Harmonic Inc (HLIT) 2004 Q3 法說會逐字稿

Ladies and gentlemen.

Thank you for standing by and welcome to Harmonic third quarter conference call. [Operator Instructions].

I would now like to turn the conference over to Mr. Anthony Ley, please proceed sir.

Good afternoon.

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

With me in our head quarters in Sunnyvale, California are Robin Dickson, our Chief Financial Officer and Michael Newman, our Investor Relations spokesman.

Thank you all for joining us.

Today we announced our result for the third quarter of 2004, which were in line with the preliminary estimates that we gave you earlier this month.

As we discussed with you on the last call, the third quarter results fell short of our expectation because of the timing of certain orders.

Despite this we feel very good about the fundamentals striving our business and how the second half of the year is now shaping up.

We are pleased with the growth and diversification of our worldwide customer base across cable satellite and Telco markets and that's a major strategic objective for us.

While the timing of customer shipments remains difficult to predict, we expect strong sales and earnings growth in the 4th quarter.

So at this point I will ask Robin to cover the financial details of the quarter and then I'll discuss our general progress in the quarter and some of the exciting trends in our market.

Robin.

Thank you Tony and good afternoon every one.

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

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

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

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

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

These items together with corresponding GAAP numbers and the reconciliation to GAAP are contained in today's earning press release, which we have posted on our web site and filed with 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 the 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 October 1, 2004.

We reported net sales of 50.6 million for the third quarter up from 47.3 million in the third quarter of 03, but down from 57 million in the second quarter of this year.

As we previously indicated, our lower than anticipated revenues in the third quarter of 2004 primarily reflected the timing of two significant customer orders.

And while Q3 bookings were very strong, the timing of these orders was such that some of the associated revenue has been pushed into Q4.

Our convergent systems division, which designs, manufactures and markets digital head-end systems had divisional sales of 34.6 million up from 29 million in the third quarter of '03 and up from 33.3 million in the second quarter of '04.

Our broadband access networks division which designs, manufactures and markets fiber optics products had divisional net sales of 16 million in third quarter '04 compared to 18.3 million in the third quarter of '03 and 23.7 million in the previous quarter.

We saw slower band shipments to most of our domestic cable companies in Q3, particularly Adelphia, but we expect to see some modest improvements in Q4.

We're very pleased with our progress in diversifying our business.

By market segment, sales to our cable customers represented 52% of revenue in the quarter.

Satellite customers represented 20%, and all other market segments, which are principally Telco and broadcast customers represented 28%.

Our convergent system sales in the third quarter included revenue from two major video-over-DSL deployments with international Telcos as well as a number of smaller Telco projects.

However, in the next few quarters, we don't expect Telcos sales to continue to represent such a high percentage of total sales.

Our Telco business is still relatively new.

It's driven by large projects and therefore, it's likely to be quite lumpy.

Nevertheless, we're very pleased with the growing activity and order levels, especially internationally and we expect significant Telcos sales in 2005.

In large part because of these international Telco projects, international sales represented 59% of total sales for the third quarter of '04, up from 29% in the third quarter of '03 and 44% for the second quarter of '04.

Sequentially we saw our sales increase in all international regions except for Europe where typical holiday seasonal patterns were at work causing a decline from Q2.

While we still expect domestic sales to represent the majority of our revenue over the long term, we're certainly pleased to see our international business so greatly improved from this time last year.

Gross margins on a non-GAAP basis were 41% in the third quarter, up slightly from 40% for the second quarter of '04 and up significantly from 34% in the third quarter of last year.

The sequential increase in margins despite the sequential sales decline mainly reflects the quarter's mix of product sales, which had a much heavier concentration of convergent system sales.

It's also due in part to the successful transition of our contract manufacturing arrangements and our sustained cost control efforts.

We expect that higher sales levels will allow to us to see continued improvements in gross margins.

Non-GAAP operating expenses were 22.8 million for the third quarter, up on a sequential basis from 21.8 in the second quarter.

The increase primarily reflects increased head count and other personnel related costs.

At the end of September, we have 575 employees, up 5 from the end of June.

We expect to continue to hire very selectively in anticipation of growth in coming quarters.

Despite the improvements in our gross margins, the decline in the revenue level meant that we simply could not deliver positive net income in the third quarter.

The non-GAAP net loss was $2 million or $0.03 per share compared to a non-GAAP net loss of 4.2 million or $0.07 per share for the same period of 2003.

Please note that we have excluded from the non-GAAP results a credit of $1.2 million in the third quarter related to the sale of previously reserved inventory as well as non-cash accounting charges of 3.5 million for the amortization of intangibles.

Including these items, the GAAP net loss for the third quarter of '04 was $0.06 per share compared to a net loss of 7.5 million, or $0.12 per share, for the same period of '03.

Once again, a reconciliation between GAAP and non-GAAP results are in our press release and our 8-K filing.

We had cash, cash equivalents and short-term investments of 89.4 million at the end of September compared to 92.2 million at the end of June.

In part, because of the timing of the large orders at the end of the third quarter, our receivables and inventory were considerably higher than anticipated levels.

Receivables were at 43.3 million at the end of Q3 compared to 39.1 million at the end of Q2 with DSOs at 78 days, up from 63 at the end of June.

Similarly, inventory was up to 38 million, up from 30.4 at the end of Q2.

In the fourth quarter, we expect both receivables and inventories to return to more normal levels.

Our capital spending was approximately $1.1 million in Q3 and as we've been saying this year, we expect Capex for the full year to be about 5 million.

In summary, we think that our financial results for the third quarter really don't truly reflect the strength we see in the business.

Mostly because of increasing customer demand and due partly to the two major orders, which slipped into the fourth quarter, we expect total net sales for the fourth quarter of 2004 to be in the range of $72 to $78 million.

We feel good about our backlog, our deferred revenue, the early Q4 order intake and the immediate pipeline of expected orders.

I believe the biggest risks in meeting this revenue guidance are in the execution area, having enough of the right products to ship, agreeing upon and providing installation or integration services on a timely basis, and making sure that we satisfy particular acceptance criteria required on certain projects, both large and small.

Based on this range of revenue, non-GAAP net income, excluding the amortization of intangibles is expected to be in a range of $0.08 to $0.12 with GAAP net income expected to be between $0.03 and $0.07.

Achieving this revenue guidance for Q4 would put our annual year-on-year revenue growth at about 30%.

I think it's still too early to provide guidance for 2005.

We're still in the process of understanding our customers' budgetary plans and working through our own expectations for next year.

However, we believe that we're in an excellent position to benefit from trends in the industry that are working quite strongly in our favor, and that we're in a good financial position to capitalize on these opportunities.

That's all from me.

Tony.

One of our primary strategic goals is the expansion of our business across multiple markets.

We're making good progress in this direction.

As we've been saying for some time, the competition between cable satellites and Telcos operators has been intensifying, which is driving their investment in our technology and diversifying our business across different markets.

Cable operators are moving toward the rollout of the triple play of video, voice and data services.

Our cable customers are deploying our head-end systems to further the transition to digital television in order to compete with the picture quality and channel array offered by satellite.

Our digital technology also enhances their ability to roll out high definition channels and video on demand.

At the same time, they can continue to extend the two-way capability of their networks by note splitting and by adding the corresponding optical transmitters.

During the third quarter, our international cable customers also began to deploy commercial services.

We announced that QRix, one of the largest cable operators in Korea, is using our commercial services solution to leverage its existing cable television network infrastructure.

QRix is rolling out scalable Internet access and virtual private network services to business and multi-tenant buildings.

This smart business market represents a significant opportunity for cable operators worldwide.

In the satellite market, our customers continue to expand their head-ends to provide more channels and better video quality as well as increasing the deployment of more high definition and local channels.

The improvement of our MPEG-2 encoding efficiency permits our customers to transmit more channels over the existing satellite and frees up bandwidth for high definition.

During the quarter, we also announced that Digital Play-Out-Center, Germany's largest satellite broadcaster, is using our broadcast network gateway NMX digital service manager to increase the security and availability of its digital TV service.

In coming periods, we expect to see increasing shipments of our high performance MPEG-2 encoders and related systems to satellite customers.

Telco operators are now forecasting some of their future growth in video services.

The most rapid entry point is by sending video-over-DSL, and we're seeing a great deal of activity using this architecture.

A great number of international Telcos have already begun deploying video over the DSL using our digital head-ends.

In fact, during the third quarter, we had the strongest Telco sales in our company's history.

As an example, we announced that CanalSatelite, France's leading satellite distribution and direct to home broadcaster has deployed our high performance MV 100 encoder.

They use this to deliver 80 channels of broadcast quality television to ADSL subscribers via the networks of their Telecom partners.

Our encoders are currently deployed by Telcos to provide video over DSL in the UK, France, Japan and Canada, and we have secured orders in other countries.

In the domestic market, we're actively engaged with Telcos on fiber on the premises and other designs to offer digital video, which creates a new market for both our optical transmission and digital head-end products.

We expect to see significant revenues from domestic Telcos in 2005.

We also continue to help our customers across different markets prepare for next generation compression standards.

As the recent IBC show in Europe, we demonstrated our technology leadership in digital video solutions based on next generation codex.

We showed our MV 100 encoding platform running both VC-1 and MPEG-4 to compress video in real time and seamlessly interoperate with new third-party set top boxes.

Our MV 100 has set the benchmark for today's MPEG efficiency and video quality, and it provides a straightforward path to the next generation standards, which can effectively double the number of channels on a system.

This has significant implications for all of our cable, satellite and Telco customers.

In summary, while the timing of customer deployments remains difficult to predict, the overall industry trends are increasingly positive for us and we're expecting strong growth in the fourth quarter.

We continue to see a struggle for subscribers between cable and satellite operators and see major Telco operators beginning to offer digital video services.

We're particularly encouraged by the continued diversification of our customer base and strength of our international business.

We also believe that our customers across different markets see us as a technology leader in their future migration to next generation compression standards.

We're very excited about our progress and our long-term growth opportunities.

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

Thank you. [Operator Instructions] Our first question comes from the line of Allen Bezoza from Friedman.

Please proceed with your question.

Hi, it's Brian on behalf of Allen.

Just a couple of quick questions.

First, obviously, international business is very strong.

You spoke a little bit about the Telcos work that you're doing overseas.

One thing you did mention was the business with Sky Perfect.

I was wondering if you could comment on that.

I think last quarter you said it was likely you would be halfway over at the end of last quarter and how you see that proceeding?

Brian, it proceeded according to plan.

We recognized additional revenue as the process -- as the project continued on track.

We have some more to come in probably in the fourth quarter to wrap it up, so it's very much on track.

So more like three-quarters of the way there?

Yes.

We're very pleased with this particular one because it is maybe one of the largest systems, if not the largest, we've ever built, and we have, of course, a very demanding customer from that part of the world, and we are still ahead of schedule.

OK, great.

One other thing is regarding the optical business, I know, I think -- I can't remember if it was Tony or Robin you said it would look better looking into next year.

Can you split that between the US and internationally?

I mean, obviously with a little bit of weakness at Adelphia and others, do you see it still being up year-over-year into 2005 with note splitting and the like?

Yeah, we believe it will be up year to year.

We do think the strongest part of the growth will be in international.

We do expect some upside on the fibers of the premises video overlay equipment that we make, but it's a little difficult to make the forecast at this stage, but we believe business will be up and international will grow faster than domestic.

All right.

Sounds good.

Can you tell me a little bit about your MSG business during the last quarter, particularly at Comcast, how that trended?

Well, I think as we tried to indicate on the last call, we had relatively modest expectations of VOD for the second half of the year, and although, clearly we had some higher projections for the second half, they, for the most part, didn't have much to do with VOD.

It came out pretty much as we expected, it was a relatively light contribution in the quarter, which was as we expected.

No particular surprises as we believe our customers have done a lot of the work to do the initial large city rollout that they had in their plans, and I think we indicated that it will be a little bit of perhaps consolidation phase until usage rates pick up and they extend it the deployment to smaller cities.

Yerah, absolutely, I remember that.

Seems to square.

OK.

And then just one final question.

Looking ahead in the shift in the revenues in the fourth quarter, again, you're going to have probably like even more convergence system sales relative to the band business, and on the CSI where you have higher margins, you know, I'm just having a hard time kind of getting to your bottom-line guidance of the $0.08 to $0.12 without really kind of grossing up your OpEx a little bit.

Unless I'm missing something.

Is there anything that's going on between the lines?

You're right, I mean, Brian, I'm optimistic about the gross margins partly because of the mix shift and partially because of the benefit of our new contract manufacturing.

You're right to point that out.

I do expect operating expenses could be up fairly significantly.

I mean, this is expected to be a very large revenue quarter, and that will trigger incentive plan, larger incentive plan payouts and the like, so we were pretty cautious on the expense side, just to be sure that covered all the bases, and also in delivering that amount of revenue, there are other factors as well, including some of the costs of getting projects completed on time and so forth.

So we may have been a little conservative, you know, but again, I expect to see some spike in the operating expenses.

All right, it sounds good.

That's all I have.

Thanks again.

Thank you.

Thank you.

Our next question comes from Nikos Theodosopoulos from UBS.

Please proceed with your question.

Thank you.

A couple of questions.

On the guidance for the next quarter, Robin, I realize you had these push-outs that I think on the prior conference call you quantified on the order of about $9 million.

So if I look at the current revenue of, you know, 50.6 million and add to that the 9 million, that gets you up to about 59 million and then the guidance is 72 to 78 million.

What gives you the confidence of, you know, getting an additional revenue to meet the guidance?

Do you have some kind of strong backlog going into the quarter?

I also notice that deferred revenues are up about 7 million sequentially.

Is that separate from these orders that shipped out, or is it consistent with the orders that have pushed out?

Thank you.

Well, Nikos, let me go back to the guidance I gave when I was in the prepared remarks.

I mean, I said we feel good about backlog.

That was up.

We feel good about the order intake that we have seen so far in the quarter.

We feel good about the immediate pipeline of expected orders and, yes, and then on top of backlog or included in backlog, if you like, some, but perhaps not all, but some of that deferred revenue will also turn into recognizable revenue in Q4.

So I think it's a combination of all of these factors, and you know, what our customers are doing or are telling us about some of their immediate plans.

The revenues that got deferred from the prior quarter, have you shipped that this quarter?

Do you have firm ship dates from those customers?

Some of it we shipped last quarter, but weren't able to recognize the revenue.

It spans a range of situations, including product that was ship but not recognizable, product that wasn't -- couldn't be shipped and has now been shipped and some that will be shipped in due course.

It's a range of stuff.

OK, all right.

Can you give us an update on 10% customers this quarter, if there were any?

Yeah, there weren't any, which is somewhat unusual for us.

You know, I think in some respects, it's a mark of the diversity of the increasing diversity of the customer base, but there were none.

There were a few that came very close.

There were several that in the 5-10% range.

Right.

OK.

Thank you.

Thank you.

Thank you.

Our next question come from the line of Eric Zamkoff from Independent Research Group.

Please proceed with your question.

Hi, good afternoon.

A couple of quick questions.

First of all, can you, in terms of the products that were deferred from last quarter, can you talk about not necessarily who the customers were, but what the products were that, you know, what type of engagement they are related to, i.e., was it more analog recapture type business, et cetera?

Then I've also noticed at a number of recent trade shows that Harmonic encoders have been featured as part of the Lucent video-over IP solution, and I was wondering if there's an official partnership there.

And then finally, with regards to Gateway sales to Comcast, I was wondering if you could go through the specifics because, you know, when you talk about VOD at Comcast, or anyone in particular, there are a lot of pieces.

In particular, if Comcast had purchased gateways and then was doing swap-out activity among the VOD server vendors, would that result in flat gateway sales for you or a pause in gateway demands, which could be followed up by, you know, a return to growth next year as Comcast continues to move forward with its aggressive VOD solution?

Right, Eric.

There's a lot of stuff there.

Let me deal with the first part about the missed revenue.

We said on our preliminary call that there were principally two large orders.

One was a cable customer and the other was a satellite customer.

I think in terms of the detail, I think we would leave it at that.

I don't particularly want to go into the product detail except to say that, again, on that call, we said it was convergence, both orders were for convergence systems products.

That's the piece on the revenue.

I think on the encoders, I will leave that one to Tony.

The fact that you have seen in our encoders trade shows on Lucent's booth, and I think actually it's probably true to say, you know, you can see them on several Telco equipment suppliers' booths, but I will let Tony deal with that one.

I actually don't know if we have a formal agreement with Lucent or not.

It's quite likely that we have one in the works.

At this stage, I simply don't know.

But it wouldn't surprise me at all to find that there's one in progress.

As Robin said, if you go around these trade shows you will find our encoders now on a great many booths.

As far as the NSG is concerned, I think Robin spelled it out earlier, that it was obviously was a very large installation phase.

It's now in what we call consolidation phase.

While the load on the networks picks up and at some point, they reach the capacity of the current install base, and then they will have to add more.

As far as swapping VOD servers in or out, that actually has no affect on our installation or the way the systems operate, as far as we're concerned.

We're actually agnostic to the server and it makes no difference which one it is.

That was kind of my point is that if given that your agnostic if they're swapping out servers and that's where they're focused this quarter, it's entirely possible that as demand picks up, for, you know, more content comes on-line, that next year could result in increased gateway demand for Harmonic as they start to, you know, max out their system.

We believe that will, in fact, happen.

We're also seeing now, and this is new, quite larger demand worldwide for this product.

There are a number of cable operators who are now engaged in making their decisions to put in VOD equipment and we're winning these deals worldwide.

But the difference will be they're nothing like -- in general, they're nothing of the size of and scale of the sort of rollout that you get at a Comcast.

Thank you very much.

Thank you.

Our next question comes from Chet White from (inaudible).

Please proceed with your question.

Thank you.

Could you break out the percentage that was attributed to Telco this quarter.

Did you say 20% Telco broadcast?

Chet, the all other segment, Telcos, broadcast, MSDS and the like was 28.

I don't have the number exactly at hand of how much of that was Telco, but it was of the order of 20%.

OK, pretty significant, but basically, two big ones and then a couple little ones.

Smaller, not necessarily little, but smaller, yes.

While we're on the subject of Telco, could you describe the domestic opportunity because it's picked up some steam and we're hearing more and more about it.

I'm wondering is there a potential head-end opportunity in '05 out there, or is it more likely to see it in '06?

I do believe things are starting to roll here in the states.

I would certainly expect to see initial deployments in 2005, absolutely, from all that we see going on.

I think, as you know, the big Telcos here have been sitting on the fence for a long time.

From everything we've seen, they just jumped off the fence and they're very serious, indeed, about accelerating whatever plans they've got in the works.

You saw this recent announcement, of course, by SBC about Verizon and all of this, of course, has got large video overturns so if they're going to put all of these facilities and networks in place, they need to get the video cracking down the pipes pretty early on.

Would you expect that to be a little bit more Media 9 or MPEG-4 oriented?

That again depends on the time of the rollout.

If you want to roll out something now, it's MPEG-2.

We do think that Telcos will be the first to go for mass deployment of MPEG-4.

OK.

What we've done is to make sure if an operator buys our MV 100, he can start with MPEG-2 and subsequently, he can be moved to MPEG-4.

Would you still consider Telco to be the swing factor which could produce strong growth next year or the most variable factor within your model versus, say, the cable or satellite markets?

It certainly won't be the biggest sector.

It probably has the least degree of predictability on it.

We're much more sure of what's going on in cable and in satellite.

I see.

Last question.

Some scope and scale on the analog recapture for some of the MSOs.

Could you give me some perspective where you were a year ago in some of the early stage all digital networks like in Long Beach, and now, are you seeing pretty much that prototype in every single MSO with pretty solidified plans over the next year?

How would you describe that?

I think every MSO comes with a problem a little differently so it's not a case of, you know, one size fits all by any means.

What we are seeing is acceleration of interest and desire to do something.

The whole activity in the cable world around digital video is definitely changed tempo quite dramatically in the last six months.

I see.

OK, thank you very much.

Thank you.

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

Please proceed with your question.

Hey, guys this is Mike sitting in for April.

I hope you guys are doing well.

A couple of questions from April.

Do you guys continue to expect to have sales from previously-reserved inventory?

I think, yes, it's always very hard to he predict the amount.

We've been running at give or take a million dollars a quarter for a little while.

I think there's some more of that to go.

Probably not vast amounts.

I think the low-hanging fruit has been picked, and it gets harder from here.

OK, thank you.

And I think you touched on this briefly already.

SG&A moved up, looks like almost a million dollars from the second quarter.

What can we expect moving forward there?

Well, I think a little bit more of the same.

I mean, I did talk earlier about the fourth quarter in particular because we have a very significant projected jump in revenues in the fourth quarter, and that could certainly cause some of the variable parts of the SG&A expense in particular to move around.

But I think stripping that out, we've been doing all year, we've been adding, you know, a handful of people per quarter to support particular areas of emphasis or interest, and I think we're going to continue to do that, so I think you should expect the expenses to trend up pretty much across the board because I think we will see this in R&D and SG&A, and again, perhaps a bit of a spike based on the fourth quarter revenue projections that we've given you.

Thank you.

The last question, can you guys give any insight into the market potential or perhaps how significant it would be for you if Comcast was to go all digital?

Well, I think that would be a very large amount of business for a company like Harmonic.

We, of course, are rather well placed as you know in the Comcast account and have been for a long time.

I think we're recognized as a leader in this industry.

If they decide to go digitally with the significant piece of business compared with our business today.

Thanks, guys.

Thank you.

Our next question comes from Ryan Cury (ph) from Rodman and Renshaw.

Please proceed without your question.

Good afternoon.

This is Dan Ernst sitting back in for myself.

Three questions, if I may.

First, Direct TV recently announced a very ambitious plan to roll out I think over 1,000 high definition TVs or 80 channels over the next couple of years.

Can you speak to where you are situated with that potential, and when will that start, and have you been engaged to submit for an RFP of that project?

Second, the China Broadcast Corporation recently announced more specifics around their launch of a nationwide IP video network, and I know you have done a little bit of about with China recently with the MSOs and didn't hear anything on China this quarter.

I want to get an update on China and on that opportunity, specifically.

And then third, yesterday, C-Cor announced the acquisition of DOD company, NCube, and I want to get your thoughts about consolidation in the video network space, and does the addition of VOD offer you a competitive edge, maybe not approaching cable TV where I think they like it separated, and in the tell coast world where they like integrate approaches.

Thanks.

I haven't seen an RFP for 1,000 digital channels.

I would certainly like to.

We haven't seen it yet, to my knowledge.

But we have, in the past, as I'm sure you're aware, sold high definition encoders to direct TV, so I hope what you're saying comes about although I'm not personally aware of it.

China Broadcast, I think that's one of our systems, but the satellite business in China this year that's been slow so that is something that we expect to see next year I think and lets see I really don't have a comment on C-Cor and NCube.

That seems to be good for C-Cor and fits into their strategy, but it's hard to see that there's synergy between the new company.

I'm missing something there.

I'm sure it will work out well in the end.

OK, just a follow-up on the Direct TV opportunity.

I mean, I think they were pretty clear about launching the space way system for use in high definition, and I think the satellite launches wouldn't start until late '05, early '06.

But just trying to get a sense of timing of when that opportunity might present itself on the head-end side to serve.

What can I tell you, I mean, everybody comes it to us at the last moment.

So we don't get much up front on that one.

It will come when it comes and it will be in a hurry to deliver the product if we're fortunate enough to get the business.

We do see high definition being a significant part of the satellite world next year.

Is there any reason would you not have the opportunity to participate in the Direct TV contract?

No.

I mean, I believe that if isn't to say that we have the orders.

There's a long way between -- between an RFP and actually getting the order.

Obviously, I believe that Harmonic will be well placed to get it, but until we've got it, all bets are off.

Fair enough.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Anthony Rahul (ph) from East Shore Partners (ph).

Please proceed with your question.

Good afternoon.

You referred to the SBC announcement earlier this week, and in that release, they indicated that Alcatel was going to be the network provider and also responsible for video services integration.

Can you tell me if you have done business with Alcatel before?

If they are actually competition to you?

Do they make encoders also?

And do you see that as a potential opportunity for you?

Well, Alcatel is a very large company.

I don't believe they make encoders.

We have done business with Alcatel in the past, and we do believe that there's a significant opportunity open for us there.

On the lines of competition, can you speak to a little bit about competition and you think where you see, I mean, obviously you see this as the Telco opportunity as a large, potential opportunity in 2005 and beyond.

Can you define for us a little bit who you think will be your largest competitor in that space and if there are any up and coming people.

I know that Cisco has been much more aggressive in their encoder work recently.

I'm not familiar with any of the encoders from Cisco.

I haven't seen one myself.

There are people in this space, as you know.

There are low-end players.

But Harmonic's a high-end player so we make products that give very high quality TV pictures, and I think an outfit like SBC will be moving to the high end of the range in order to compete with the cable companies, and the players in this space, when you get to the high end tend to be Harmonic, of course, and then we have European competition, Nextream a Thomson Company, (inaudible) Valley and Sandberg (ph), which is a Norwegian company with most of its operations in the UK.

Right.

One last question.

Someone touched on it before, and I'm not really too familiar with it, but I remember about two months ago an announcement coming from China and one of the ministries about an aggressive plan to roll out digital cable in select provinces and ultimately throughout the country.

Very ambitious plans.

Can you speak to that at all?

Are you aware of that?

Are you in any discussions there?

And what type of potential do you think that might present for you guys?

Well, it's certainly correct, and in fact, I discussed that with the minister in China about 18 months ago, and they were very concerned to push digital television into China as fast as they could.

It is happening, but, of course, it's one thing for the government to say they're going to do it but then the operators have to get on with it and find the money, and they have to find their own money.

It's not a case of the government's funding.

The government is pushing everybody to do it.

You know, we are well placed in China.

It's always been our second market, I think, outside of the United States, but it affects both the network side of our business, the fiber side and the head-end.

The only thing you have to remember is that we play, again, at the high end of the quality range, and that's certainly what happens in the large city, and there's a second-tier market in China serviced by the local companies which make a different level of price and performance from anything that you will get in the west.

We do think it's a good opportunity.

We are well placed in China.

It's a steady part of our business.

So do you have any numbers that you are thinking about as potential for next year in China?

Not that I can give at this time.

When you spoke about the lower tier and the second tier suppliers in China, were you talking about companies like ZTE and Walay (ph) or are there other companies that you are speaking of?

There are those guys and others, as well.

Thank you.

Thank you.

There are no further questions at this time.

I would like to turn the conference back to you.

Please continue with your calls and remarks, please.

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

Thank you and good day.