Harmonic Inc (HLIT) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q2, 2005 Harmonic earnings conference call.

My name is Carlos, and I will be your coordinator for today's presentation.

At this time all participants are in a listen only mode and we will be conducting a question and answer session during today's conference. [ Operator Instructions ] I would now like to turn the presentation over to your host for today's call, Mr. Anthony Ley, Chairman, President and Chief Executive Officer.

Please proceed, 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.

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

The results in the second quarter were disappointing.

Yet, despite the challenge of predicting the timing of customer orders in a very competitive business environment, we continue to maintain our technological leadership and win significantly orders for digital headend and fiber-optic systems across different markets.

During the quarter we extended our customer base in Europe and Asia, including shipments to new telco customers.

We also introduced important new products to further strengthen our competitive position.

Moving into the second half, our satellite and telco customers continue to view us as a key technology partner for Next-Generation systems and another U.S. cable operator recently selected our systems for their first digital simulcasting installation.

At this point, I will ask Robin to cover the financial aspects for the quarter and I will then review some of our progress during the quarter.

Robin.

Thank you, Tony.

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.

Such statements are only predictions and actual events or results may differ materially.

We refer you to the documents that we file the SEC including our most recent 10K and 10Q reports.

And these reports 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 will provide you with financial metrics determined on a non-GAAP or pro forma basis.

These items together with corresponding GAAP numbers and a reconciliation to GAAP are contained in today's earnings press release which we have posted on our website and filed with the SEC on form 8K.

We'll also discuss historical financial and other statistical information regarding our business and operations, some of which is included in the press release and the remainder of which is available in the recorded version of this call on our website.

Today we announced our results for the second quarter ending July 1, 2005.

We reported net sales of 59.8 million, up from 57 million in the second quarter of last year but down from 72.9 million for the first quarter of 2005.

Our conversion systems division, which designs, manufactures and man -- and markets digital headend systems, had divisional net sales of 43 million in the second quarter compared to 33.3 million in the same period of last year and 56.6 million in the first quarter of 2005.

As we discussed on our preliminary second quarter call in June, the sequential decline in CS revenue was primarily as a result of slower orders of digital headend systems from domestic cable operators in May and in June.

On the other hand, our second quarter convergence systems shipments included new and expanded video over DSL deployments with international telcos and our satellite revenue, while not as strong as we would like, showed sequential growth over Q1.

Our broadband access networks division, which designs, manufactures and markets fiberoptic products had divisional net sales of 16.8 million in the second quarter compared to 23.7 million in the same period of last year and 16.3 million in the first quarter of 2005.

Shipments of our band products into the cable market improved in line with typical seasonality while shipments of our optical products for domestic FTTP projects were down sequentially from Q1.

International sales represented 41% of total sales for the second quarter, compared to 36% in the first quarter and 44% in the second quarter of last year.

Relative to Q1, we saw particular strength in Europe but lower revenue in Latin America, where the availability of financing was, as usual, a factor in project timing.

In the second quarter, Comcast represented 19% of our revenue and was the only customer greater than 10% of sales.

The revenue from our cable segment in the second quarter was 66% of the total revenue and in absolute dollars accounted for the entire drop in revenues compared to Q1.

Satellite revenue represented 15%.

Other customers including telcos were 19%.

And both were up modestly from Q1.

The lower-than-expected volume in the second quarter certainly impacted our gross margins.

However, we did reduce sales of the lower margin third-party products as we had expected and compared to the first quarter.

Clearly this hurts from a revenue perspective but it did help us in gross margins.

Although we certainly saw price competition in some areas of our business, product cost reductions and sales of new product also helped to offset some of the volume impact.

Non-GAAP gross margins were 39% in the second quarter, an improvement over the 37% of Q1 in spite of the lower revenue.

Our non-GAAP operating expenses, excluding the amortization of intangibles, were 26.1 million for the second quarter of 2005, up sequentially from 24.8 million and from 21.8 million and in the second quarter of last year.

The sequential increase reflects in part the very heavy trade show activity in the second quarter, where we exhibited at four major domestic events.

We also had a full quarter of expenses from our BTL acquisition, which closed at the end of February as well as modest growth in head count.

A the end of June the headcount was 653, up 9 from the end of March.

The non-GAAP net loss for the second quarter was 2.2 million or $0.03 per share, compared to net income of 0.5 million or $0.01 per share for the same period of last year.

We've excluded from the non-GAAP results in the second quarter non-cash accounting charges of 0.3 million for the amortization of intangibles.

Including this amortization the GAAP net loss for the second quarter was 2.5 million or $0.03 per share compared to a loss of 1.8 or $0.02 per share for the same period of 2004.

On the balance sheet our cash equivalents and short-term investments were 98.2 million at the end of the second quarter, down from 104.6 at the end of March.

Receivables were down also, 48.2 million from 54.8, although our DSO is trended up slightly at 73 days.

Inventory was 42.6 million at the end of the second quarter, down from 43.2 at the end of March and we have adjusted purchasing levels to correspond to current revenue expectations.

The reduction of $9 million in accounts payable is due largely to lower levels of inventory purchasing.

Our capital spending was about $3 million in the first half and we expect it for the full year to be in the range of 6 to $7 million.

Looking forward, this is a business that remains very difficult to predict from quarter to quarter and in particular, our domestic cable business clearly has slowed down recently with lower order levels in May and June.

We have good indications on the outlook for both new and existing large projects, but the order rate has not yet measurably improved and we do not have solid visibility on the third quarter, in particular.

Looking at the six months and based on current indications from customers, we anticipate revenue for the second half of the year to be in the range of 110 to 120 million.

On the upper end of that range would still represent year-over-year revenue growth.

We are driving hard on new product introductions and cost reductions to mitigate the effect of price competition on gross margins.

In addition, we are curtailing hiring in order to hold down operating expenses.

However, we will continue to make the critical investments to improve our competitive position because the opportunities are very real and our cash position is very solid.

Tony?

Thanks, Robin.

While it continues to be difficult for us to predict the deployment time frames of our customers, we believe that we strengthened our competitive position during the first half of 2005, penetrating new markets while wide and maintaining our technology leadership.

Our cable customers continue moving towards the rollout of the full triple play of video voice and data services.

In the second half of 2005, we expect to see a renewed focus on VOD and HDTV deployments.

As you know, our digital headends enable operators 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.

As we've said, some of the initial digital simulcasting activity by major operators has slowed and it's taking longer than we originally expected for many cable operators to move to digital simulcasting across their networks.

Even so, simulcasting was a major contributor to our revenue in the second quarter.

Another major MSO in U.S. has just selected our systems for its first digital simulcasting headend and this will be followed by substantial numbers spread across the U.S.

By this time next year, we expect most of the domestic cable operators will be rolling out digital simulcasting in one form or another.

Eventually all operators will migrate to all digital networks.

Although we've had low revenue from our satellite customers in the first half of 2005, we expect satellite to remain a major business segment for us.

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

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

Satellite operators today are planning to migrate towards next-generation compression standards and they're carefully evaluating their options.

We believe the planning for migration to next-generation compression and increased alternatives has impacted our satellite business so far in 2005.

However, our encoders offer a built-in migration path to MPEG 4 VC-1, which is a key competitive advantage.

We expect increased satellite business in 2006.

In the domestic telco market, we continue to make shipments of fiber-optic products to Verizon Communications for as fiber to the premise is deployment.

Deliverers to Verizon will lessen [inaudible] our anticipated in Q2 but we expect quite a pickup in activity during the next two quarters.

We're only at the initial stage of the telcos entry into video services with many opportunities and challenges ahead.

Yet, we already offer one of the most comprehensive range of solutions for enabling delivering broadcast quality video over both fiber deep and DSL networks.

Recently there have been a number of well-publicized issues in the IPTV segment and some operators are reassessing their plans to determine the most appropriate path to roll out video services.

Even so, a growing number of international telcos are deploying video over DSL using our high-performance encoders.

During the second quarter these included Plala networks, a subsidiary of MTT and a leading ISP in Japan, and Alliant, a leading information and communications technology provider in Canada.

Moving into the third quarter, we have just won a major IPTV telco system in Europe and expect orders for IPTV systems in the U.S., Europe and Asia during the quarter.

One of the cornerstones of this Company is our commitment to strengthen our technological leadership.

During the quarter, we continued introducing unique and important new products.

We recently set the benchmark for the standard definition MPEG 2 picture quality and channel density with our new IP based electric compression platform.

One Electra supports up to four high-performance MPEG 2 encoders.

Using the latest video compression algorithms, preprocessing, filtering, multi-plas analysis and noise reduction technology, Europa delivers superior picture quality at lower bit rates while conserving valuable rack space of power.

Our new DiviTrack IP compence --- combines the benefit of IP with the industry leading statistical multi-plexing solution, allowing operators to efficiently compress and aggregate content.

Combining Electra with DiviTrack IP yields the first 16 channel multi-plex in the sixth rack units.

This gives satellite, terrestrial and cable operators an efficient compression system in a remarkably small size.

And, lack of space is becoming a big issue in headends.

In the second half of 2005, you can expect us to introduce more industry leading and cost-effective products, with important announcements centered on the IBC exhibition coming in September.

In summary, the new term competitive environment and timing of customer deployments remains challenging.

The long-term industry trends and our business fundamentals remain positive.

We continue to see intense competition between cable and satellite operators and see major telcos gradually beginning to offer digital video services.

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

We also believe that our cable, satellite and telco customers see us as a technology leader and as a key partner in their plans for future migration to next-generation compression.

We continue to invest in developing and introducing innovative products and remain very confident about our prospects over the longer-term.

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, sir. [ Operator Instructions ] Sir, our first question is from the line of Daniel Ernst with Hudson Square Research.

Thanks Robin.

Thanks Tony for taking the call.

I guess two broad questions, if I might.

One, if you can help us to reconcile the guidance and visibility with the industry tailwind towards moving to digital simulcast [mean to] high-definition.

Even the Wall Street Journal picked up on the new technology that the cable operators have to deploy it in order to keep up with the Joneses as satellite and telcos become competitive in their markets, and so that tailwind seems to be pushing people in your direction, yet you guys are hitting headwind.

And then secondly, I think I've heard you guys talk much more about the competitive environment picking up.

I wonder if you could talk a little bit more about that.

Where exactly are you seeing competition?

Is it in new technologies, like private companies -- like big bands that have switched broadcasts or is it as cable is moving into the IP environment, are they moving projects towards a more strict traditional IP providers like Cisco?

If you could maybe to give us a little color on be competitive environment.

Thanks.

Well, thank you.

I think in terms of the estimates of the markets and what's happening, there's no doubt that all these operators, I think, are going to spend a great deal of money over the next few years.

It's really, in my view, a question of timing.

Just within the cable space, we started off at a pretty high rate this year but it gradually a small number of MSOs.

When one slows down and the second hasn't yet picked up, there tends to be a bit of a gap and I think that's what happened to us.

We see the market strong in the second half in cable and we do believe that the satellite industry will continue to spend a great deal of money to be competitive, but that really comes on strong, we think, in 2006.

So, I think really what's happened to us is more a timing patch and will take a little while in the second quarter I think before --- in the second half, I mean, before things really come back to where they were before.

For me, the first part of your question is really to do with timing.

As far as competitive environment is concerned, on the the big deals, the people we see are very much the ones we've always seen.

In the new applications of MPEG 4, then we find some startups and other companies but in general, they have not got much traction and they suffer from not being able to supply fairly complete systems, which is what at the end of the day we will have to do.

So, we believe the long term our competitive environment will be much like it's been in the MPEG 2 world.

Just a follow-up on the competitive side.

I mean, again, you've been talking more about it but I'm just trying to understand to what extent the headwinds your experiencing are timing versus are you losing some of these potential contracts to competitors and then ultimately, you go back ten years when you guys introduced a WDM into the market and put yourselves as the technology leader in the cable space.

Do you see yourself achieving that technological leadership as we move into things like Insight 4, HD, and switch broadcasts?

Thanks.

Well, we don't play so much in the switch forecast as most people know.

But, I think when we're talking encoding and all the things around us, in particular when we're talking about the larger systems, I think we have a remarkably large market share and I think we're attaining that.

One of the issues that arise where there's a lot of competition, is that it does slow things down while the customers evaluate all the various alternatives.

And I think we've seen a great deal of that.

But, I think Harmonic is continuing to win and will continue to do so.

Likewise, if we go back to fiber-optics for a moment, the fact that we're in through telex and the Verizon scene and we have some very limited products coming, I think you'll see that our competitive position remains exceedingly strong.

Okay, thank you.

Sir, our next question is from the line of Tim Savajo with with Merriman Curhan Ford.

Hi guys, I have a question about your commentary on the telco situation.

I thought I heard a couple of things that might conflict but I'm not sure.

You indicated, I thought, that overall shipments to telcos in the quarter were up but that shipments to Verizon were down.

Wonder if you could amplify more on that.

And then further indicated that expectations for the second half in the telco market were reasonably strong.

I thought I heard the same thing regarding cable and yet the overall revenue guidance sort of would indicate kind of quarterly revenue that's sort of down from the current level, so is satellite expected to take a further step down or something internationally?

Wonder if you could just sort of amplify on both of those comments regarding the current quarter --- sorry the second quarter and then the outlook.

Okay, with respect to the second quarter --- no you heard correctly.

Shipments to Verizon were down.

At the same time our telco business overall was up slightly in absolute dollar terms.

I don't think there's any real contradiction there.

We've been saying for some time that there's quite a lot of activity internationally with lots of telcos in perhaps what I might categorize as relatively small installations, compared to say what a Verizon and is doing or SBC, for that matter.

So, there's a lot of activity in that space and we're continuing to win a share of business and a think interestingly now we're beginning to see the expansion of some of the systems that were put in maybe a year or two ago.

So yes, the telco number was up slightly in spite of Verizon being down.

Okay, fair enough.

And then with regard to the the guidance --- not the guidance but the commentary going forward.

Was I right in hearing you say that cable and telco were kind of expected to strengthen a bit --

We think they are.

I think it's more a question of timing.

We believe there's going to be a lot of orders in the second half.

The real question is to do with when the projects are complete and we can recognize revenue.

These things are more complex, as you know, then they used to be and be sure that affects some of the timing and whether it falls in this year or into next year.

Okay, fair enough.

And then, one final question with regard to Verizon in particular.

Wonder if you comment on sort of how closely you were tied to telex at the account.

And that is to say, should we see other access suppliers notably Motorola, but perhaps others over time, take a more prominent role in the Verizon buildout?

What would that mean for Harmonic over time?

Do you have other partnership opportunities or, could you just comment on that issue broadly?

We certainly have at the moment other rel -- other partners in the this FTTP space and there's always a possibility that we can operate directly as well.

So I think we have a number of alternatives and while we value the telex relationship, it's not the only one that we have.

Okay, thanks very much.

Sir, our next question is from the line of Nikos Theodosopoulos with UBS.

Hi, thanks for taking my call.

This is [inaudible] on behalf of Nikos.

Just wanted to follow-up on the competitive landscape question.

A think both Daniel and the gentleman asked quite a bit of questions around market share.

I guess my my question is who would you say are the top two or three competitors that you encounter the most and [inaudible]?

Well I think, in our business, the people you run into worldwide are of course Motorola and Scientific Atlanta, particularly Scientific Atlanta, they are everywhere we go in cable.

When we get into satellite, it tends to be companies like [Thompson with next stream and tennburg].

In telco, it would be very much a mixture of the same sort of people.

Okay.

Just following on that, it seems [tennburg], at least our impression seems to be making some inroads into U.S. and North American market.

Just wanted to get sort of your feedback in terms of how competitive and how much of a threat you perceive them to be here in the U.S.

Well, I think what you should perhaps do is look at the published information in their call.

I think when you do that, you'll find that given they have [anti] broadband, their sales in the U.S. are not particularly large.

The total segment sector in cable is relatively small.

They have a very large sales in what they call satellite, insight satellite is included; contribution and distribution.

This is to do with broadcasters, outside broadcasting trucks, that sort of thing, and Harmonic doesn't play in those areas.

So we believe that in the large systems, where we tend to play, we have a very large share.

Okay.

My last question is I guess just more tactical, as you might call it.

Seems like SG&A as a percent of sales is pretty high this quarter and I was just wondering as far as the second half goes if you could give us some sense of where you see that might be revert back [inaudible].

Well, I think we're going to take some time here to establish really the market, particularly for next year.

And depending on how we assess that, will decide what action to take.

Okay, thank you.

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

Hi Robin.

Hi Tony.

It's Eric for Steve.

Just a couple of real quick questions, I guess.

First on the margins -- gross margins, and is it possible for us to see gross margins bounce back into the low 40% range?

Now that I guess a lot of the third-party sales [ inaudible ] are mostly have been reduced by to a normalized level?

Well, I wouldn't say we're quite at the normalized level yet.

As we indicated that the end of the first quarter call we had commitments, backlog mostly in the second quarter for delivery of higher than normal third-party revenues and while they were down compared to the second quarter, they were --- sorry for the first quarter, they were still higher than typical levels.

So, I do you think there is some opportunity there as those sales further wind down and we get back, as you say, to more normalized levels.

That in itself should get us back at least into the low 40's.

Now, that's at, let say, revenues of 60 million, so if you assume the high-end of our guidance for the second half, and I think we've got a reasonable shot at being there.

It's not guaranteed and obviously it depends a lot on a particular product mix but I think we have a reasonable shot.

Okay looking at operating expenses, is up a little bit as the previous question was asked, but I'm wondering if it comes down a little bit this coming quarter just because you don't have those trade shows or the extra expenses in the quarter so they kind of return back to the mid 15.5 kind of level?

I'm looking for that.

The trade show spending should be down considerably.

We do have the big, as Tony mentioned, the big IBC show in Amsterdam which is not an inexpensive place to visit but in general yes, we are looking to hold operating expenses at worst flat and hopefully down.

Okay.

And then finally if you could just touch on the new U.S. simulcast customer you announced.

Could you give us a little more color as to whether are not that was a new customer or somebody that was previously a customer of yours and maybe some of the merits behind their decision.

Where made them choose you guys versus other guys or if they even made a choice?

I can assure you they made a choice. [laughter] Belive me.

But we have been focused on some of these larger operators for two and half years, working with them and helping them to understand what we can do and us understanding their problems.

And I think at the end of the day, our solution was superior, particularly in terms of picture quality for the cost to the customer.

And I think we're off to a cracking start, which is a major MSO.

Great.

Thank you.

Sir our next question is from the line of with Brian Coyne with Friedman Billings Ramsey.

Hey, Tony, Robin.

Can you hear me alright?

Thanks.

You hit on most of my questions so I might try to drill down a little bit on a couple more.

On the competitive dynamics side, for the encoders.

I mean you spoke a bit about the competitors coming on.

I was wondering if you could just talk a little bit more specifically about what you see happening on the pricing side.

What are operatives really kind of basing their purchasing decisions on now?

To what extent do you still see them kind of looking for the integrated solution or are they kind of taking a flyer here and there where they think they might people to give a price break and how often you see that?

It's a complex issue because there are many applications of encoders and these large systems.

When we really get going.

And it centers really around picture quality.

So if we're talking, shall we say, about the main broadcast channels, you need those to be very high quality indeed.

On the other hand, a large MSO will buy a great many encoders for what they call the peg channels, public services, where they relay the, shall we say, the city council meeting or whatever it is.

And there the quality level can be very different from the main broadcast.

So you end up with a range of products for a range of applications.

So, there are encoders that are very inexpensive and will perform adequately for the task that they're required for and they generally are not part of the very large system application, where we have to do things like bring on advertisements and all sorts of other requirements in operating a system.

So there is a big spread in encoders.

We do now have a number of competitors which I didn't mention, but they're at the bottom end, very low cost reasonable performance.

When you get to the large system, major headends, then it is very conditional on the facilities that the encoders provide on industry recoding, plus the real emphasis on picture quality.

Okay great, thanks.

Could you maybe kind of I guess characterize the pricing declines?

Any pricing press you've see at least relative to expectation?

There has been some decline, that is for sure.

Difficult to put in numbers on it, but I would say we're seeing -- we've seen over the last year, say, or shall we say 20, 25% probably a reduction in encoding pricing of the sort that we make.

Okay great.

A couple of quick ones then.

On the satellite side was wondering if you could speak a little bit about what you're seeing with direct TV.

I mean, apparently they got another bird scheduled to go up sometime either the summer or sometime this year to help them roll out more HD over time.

How much, what you think in terms of the delays that orders you are seeing is relative either to getting the satellites up or how much do you think is related to other factors, potentially [ INAUDIBLE ] or anything else out there?

It is certainly due to a number of aspects.

The [inaudible] I think are going to be very much the holding factor because you do need a bit of time before you start rolling out the considerable quantity they have to put out to make the system useful.

So, the gating item I think is very much the [set top boxes].

We've always said and we still believe that the real drive for MPEG 4, in particular, will be next year in 2006, is when the volume is really get going.

There'll be some systems up this year but I think a very small quantity.

All right, thanks.

And then one final one, on margins, you obviously mentioned lower third-party sales.

I think last quarter you characterized that as somewhere north of 10%.

Can you kind of put that into context this quarter and then just following on that, you mentioned how that, I guess in your comments or the press that in part true of margin improvements, what else was behind that?

Was it just primarily mixed or were there kind of selective cost improvements as well?

Thanks.

On the the third party, in fact, in the first quarter, we were actually north of 15%.

We've come down now into 10 to 15% range, and I would expect that we will be down to below 10% in the second half, which is traditionally where we've been.

So we're certainly making progress pretty much along the lines of what we expected.

On the gross margin.

Any other sources of the improvements ---

Yes, I mean we've talked about encoder pricing and certainly there are areas where there are challenges, but I wouldn't say that's true across the board.

I mean some of the new products that Tony has referred to are already shipping and that's helping.

And in general, we're seeing good margins on some of the smaller projects we're doing around the world so it's not all a one-way story, by any means.

And in the encoders as well, as I think you hinted at, yes we're continuing to work cost reductions.

Okay, great.

Thanks very much.

Sir our next question comes from the line of Erik Zamkoff with Morgan Joseph.

Hi, good afternoon.

I was wondering if you could take a little time to talk about the Verizon scenario and if the Q over Q decline related to a technical issue, a competitive issue, our just the general slowdown?

What is your level of confidence at this point that Verizon will aggressively deploy RF overlay technology?

Start in from the back towards the front, my confidence in them using overlay technology is 100%.

Definitely that's what they're building, that's what they're doing.

The delay, I don't think it would be any surprise to anybody given the size and complexity of what they're doing.

I think by any standards progress is remarkable.

The fact that we all carried a little weight with our enthusiasm and forecasting, maybe we should have known better, but we have strong indications through Verizon, through telex that they're really, as far as the video overlays is concerned, coming into gear in the second half.

So we are quite confident that this part of our business will show improvement in the second half of this year.

One more quick follow on.

Can you give us an update on the VOD gateway business and whether that was up again Q over Q and your outlook for that business going forward as some of the domestic operators grapple with the next stage of deployment?

We're quite optimistic about the outlook, particularly towards the back end of the year.

We think this is probably not a big driver in Q3 but we feel very strongly that it will be by the time we get to Q4 and into next year.

And I think it's simply that VOD is very successful, that the operators have learned how to sell it, if you will, and entice people with the service.

They put in a fair amount of capacity and you recall that our gateway scales with the number of uses that are on a peak demand.

We have reasonably strong evidence that if things continue as they are, that we'll be back buying this equipment later in the year.

Was that business up sequentially in the second quarter?

Eric, it was relatively flat in revenue terms.

I think some of that was due to the fact that quite a bit of the activity right now, as we've discussed before, is in international projects which for the most part are start --- are new deployments.

As is always the case with new deployments often go more slowly than either the operators or the vendors think they will, so we weren't able to see -- we didn't see quite as much revenue in that as we'd expected but I think the underlying trends are still good.

We're winning a pretty good share of international VOD deployments but the execution is moving a little bit more slowly than we thought.

Excellent, thank you.

Sir our next question is from the line of Robert Tango with Lazard Capital Markets.

Hi, thank you.

Hi Tony.

Hi Robin.

Hi, Robert.

Tony just listening to all of your commentary in a recovery in cable and maybe some push outs in order that should be returning.

The possibility of IP TV shipments being somewhat healthier in Q3 or in the the coming months going to Euro, the domestic telco business, you seem very confident that that is also coming around.

And then even in the last question, I think you just implied that the possibility of VOD shipments returning possibly before the end of the year.

The tone, the body language seems to be somewhat positive and I think for some of us, at least what hit the headlines, the initial guidance was a little odd.

It was kind of like expect flat numbers for the next two quarters and I think this question was already sort of asked but it's still a little confusing to me.

Where is sort of the disconnect or is it just maybe in the next four weeks we don't know what's going to happen with "one or two domestic cable operators" but we know it's coming in September or October, November and all these other things are hitting as well.

Or is there clearly some major question marks as to where this business is coming in for not?

Let me try and answer.

My belief is that there is business there, as we've talked.

It's very much, I look at the deals that we win and I think we're going to win a great many.

It's more, for me, a question of timing.

Whether it all comes in and projects are completed within the second half.

Because it doesn't -- you do not need many of the larger ones to slip off into 2006 before they're completed and the numbers change very quickly.

And I think it's that concern and the difficulty we've had in trying to understand this business and no desire to disappoint again but we're being I think reasonably conservative with what we're suggesting as the revenue numbers.

And without putting you on the spot, because I know you've been --- you've seen these fluctuations for the last ten years I've known you, but would you say that your confidence level in these "bigger deals" with sound material to the topline are more likely to occur between now and the end of the year and not slip out or is the body language from these potential customers relatively benign or weak at this point?

I think one of the real problems in this business is trying to understand what the customer's really going to do, whether he understands it himself when he tells you.

I think we've shown over the years that it's a little uncertain.

I think in the circumstances we have no choice now but to be very conservative.

Okay, thank you.

[ Operator Instructions ] Sir, our next question is from the line of Sue Ann Roberts with Kaufmann Brothers.

Good afternoon.

Sue Ann Roberts on for Bill Choi.

Most of my questions have been asked and answered; however, I have a couple that are sort of I guess strategy focused.

You mentioned continuing investing in critical areas and you obviously have a rather bullish outlook on the return of the cable operator spending to go to digital and the announcement of, or planned announcements for new products for September, just wondering do you have anything in the works or any plans to announce new products that are specifically addressable to digital cable, especially in light of your recent reseller with Terayon in order to round out your end to end solution?

The second question: previously you had mentioned you were looking to hire strategic areas at nine in a quarter and that you're looking to curtail your hiring; what areas where these nine hires in and do you feel that they're all in place in the areas they need to be?

Thank you.

On the first question, I think most of the product announcements that we're going to make are in line with the current product lines that we're in at the moment, so I don't think you'll find anything that will suggest we're prone to replace the third- party products or anything like that.

As far as hiring is concerned, I think our hires have been in, mainly of the areas that are really all to do with the future or looking after our current customers.

They've tended to be around R&D and service and sales.

Okay, thank you.

Sir our next question is from the line of Paul McWilliams with Indie Research.

Hi Tony, Hi Robin.

Organic business, non third-party business; what would be the year-over-year comparison?

Probably pretty flat because we had, I don't have the numbers at hand for this time last year, but since we did 57 in total revenue in the second quarter and we did almost 60 this quarter, quickly making the adjustment, I would say flat.

Okay.

I think the question that everybody seems to want to get their arms around here is --- is the guidance, is the performance, due to a slowing in opportunity or due to a decrease in your batting average?

I think it's probably a decline in dollar value of the opportunity.

It's not a decline, in my view, on our batting average.

Okay, so cable is slowing up spending, essentially this year, or at least in the last three quarters of the year, as compared to what people expected going into the year?

I think possibly in dollar value, yes.

In terms of number of systems and number of channels, no.

Okay, and so the dollar value being down a little bit is pretty much due to competitive pricing?

Well, pricing is in my view [they always steer the competition], and I did indicate that we've had a decline in encoding pricing.

It is of course due to competition.

Okay.

Do you feel like your market share in encoders has changed measurably, year-over-year?

No, I don't

Okay.

Just two more quick ones.

MPEG 4 HD.

When do you think you'll be announcing something there?

I am not sure when we're going to announce it but we said it will be a product available at the beginning of next year.

Okay, I might have missed that comment.

Sorry.

What are you seeing in general from China, Japan and then the rest of Asia?

Demand wise?

In terms of market or competition?

Market, I'm sorry.

In Japan for us is a very significant place.

I think it's -- it's our -- it's been consistently strong for us in the last few quarters in terms of the digital video business and we have a sort of base business there in fiber-optics that works here and in year around.

Japan has been continuously very strong.

China is a more complex issue.

Because in China, we run into the home grown competition, which is varied from performance, but at a remarkably different price.

So, the market there tends to split into high-quality, high-priced, which is us and our normal competitors and then a large number of local suppliers with very low prices.

The result of all that is what is below the market I think of [inaudible] growing.

I think for us and our normal competitors it's been pretty flat.

But Asia in general is good for us;

Japan in particular strong.

Oh, one more housekeeping real quick if you can answer, what percentage of your band revenue was MRO?

Sorry.

MRO?

Maintenance, repair, ---

Very, very small.

It's a pretty small piece, Paul.

We don't have a whole lot of maintenance revenue in the band division.

Okay, thank you very much.

Thank you.

This concludes our question and answer portion of the conference.

Back over to you for any closing remarks.

Thank you.

And thank you all for participating today in today's conference call.

And we look forward to speaking to you again at our third quarter conference call, which will be in October.

Thank you and good bye.

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

This does conclude your presentation and you may now disconnect.