioned to help address the competitive challenges of our different customers.

We believe increasing competition between operators combined with the ever-going requirements of new residential and business services will fuel growing demand for our fiber optic and digital video products in 2004 and beyond.

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

Thank you. [Caller Instructions] Our first question comes from the line of Maurice McKenzie of Friedman, Billings, Ramsey.

Good afternoon Tony and Robin.

Good quarter first question I have for you, as DirecTV prepares to double it's local into local markets in 2004, have you begun to see orders from the operator; and secondly can you discuss the order cycle meaning how long, what is the timing difference between when they would actually order the gear and actually put it into service for local into local or HDTV?

I think we see continued activity on the part of the satellite providers in the U.S.

As we do elsewhere, in fact, but in the U.S. it's largely at the moment for local channels and I would say that there's probably a valid three month lag between us getting the order and customers getting service; something of that order.

Have you begun to see activity from DirecTV pushing in that direction as they prepare to really launch on several more local channels this year?

I would say the activity from DirecTV remains pretty constant.

It's been continuous and constant for some time.

Switching gears to the VOD side, with the entrance of Cisco into the arena, can you describe the current competitive landscape?

Has it become more competitive, where do you see the size of the market growing considering the ramp up in VOD and how do you assess your share at this point?

Given that it is mainly an American phenomenon at the moment, I would say that most of the decisions for deployments have been made and as a result of that, we -- I think we have the greatest share of the market.

I would would say that Scientific-Atlanta has a good piece, and Motorola has come in a bit.

We have not seen Cisco at this stage anywhere at all in the business.

And as I say, most of these deployments are now set and what you are going to see from here on is extensions of the systems that are in place as the penetration within a particular system increases and the demand goes up.

This provision this stuff, of course, with a peak load and that's what the operator has to keep in mind.

So if the peak load increases they'll need more equipment like the NSG's and basically in most cases going to add it onto the existing system.

Thank you, Tony.

Our next question comes from the line of Nikos Theodosopoulos with UBS, please proceed with your question.

Robin I had a couple of clarifications.

The third 10% customer I missed who that was after Comcast and EchoStar.

Yeah, just to repeat Comcast was 14%, EchoStar was 14% and Cox was the third at 13%.

Okay.

Okay.

Second question I have is, can you comment at all on how the bookings trended.

You mentioned that linearity, I think, was better than a normal Q1 and in the same fashion I also noticed that the deferred revenues went down sequentially.

Can you talk about what happened there?

Thank you.

Okay, well as you know we don't talk specifically about backlog on a quarter to quarter basis.

In general though, as is not unusual in the first quarter, booking were a little lighter than revenue and so you did see, for example, one of the things you did see was a drop in deferred revenue.

This is, of course, tied mostly to the Convergent Systems Division.

Okay.

Okay.

And the guidance -- the guidance for the second quarter, it sounds like the band business right now with Comcast picking up its spending in the second quarter you'd have the better visibility there and variability in guidance is just tied to the timing of some of the revenue recognition on the Convergent side.

Is that a reasonable--

I think you said it as well as I could say it, because yes, exactly.

That's a pretty good description.

Okay.

One final point.

Tony did you say you expect to generate revenues later in the year on fiber to the prem, were you specifically talking about the U.S. market?

Can you clarify that a little bit?

I think this year we're going to see small amounts of revenue and most of it will be in the U.S.

Okay.

It is not a huge amount, but it's very significant in that it's a precursor of things to come.

Okay.

Thank you.

Our next question comes from the line of Eric Buck from Janco, please proceed with your question.

Good afternoon guys.

I'm sitting in for April here.

Couple of questions for you.

First of all, I was wondering if you could update on the status of your MPEG-4 encoders and tell us whether that's still on schedule to be shippable by the end of the year.

Secondly, wanted to get some more details on the China deal that you had announced back near the end of March with Hefei.

Give us an idea how large that is and what the overall opportunity and how fast you think that develops in China.

And finally you also recently announced a deal with Sinclair Broadcasting and you talked a little bit about the broadcasting business.

Your commentary seemed to suggest you didn't expect that to rebound to be a big part of the business down the road, but I just wanted you to kind of elaborate a little bit on what your expectations overall are for the broadcast segment.

Certainly.

Well first, MPEG-4 development is absolutely on track and we've been already demonstrating equipment at the NAB show this week and the suggestion that we're going to be shipping by the end of the year, I believe, is absolutely correct.

So that's right on course and we are very excited about what is going on.

The Chinese, this was a significant announcement, because I think it is the first VOD system in China and like in all the systems I think you are going to see it start fairly modestly because the cable company has an awful to learn how to do to roll the service out and to learn to bill the customer and get all this equipment working.

So it is relatively modest at this stage, but we expect it to go into much greater things in subsequent years, or later this year.

Finally, Sinclair, I forget the question, but what is significant about the Sinclair release was it was high-definition.

We have a steady business in the United States with the broadcasting, as you know they all have to be digital, all transmission is digital by 2006 and we've been providing combinations of standard definition encoders with a small amount for HD for some time.

We're now seeing the high-definition wave really getting underway.

That's very significant to us because HD puts tremendous pressures on everybody's bandwidth, so if all types of operators have to put in more and more HD, they have to do an awful lot of work in their systems, which will reflect well for us.

So does that suggest a significant change in the revenue run rate of the broadcast business over the next several quarters?

Not necessarily significant, but it's a very good steady base.

It is not a great part of the businesses, you know from Robin's figures; but it's a very consistent and stable part of our business.

Okay.

Thanks.

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

Please proceed with your question.

Good afternoon.

First just a couple of housekeeping questions.

Looks like inventory jumped up bookings on a simple basis stays inventory 60 days to 76, can you speak of that?

And then SG&A jumped up more than $3 million in the quarter and you said part of it was the marketing expenses and 5 additional hires.

But it doesn't seem to add up to quite $3 million so if you could talk about that.

Then on the product side or customer side today Boeing announced that they began the launch procedures for DirecTV 7S satellite, can you talk about how long after their launch, which they are saying is May 5th or May 4th, where you think you'll be engaged to supply encoders for that system?

Okay, let me try to take that-- I think actually, Dan, we've probably answered some of that; particularly the DirecTV question later on.

Maybe Tony can come back to that later.

On the inventory what I said in the call is really the essence of it.

We see some pretty significant projects looming, particularly on the Convergent Systems side of the house.

They're always difficult to time precisely, but we've been building up inventory in expectation that it is going to be a good year in Convergent Systems and we want to be ready to deal with that.

One element of it--it's a smaller piece, but one element of it is just the ability to provide inventory for customers for demonstration purposes, for testing, lab trials and all the rest of it; and these are fairly significant systems that we do.

So there's a bit of inventory going into that, but it's all tied one way or another to future business.

On the SG&A, I don't quite follow your numbers unless you're talking on a year-over-year basis; but even there I don't get the $3 million.

Inventory was up sequentially--I'm sorry, operating expenses were up sequentially about a million quarter-over-quarter, Q4 to Q1.

And as we said, it was a pretty long quarter because it ended on April 2nd so we had three full months and a bit in there.

We had no seasonal shut down unlike Q4 where we closed the company just before the Christmas holiday.

And we did a little bit hiring, as we said it was the first quarter in some time that we've hired.

We didn't hire a lot of people, but we had a net increase of 5 and so that is starting to drive up the expenses.

Just back to the inventory question.

Is any part of your desire to build up inventory related to reports of the contract manufacturers adding capacity?

No.

Although as we've discussed we have our own transition going on in contract manufacturing to one principal provider.

And so to some extent, I don't think that's a major factor, but I think that may be something of a factor just to make sure we are well protected through that transition.

But, no, it's more related to specific business opportunities that we see in front of us for the rest of the year.

Okay, good.

Ladies and gentlemen, as a reminder to register for a question please press the one followed by the four on your telephone.

Our next question comes from the line of Erik Zamkoff, Independent Research Group.

Please go ahead sir.

Hi.

Good afternoon.

Nice quarter, gentleman.

Thank you.

Thank you.

I was wondering if you could take a little time to go through the scenario with DirecTV?

If you're seeing any uptick there, you know, potential for satellite uptick in the Japan market.

And also just a quick clarification question on cost of goods sold.

Backing out the charges.

Was your gross margin actually 39.7?

Let me sort of -- I'll try to sort through the first part of that.

Actually, in terms of the satellite business, 22% of our revenue was from satellite customers in the first quarter, so I think things are already going quite well.

I think we were 19% for the year as a whole last year.

So I think that's indicative that there is quite a lot happening in the satellite world overall and as we pointed out EchoStar was a more than 10% customer.

I didn't quite catch all of the question about Cox.

I didn't ask a question about Cox--oh COGS.

I thought you said Cox, I'm sorry.

What I was asking was there was in the reconciliation-- and this is just housekeeping of GAAP to non-GAAP.

Attached with your release, there is, you know, a charge that says total charges to cost of sales and I was just curious if, you know, that is something that, you know, -- was the actual -- you know, gross margin from your operations this quarter a little bit lower because of that?

Can you just go through what goes into that charge?

No, the gross margin -- the gross margin was actually a little bit higher at 41%.

Now that gross margin, which is on a non-GAAP basis, and that's the last page of our press release; that gross margin excludes two items.

It excludes the amortization of intangibles which is $1.-- in cost of sales is $1.5 million; and it also excludes a benefit from the sale of inventory which had been reserved and that's $700,000, so the net is about $800,000 to $900,000.

Those two items are excluded from our GAAP numbers to provide the non-GAAP numbers that I think most of you are measuring us against.

On that basis our gross margin's increased from 40% in Q4 to 41% in Q1.

Got you.

All right.

Thank you.

You mentioned Japan.

As you know we have a very large contract to rebuild at Sky Perfect in Japan and we'll be recording revenue in the second half this year on that project and maybe a little in the first quarter of next year.

Thank you.

Our next question comes from the line of Robert Tango from William Blair & Company.

Please go ahead.

Thank you.

Robin, just looking at the telco market, you know, most of the discussion is always targeted to the cable operators and satellite players and obviously there's increasing interest by the telcos in competing more effectively against cable operators and they're obviously trying to implement some systems to provide video over DSL, et cetera.

They're looking at various source of solutions and technologies.

I guess I am interested in just the mindset of the telcos at this point.

We know it is still early, but what kind of feedback are you getting from that segment, specifically, in terms of their intentions, whether it be this year or in 2005 to potentially be more aggressive?

Thank you.

Let me take that.

I think you can look at it in two ways.

I think you should look at the U.S. where cable is immensely strong and the rest of the world where telco is a much better place.

So we go outside the United States and we see a lot of interest in fiber to the premises type of solutions.

Initially you are going to see a much greater driver of video over DSL.

The systems abroad tend to be of higher bandwidth and the competition is not from cable so much.

I think the telcos abroad are going to move faster with video over DSL.

It is not such a good solution in the United States when you are really up against the cable industry.

And there the telco really wants to compete.

It's gotten so, at the moment, the only way forward is to get into fiber to the home or fiber to the premises and that's why you are seeing companies like Verizon really starting to move pretty aggressively to make something happen.

We have two worlds really.

That within America and that without.

Okay.

Thank you Tony, appreciate it.

There are no further questions at this time.

I will now return the call back you.

Please continue with your presentation or your closing remarks.

Well, thank you everybody for participating in this conference call today.

And we very much look forward to speaking to you again at the end of 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.