Harmonic Inc (HLIT) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2005 Harmonic earnings conference call.

At this time all participants are in a listen only mode and we will be facilitating a question and answer session during today's conference.

If at any time during this call you require assistance, feel free to press star followed by zero on your touch-tone telephone and a conference coordinator will be happy to assist you.

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Mr. Anthony Ley, Chief Executive Officer.

Please proceed, 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 all for joining us.

Today we announced our results for the first quarter of 2005.

We're pleased with a strong sales growth in Q1 compared with a year ago and this quarter is typically our slowest period for the year.

Our domestic cable customers continued to deploy additional headend systems for simulcasting, which helps them reclaim bandwidth for more high definition channels, video-on-demand, IP services.

We helped cable operators extend their services to business subscribers and continue to expand into international cable markets.

Our satellite customers continue to work with us to provide more standard and high definition channels and to determine the most flexible and cost effective migration strategy for deploying MPEG-4 compression in the future.

And while only in the early stages of the telco's entry into the video services, with many opportunities and challenges ahead, we continue to ship our fiberoptic products for domestic fiber to the premises applications and our digital encoders for Video over DSL deployments.

We remain very encouraged by the business fundamentals, the growth of our customer base worldwide and our newly introduced and acquired products.

So at this point I'll ask Robin to cover the financial details of the quarter.

Then I'll discuss our general progress in the quarter and some of the exciting trends in our markets.

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 documents that the company files with the SEC, including our most recent 10(K) and 10(Q) reports.

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

On this call we will provide you with 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 statistical information regarding our business and operations.

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

Today we announced our result for the quarter ended April 1, 2005.

For the first quarter we reported net sales of $72.9 million, up 32% from $55.1 million in the first quarter of 2004, but down as expected from $85.6 million in the fourth quarter.

Our Convergent Systems division which designs, manufactures and markets digital headend systems, had divisional net sales of $56.6 million, up from $35.8 million of the fourth quarter of 2004, but down again as expected from $67.7 million in Q4.

Convergent Systems sales were driven by the continuation of cable digital simulcasting projects which started last year.

But these projects were marked in the first quarter by an unexpected change in product mix to our third party products.

Our Broadband Access Networks division, which designs, manufactures and markets fiberoptic products, had divisional net sales of $16.3 million in the first quarter compared to $19.3 million in the first quarter of '04 and $17.9 million in the fourth quarter.

The first quarter has historically been the slowest season of the year, particularly in our band cable business.

But shipments of our optical products for domestic fiber to the premises networks represented a growing portion of our band business in the first quarter.

We're pleased with our continued progress in international markets.

Our international sales represented 37% of total sales for the first quarter, compared to 33% for the first quarter in '04 and 36% in the fourth quarter.

In particular, we saw continuing signs of improvement in the European cable market.

In the first quarter Comcast represented 35% of revenue and Charter 10%.

They helped our -- they helped drive our total sales for the cable segment in the first quarter to 75% of our total revenue.

Satellite customers represented 10% and all others including telcos were 15%.

This was a very quiet period in the satellite segment, but I should remind you that both our satellite and telco businesses can fluctuate from quarter to quarter.

We do expect to see higher satellite revenue in future quarters, driven by competitive dynamics, especially in high definition television.

In recent quarters and especially in the fourth quarter of last year, we made significant improvements in gross margins, due to the heavier concentration of Convergent Systems revenue, increased overall sales volume, and the successful transition of our contract manufacturing arrangements.

During the first quarter, however, customers placed large orders for digital simulcasting projects, including substantial quantities of third-party products.

This is really the first time we have had orders for third-party products in such high volumes.

As a result of this unusual product mix, and the substantially lower margins associated with third-party products, gross margins were only 38% in the first quarter of 2005, compared to 47% in the previous quarter and 41% in the first quarter of 2004.

And in the current second quarter, we expect to see continuing significant third party products in our overall mix, although we do expect some modest improvement in gross margins over Q1.

Our operating expenses, also on a non-GAAP basis, excluding the amortization of intangibles, were $24.8 million for the first quarter of '05, up from $22.8 million in the first quarter of '04, but down sequentially from $27.9 million in the fourth quarter.

Our strong finish to 2004 generated higher variable sales expenses and we also carried the peak cost of new compliance, especially in section 404 of Sarbanes-Oxley.

These expenses dropped off very substantially in Q1 although we are expecting that audit and compliance costs will remain at elevated levels, certainly compared to years before 2004.

The year over year increase in operating expenses mainly reflect our growth in head count.

And at the end of March, 2005, our head count was 644, including 42 new employees from our acquisition of Broadcast Technology Limited in the UK.

This is up from 590 employees at the end of '04 and 562 at the end of March last year.

In 2005 we expect to continue to hire selectively in key areas.

As a result of the product mix shift and the consequent unanticipated decline in our gross margins, our earnings were below the guidance we gave in January.

Our non-GAAP net income for the first quarter of '05 was $3.4 million or $0.05 per fully diluted share, up from $0.2 million or $0.00 per share for the same period of 2004.

We have excluded from these non-GAAP results non-cash accounting charges of $1.7 million for the amortization of intangibles.

Including this amortization, the GAAP net income for the first quarter of '05 was $1.7 million or $0.02 per fully diluted share, compared to a GAAP net loss of $2.6 million or $0.04 per share for the same period of 2004.

Once again, a reconciliation between GAAP and non-GAAP results are in our press release on our website and in today's 8(K) filing with the SEC.

Turning to the balance sheet, during the quarter we paid out about $5 million of our outstanding DiviCom tax liabilities, with about $10 million still remaining to be paid.

We also acquired Broadcast Technology Limited at the end of February for about $7.9 million of which $5.7 million was paid in cash and the remainder in our common stock.

In spite of these significant payments, cash, cash equivalents and short term investments increased to $104.6 million at the end of Q1, up from $100.6 at the end of 2004.

While our cash position is quite adequate to support current business levels, we filed the shelf registration with the SEC at the beginning of April.

This registration statement, which is not yet effective, will in combination with our existing shelf statement filed in 2002 allow us to issue various types of securities up to in the aggregate of $200 million.

And just like many other companies, we want to be fully prepared to raise capital quickly and efficiently if needed.

The receivables were $55.8 million, down from $64.1 million at the end of Q4, but with DSOs up very slightly at 69 days.

Our international business, which has increased in recent quarters as a percentage of total sales, typically carries longer payment terms, at least in some countries and is having some impact on DSO.

Inventory was $43.2 million up from $41.8 million at the end of Q4, with the increase due almost exclusively due to the acquisition of the BTL inventory.

We're well positioned to satisfy our customer requirements in anticipation of higher revenue in the second quarter.

Our capital spending was approximately $1.8 million in Q1 and we expect it for the full year to be around $8 million.

In summary, our performance in the first quarter, which is usually our slowest season, was not as we expected.

While we reported year over year sales growth in line with our revenue guidance, the shift in the profile of our revenue adversely affected gross margins and net income.

Nevertheless, we turned Q1 from break even last year on a non-GAAP basis to profitability.

We continue to see healthy demand worldwide; as you will see in our balance sheet, our deferred revenue is at a high of $21.7 million.

We expect our full second quarter revenue to be in the range of $73 to $77 million, close to our previous guidance three months ago of approximately $150 million for the first six months.

We're unhappy with the impact of the product mix on our gross margins, but we are expecting to see a continuing impact of third party sales in the second quarter, although perhaps to a slightly lesser extent.

We are exploring all the alternative solutions, but it will take time to make necessary adjustments.

With our operating expenses expected to grow fairly slowly, our non-GAAP income for Q2 is expected to be in the range of $0.05 to $0.07.

As the amortization of intangibles will drop significantly in the second quarter, we expect our GAAP net income to be only $0.01 lower, in the range of $0.04 to $0.06.

So in conclusion, while the gross margins are unsatisfactory, our business outlook remains very good.

And we remain profitable with positive cash flow in the quarter leaving us well positioned to capitalize on growth opportunities.

Tony?

Well, thanks, Robin.

During the first quarter of 2005 we continued to make excellent progress in penetrating new markets worldwide and in maintaining our technology leadership.

Our cable customers are moving towards the rollouts of the full triple play of video, voice and data services.

They are very focused on improving picture quality and channel capacity as they see the competition gaining strength.

Our digital headends enable the to simulcast high quality digital channels, which is an important step towards reclaiming bandwidth for more high definition channels, video-on-demand and other services.

While only a few cable operators have started the move to digital simulcasting, it was a major contributor to our revenue in the first quarter and we expect this trend to continue.

In addition, we saw increased sales of our NSG product for VOD applications in the first quarter, especially internationally.

We expect our DOV sales to continue to gain momentum throughout 2005.

This process of going digital is taking place not only in the U.S. but among international cable operators as well.

During the quarter, we announced that our digital video solutions are helping National Cable Networks, one of Russia's largest cable operators, more than double its capacity and improve video quality while reducing the complexity and costs.

NCN can now transport a competitive lineup of digital channels from the main headend to 50 distributed headends using an existing MMDS wireless backbone.

In China, GuangXi Cable expanded its digital television service using our high performance encoders and broadcast network gateways to increase the reach of their digital TV service to 14 regional cities.

We're also seeing cable customers moving forward with commercial services.

We announced today that Charter Communications has deployed our FLXLink commercial services solution to deliver ultra high speed network services up to a gigabit per second to business, government and educational institutions in southern California.

And finally on cable, today's announcement of the acquisition of the Adelphia systems by Comcast and Time-Warner is a positive development for us, as there is much to do in these systems.

Although we had fewer shipments to our satellite customers in the first quarter, we expect satellite to remain a major business segment in 2005 and it is of course an important area with respect to video compression technology.

Our satellite customers continue to work with us to provide more standard definition channels and increase the deployment of high definition and local channels.

And despite all the discussion around MPEG-4, the satellite operators today are primarily buying MPEG-2 encoders as the increasing efficiency lets them free up bandwidth.

However they recognize our MV 100 has built in migration power to MPEG-4.

As we move into 2005, telco operators continue to make increasing investments in video services.

A growing number of international telcos are deploying Video over DSL using our high performance encoders.

During this first quarter, we shipped encoders to new telco customers in Japan and Canada and Video Networks Limited in the UK is now operating Video over DSL using MPEG-4 compression on the MV 100.

And this is the world's first commercial deployment of advance video coding to paying subscribers.

In the domestic telco market, we continue to make significant shipments of fiberoptic products for Verizon Communication, for fiber to the premises deployment.

We also announced that we have a first provider of WK to the video transport solutions for FTTP networks to receive TL9000 certification, a critical quality requirement for providing network infrastructure solutions to telcos.

We're only at the initial stages of the telco's entry into video services, with many opportunities and challenges ahead.

Harmonic now offers one of the most comprehensive range of solutions for enabling and delivering broadcast quality Video over DSL and fiber deep networks.

We expect to have more revenues from telcos in 2005 and expect this activity to become significant for us over the longer term.

During the quarter we also continued to strengthen our technology leadership by both introducing and acquiring exceptional new products.

Our new MAXLink R series is designed to meet the performance management and cost requirements of small to mid-sized cable operators.

Our new FLXLink 1 gigabit per second commercial services solution permits the secure delivery of ultra high speed commercial grade Internet access and other value added services to support large business, government, and education customers.

We've just introduced a revolutionary product in statistical multiplexing, the DiviTrackIP.

Statistical multiplexing is used to increase the number of TV signals in a given bandwidth and is essential for satellite and many other operators.

The encoders get timing signals from the multiplexor and until now, they've had to be located all in one place.

DiviTrackIP takes away this constraint so that the encoders in different cities anywhere in the United States can be stacked together into one stream with the same bandwidth efficiency as if they were in the same rack.

It's supports both SD and HD and all the standards, MPEG-2, MPEG-4 and VC-1.

Its use will enable operators to carry many more channels within their existing distribution systems.

And finally, we completed the acquisition of BTL in the UK by integrating BTL's receivers and encoders into our current convergent system division.

We've expanded the scope of our solutions.

It will help us play a stronger role in the content delivery chain for cable, satellite, broadcast and telecom applications.

In summary, the timing of customer deployments remains difficult to predict, particularly in the satellite and the telco market.

The overall industry trends in our business fundamentals remain very positive.

We continue to see the contest with subscribers between cable and satellite operators heating up and see major telco operators beginning the long-term proposition to offer digital video services.

We're encouraged by the continued diversification of our customer base and the success of our new products.

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

We're expecting a strong second quarter and we're excited about our prospects this year and beyond.

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

[OPERATOR INSTRUCTIONS] Our first question is from the line of Erik Zamkoff with Independent Research Group.

Hi, good afternoon.

I was wondering if you could take us through more flavor in terms of what percentage of revenues actually was third party products and if you can give us an idea of what market or initiative that the third party products are attracting, just to give us an idea of what that looks like going forward.

And then number two, I was wondering if you could give a little more flavor on gross margins in terms of where they shake out in Q2.

And then for the year, do you still believe that you can get, you know, gross margins back up to the 42% to 45% range?

Well, let me deal with the first part.

The application is the one we talked about, the simulcasting application where we supply a very complete system to our customers and the customers ask us to provide the whole thing.

So that's the application and there are alternative ways of course of doing various things.

We're looking at them, but in this particular example that came this quarter, the customer very much wanted this to go the way that it went.

So the -- I think this issue is confined really to cable and within that to the simulcasting.

I'll ask Robin to take you through the numbers.

Hi, Erik.

Well, we generally don't break out third party sales.

I mean, they typically -- we always, as you know, have had a number of arrangements with third parties where we sell other people's products as generally a small part of our solution sales.

And generally, that's certainly well under 10% of sales.

I don't want to break out numbers in detail, but it -- it's the safe assumption that in the first quarter, the third party portion got into double-digits and -- and the -- you know, the consequent effect on gross margins.

And as I said in the script, we do have backlog and anticipate some continuing stronger mix of third party products, at least in the second quarter.

And so, this said, I'd expect to see some modest improvement.

We were at 38% on a non-GAAP basis in Q1.

I would hope to see that at least around 40% and I think once we worked our way through this particular wave, and also as we said, explore all the options for -- to do something about it, I think we can expect in the second half to see a return to more normal types of gross margins that would be much more comfortable into the 40s.

Now, am I -- when you gave your initial $150 million in guidance for the first half of the year, what was your expectation on the third party piece?

And then, are we correct to imply that, you know, the -- you know, $72.9 million which is in line with -- with guidance for Harmonic, but actually includes a significant piece of third party stuff?

Is this technically a miss?

Did something go away that you had previously expected to be in the number?

I'll let you decide if it's a miss or not.

I think as we did say -- we certainly acknowledged that the satellite business was pretty light in Q1.

We don't think that's a continuing feature, but it -- as you know, the satellite business can be quite lumpy and this was one of the quarters where we really didn't get any significant amount of -- of satellite business.

All right.

Thanks.

Sir our next question is from the line of Ari Bensinger with Standard & Poors.

Yes.

Getting back to the third party issue, is -- was this -- I'm just trying to understand, was this due to a technology issue?

In other words, you had to use a third party product that was in a system as opposed to product that usually was your own?

Or was there some other factor involved why this specific customer wanted to go this route?

Well, this is a requirement from the system of products that we don't make basically.

He wanted us to supply the whole system.

Okay.

And in terms of going forward, you talked about other alternatives.

That would be for after Q2 but for now, based on what you have in your backlog, the same type of arrangement obviously will go forward and impact gross margins?

That's quite correct.

Some of it will go forward, that's for sure.

And by the time we get out of Q2 I would expect this to be going away.

And can you talk a little bit about the announcement by Atelco to go with Scientific-Atlanta and how that positions you in that growing market?

Well, I think you're referring to SBC going to Scientific-Atlanta for their headend.

And I think that was in many ways to be expected when you have a major corporation getting into a technology about which it knows -- which is not its field of expertise, let's put it like that, it's typical for such a customer to go for a turn-key solution and that, I think, is what you see here.

We've seen this in the number of cases from the past.

First time around, you go with a -- a turn-key supplier, then when the customer understands how the systems work, he goes out for individual components, but for the best of the business.

We've seen that in the past in all areas.

So I don't think it was a big surprise to us that SBC did that, but as we've been telling you, our sales around the world are really quite good and we expect them to be increasing quite a lot over the next year or two.

Okay.

Sir, we have a question from the line of Chet White with Merriman Curhan Ford & Co.

Hi.

Thank you very much.

I have a question and maybe you can walk through the color on these third-party products.

I assume that this is the Cherry Picker from Terayon and I wonder if you can tie this into the new product, the DiviTrack, because I know there's some capabilities, the marks capabilities which are inherent in the DiviTrack and I'm wondering as you look at ways -- as you said, you're looking at different ways to get around this problem and you've -- added some of the -- at least the technology as far as I can see through the DiviTrack.

Is that something that you're going to try to do yourself to try to get around this issue or is it just not enough and the depth of the Cherry Pickers and value proposition is kind of too much to over come, to have to acquire?

And if you could give us some color on where you stand on acquisitions.

The DiviTrack over IP is really quite a different animal.

It's the -- the multiplexor that we really use just with encoding technology.

And so we'll be looking at Cherry Picker applications, the -- this -- the DiviTrack over IP is not a -- in any way related to that particular application.

But there are many ways of designing these systems with what the customer has in mind.

And we do have alternatives and we really do have to choose between them, but I don't want to get into which product and I'm not at liberty to do so anyway, for a number of reasons.

I see.

And just the timetable were to -- and kind of choose a path, so we can get a handle on the third party product as a percentage of your mix?

Is it resolved at the first half of the year or is there any scale to that?

I'm fairly confident we will have resolved these issues by the time we get into Q3.

I see.

Sir, the next question is from the line of Sue Ann Roberts with Kaufmann Brothers.

Good afternoon.

Sue Ann Roberts on for Bill.

I had two questions.

You referred to deferred revenue being up significantly quarter over quarter.

I was hoping you could give some color as to what is in this increase.

And the second question, could you give some coloring on what your position is with MPEG-4 and satellite?

One of your competitors got the Direct TV business and wanted to get some expansion on where you are with the satellite company, specifically with EchoStar.

Thank you.

I'll deal with the first part.

Over the last few years our -- our business is moving more and more to solution sales where we are selling a number of products into a solution, for example, a digital headend, the digital simulcasting projects are quite a good example of that.

And often in these -- in these sales there are acceptance criteria or other factors that require us to defer revenue until delivery is made.

We're also -- and this is true again in the -- in many of these projects, we're also doing more support contracts as the cable industry, which typically has not -- not gone to these much in the past.

The cable industry gets into much more complex headends and complex delivery of services and so on.

They're finding that solution -- these solutions require maintenance and support over a period of time and that revenue is also deferred obviously over the term of the agreement.

So it's really a shift in our business over -- over a period of time and -- and particularly now I think we're seeing it in cable to an extent we haven't seen it in the past before.

So to go to the question on MPEG-4.

When we first started standard definition,I think -- I don't know for sure, but I think we probably shipped more MPEG-4 encoders than anyone else and in terms of the satellite markets and HD in particular, in our view, that market really won't take off until we get into 2006.

So of course there are some early sales and a great deal of noise in the marketplace.

We do, of course, have products in development and we're taking a very fundamental way in which we're going about it.

And just as the MPEG-2 business has been one where the quality of their product affects your ability to get the major part of the market, our intention is to come with the right product later in the year and to be a very significant player in this business.

We may -- may not get the first one or two, but we do not think that's significant in the long run.

Every time one of these operators goes for major builds, he compares the available products on the market.

And as we've shown with MPEG-2, we know how to win in this game over -- over a very long periods of time.

The MPEG-4 technology will follow the MPEG-2 route, where it starts off with a certain compression efficiency and over time will continue to improve.

Many of the tools and algorithms that put Harmonic in the lead in the MPEG-2, which has been the reason that our business has been so strong recently, many of those applications fall straight over into the MPEG-4 product, So we'll be having that as we've always said later in the year.

Okay.

Thank you.

Sir, our next question is from the line of Steve Levy with Lehman Brothers.

Hi, guys.

It's Eric for Steve.

Just a couple of real quick questions I guess.

The first is when do the shelf become effective?

I guess, how long does that take?

I'm just not familiar with how that works.

That's really up to the FCC and their review process.

So it's hard for me to say at this -- at this point.

Is there a typical time frame at all or -- ?

If there's no review, it can be relatively short.

Okay.

And then I guess with Verizon announcing Motorola as a second source for some of the central office stuff and its optical amplifiers, is there a potential -- could this potentially affect your business with Verizon in the future or do you not think it's a big deal at all?

I don't think it's a big deal in the sense that the stated policy of companies like Verizon is to have two suppliers.

I think we've done very well with them so far.

It's our intention to stay there in the pole position.

And then finally can you just talk about the potential incremental revenue opportunity associated to the Comcast acquisition of Adelphia and maybe the timing of any potential revenue ?

No, I can't.

I mean, it's -- in the sense that I only saw the press release today and we haven't really had time to look at the implications, but we do believe there's much to do as -- as I said in those systems, and get from the people that have acquired them, Time-Warner and Comcast.

We feel very good about our prospects, about us playing a major role in whatever those companies decide to do.

Is it likely that they'd be spending dollars before the closing of the acquisition or -- ?

That, I think we'll -- we'll need a little bit of time to find out really what's going on.

Okay.

But we'll -- we'll let you know as soon as we do.

Fantastic.

Thanks.

Sir, our next question is from the line of Alan Bezoza with Friedman, Billings.

Hey, guys.

It's Brian on for Alan.

How are you?

Good.

Doing fine.

I was wondering if we could quick go back to an earlier point that was raised about, I think, really regarding the third party sales, obviously, and if third party sales were stronger than expected and I think you also mentioned that NSG also showed some strength, wouldn't that suggest that encoders are perhaps lower than anticipated?

And if so, you've commented on whether that was maybe a little bit more the reason why margins were lower this quarter, given that, we think that the Cherry Picker margins, the Terayon, at least for its part gets some pretty nice margins on DV and Cherry Picker.

Well, I think if we look at some of the -- the big projects, yes.

I mean, I think that's right that we were -- the mix was not quite as we expected.

The third party products were a bigger piece of the mix than -- than our encoders or at least certainly relative to what we thought initially.

But you know, these things are bought in -- you know, in multiple systems and multiple regions around the country and it's quite difficult to predict exactly what's going to happen as planned and I think that's a lot of what happened here.

The mix moved against us at least from a margin perspective and so our -- I think, it is a reasonable conclusion to say that, yes, our encoder sales were lower both in the cable segments and certainly also in the satellite segments than we expected at the outset.

Okay.

I -- just following up on it then, how would you characterize the competition on the encoder side?

Has it changed a lot recently?

Is it new entrants or technology or kind of a pricing kind of issues going on in the market right now?

I don't think there's been a lot of change.

I mean MPEG-2, MV 100 is doing exceedingly well and it's not a case of we're losing market share or anything like that.

It's a case of when customers place these orders in what is typically a lumpy business and the market certainly accepted the MV 100 as a transition to MPEG-4 and our positioning there is -- is very correct.

So -- now, with the arrival of MPEG-4 you are seeing also some startup companies and people rushing in.

But it's one thing to make an encoder that does MPEG-4.

It's another thing all together to be on the cutting edge of the efficiency of the encoder.

So I think you're going to see quite a shakeout in this business over the next 12 months and my view is the established players in MPEG-2 will eventually dominate in MPEG-4.

Great.

Finally, just one other quick thing.

You talked about strength internationally and everything you're doing on all sorts of different fronts, particularly with the PTTs.

It just seems just from what we've been hear ago little bit that maybe some of the international PTTs are slowing their advances a little bit.

Mainly, just kind of wait and see what happens with Verizon and SBC.

I don't know if you guys think this is the case at all.

Maybe it is or maybe it isn't.

Or -- if so how do you think it might impact you all?

I think it's the other way around.

Our international business in providing headends for these DSL applications really got going a couple of years back now and the arrival on the diversity around this of Verizon, I think is making all the telcos look much more seriously at video and I think we're going to see enormous growth in this sector over the next two or three years.

Worldwide.

Thank you.

The next question is from the line of Eric Caner with Needham & Co..

Thank you very much.

Just a couple of questions.

I'd like to hear maybe a little bit of color around the new accounts that you're talking about signing.

Is there a number of new accounts or -- or maybe kind of a percentage of bookings over the past quarter that was attributable to new accounts?

Is there some way we can kind of quantify that, get a little color behind that?

Well, that's a little -- let's see.

How do we get to that?

It's more subjective.

We -- we're always trying to expand our businesses.

We've found that we've got into -- we're making headway in the underdeveloped world in the sense of eastern Europe and Russia and places like that.

We are getting accounts in new countries where we haven't been before.

They're taking some from the competition -- it's all over the map and it helps us build the base and the stability of the business.

Okay.

When you're talking about the diversification of the customer base, are you seeing for instance, something like, your top five or ten customers accounting for a lower and lower percentage, something along those lines, something you might be able to give us quantitatively?

Well, we published numbers in our 10(K) annually now for some time that show the top 10 customers percentage and I don't have them all in the top of my -- the top of my head or on the top of my head, but certainly, in '04 our top ten customers represented 55% of revenue and that's down from numbers that have been typically in the 60s over the last several years.

And I think as Tony said, a lot of that comes from broadening our international base and so some of the customers we've announced while not large -- particularly large in dollar terms, say compared to a Comcast or an EchoStar, nevertheless, help diversify the base and are one reason that we've been able to bring that number down.

I'd love to see it go below 50 and I'm not necessarily predicting that in the immediate future, but I think as we continue to grow the international business, particularly in some of the emerging markets, I think we've got a shot at doing that.

Okay.

Thank you.

Sir, your next question is from the line of Ryan [Corie] with Hudson Square Research.

Hi, guys.

Good afternoon.

It's Ryan calling in for Dan and I'd like to go back to the international side.

I was just wondering if you can just talk about your business in China a little bit and additionally, I know with your -- the number of countries in your Video over DSL opportunities and one thing that I -- one country that kind of surprised me that you did not mention was Korea and I was just wondering if you guys are positioned to possibly go into business with SK Telecom, qualitatively discuss that a little bit.

Thank you.

Well, we've had a strong business in both -- in China and Korea for many, many years and we sell the band products for the HSC stuff in cable in both countries and have been very successful and we sold head in equipment to satellite and cable again in both countries, The whole of that area, we regard as very significant.

China, Korea and also Japan where Harmonic's been very successful over the last two or three years.

Thank you.

Sir, your next question is from the line of Richard Rossnia with Roth Capital.

Thank you.

I just want to get a little clarification if I may.

The -- I think you made a comment before that you were confident that the margin impact of third party product would be sort of going away as you moved into the second half of the year.

Is that confidence in -- in your expectation that you'll have this product yourself to offer or that digital simulcasting that requires the use of this third party product might diminish in any way?

I don't think digital simulcasting is going to diminish at all, to the contrary, and in terms of the product, there are alternatives, both in house and out of house to deal with this situation.

And is this -- this requirement from one customer or from any others that are doing digital simulcasting?

We sell and have sold third party products on a modest scale to many customers over the years.

I think what's unusual about this is it's particularly concentrated in a couple of cable customers in this particular first quarter, but selling third party products is a modest part of our solutions has been something that we've been doing for years.

Great.

Thank you.

And sir, we have a question from the line of Chet White with Merriman Curhan Ford & Co.

Hi, guys just a couple quick follow ups.

Is it fair to say then that -- ?

Hello?

I'm afraid we lost you.

Completely lost you.

Sir our next question is from the line of Steven Kamman with CIBC World Markets.

It's Jeff Osbourne for Steve.

I want to try to hit this third party stuff at a different angle.

Robin, at a lot of investment conferences, you've quoted a figure of $3 to $7 million per market for the digital simulcast opportunity.

Was the $3 to $7 million, is that just on the encoding side for the year that you supply or is that the -- the total revenue opportunity for Harmonic?

Well, the -- these numbers that we've used at conferences is typically addressed headend in general.

I mean, they're not designed to be specifically around simulcasting, but we were really talking about the number of encoders and other -- other products that you'd typically need for any digital headend, whether it be telco or cable or whatever and generally in those instances and in that kind of thinking we're certainly discussing predominantly Harmonic products.

It certainly didn't contemplate this type of mix that we saw in Q1.

So is it fair so they that you know, for example the Long Beach deployment that you had last year, it was over 75% your own product or just trying to get a sense of the magnitude.

Absolutely, yes.

And is it just Comcast that has this issue or is it Charter as well?

It's more than Comcast.

Clearly Comcast was 35% of revenue in the quarter so that was where it was most pronounced.

I got you.

And what gives you the comfort that satellite will improve in the second half?

That satellite will improve?

Yes.

Oh, the satellite customers have got plans to do various things that we're aware of and we're quite sure they'll be spending money during the course of the year.

Great.

Appreciate it very much.

Thanks a lot, guys.

And sir we have no further questions.

Back over to you for any closing remarks.

Thank you all very much for being with us this afternoon.

And we look forward to being with you at the end of next quarter.

Thank you and good-bye.

Ladies and gentlemen, we thank you for your participation in today's conference.

This concludes your presentation and you may now disconnect.