Harmonic Inc (HLIT) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Harmonic fourth quarter 2005 earnings conference call.

At this time all of our participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of today's prepared remarks. (OPERATOR INSTRUCTIONS).

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

Please proceed, Sir.

Thank you.

Good afternoon.

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

With me in our headquarters in sunny 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 fourth quarter and year end of 2005.

During the year, we continued to expand our customer base across different markets and introduced important new technologies that will help shape the future of video.

We shipped significant orders to major domestic cable companies with digital simulcasting deployment and continued to provide digital systems to many new international telco customers for IPTV deployments.

In coming periods, we see the world of digital video evolving into new distribution models.

We've reorganized our Company to focus more resources on flexible solutions that let different operators offer video services over a variety of networks to a growing array of home, office, and mobile devices.

So at this point I will ask Robin to cover the financial aspects of the quarter and then, later, I will review some of our progress during the period.

So, 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.

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

We refer you to documents that we file 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.

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 our press release today which we have also posted on our website and filed with the SEC on a form 8-K.

We will also discuss historical financial and other information regarding our business and operations.

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

Today we announced our results for the quarter and year ended December 31st, 2005.

For the fourth quarter we reported net sales of 63.7 million compared to 85.6 million in the fourth quarter of 2004 and 61 million in the third quarter of 2005.

For the full year, our net sales were 257.4 million compared to 248.3 million in 2004.

Our convergent systems division which designs, manufactures, and markets digital headend systems had divisional net sales of 37.2 million in the fourth quarter of 2005, compared to 67.7 million in the same period of 2004 and 35.8 million in the third quarter of 2005.

It was certainly a tough comparison on the year-over-year numbers.

You may recall that in Q4 of 2004 we had two exceptionally large deals as Comcast accelerated its digital simulcasting and we completed the [Voom] project.

The sequential increase in CS sales was driven by increased revenue from Time Warner as they moved forward on their digital simulcast projects.

Time Warner was our largest customer in the fourth quarter at 14% of total revenue.

Our broadband access networks division which designs, manufactures, and markets fiber optic products had divisional net sales of 26.5 million in the fourth quarter of 2005, up from 17.9 million in the same period of 2004 and from 25.2 million in the third quarter of 2005.

The year-over-year increase in band sales in the fourth quarter reflects major shipments to [Tellabs] for the video infrastructure portion of Verizon's fiber-to-the-premises deployments.

Tellabs Verizon represented 13% of our total revenue.

By market segment, cable revenue in the fourth quarter was 65%; satellite customers 9%, and telcos and others represented 26%.

In the telco segment in addition to Verizon, we are continuing to have success in winning IPTV orders from international telcos.

In the last few months we have received a number of orders for our systems from a variety of telco customers, principally in Europe.

In part because it was telco activity we continued to do well internationally.

Our international sales represented 41% of revenue in the fourth quarter and 40% for the full year of 2005 compared to 36 and 42% respectively for the same periods in 2004.

Once again in 2005 we thought that we saw particular strength in Europe.

So as we stand back and take a look at the year, while we were pleased to see another year of revenue growth, our gross margins suffered from an unfavorable product mix and pricing pressures in some areas.

For the year as a whole, our gross margins on a non-GAAP basis declined from 43% in 2004 to 37% [day spend] 2005.

You may remember that we supplied a much larger than normal quantity of third party products in the first half of the year, going into digital simulcast projects.

These third party products carried very low margins.

In the second half, third party sales returned to more typical historical levels at approximately 5 to 10% of our total sales.

But at the same time, Verizon started to move rapidly on video deployments; and in the second half we shipped over $16 million of optical products, also at relatively low gross margins.

As we discussed on this call three months ago, continued pressure for lower prices caused us to take the very difficult decision not to participate aggressively in the next round of purchasing for these projects.

As a result, we expect significantly lower sales of FTTP products in 2006.

Further, in some areas we have seen pricing pressure from our competitors, particularly in digital simulcasting.

Our widespread success here has led our competitors to respond with pricing as the principal competitive weapon.

In response to this, we have introduced a range of new encoding products, aimed particularly at these emerging new applications and requirements.

These new products are enabling us to further improve our competitive position and in turn should improve our gross margins during 2006.

Partly as a consequence of these continuing rapid changes in our encoding product line, we have taken a charge of $2.8 million for excess and obsolete inventory in the fourth quarter.

As a result of these reserves and the continuing impact of low margin FTTP product sales, non-GAAP gross margins in Q4 were 35%, relatively unchanged from the third quarter.

As we turn to operating expenses, we took a benefit to our excess facilities reserve of $1.1 million, due to the recent completion of a sublease of an empty building.

We also recorded a charge of $1.1 million in the fourth quarter for severance costs associated with the consolidation of our band and CS divisions.

This reorganization is intended to increase our flexibility in the use of internal resources, particularly in R&D, as well as to reduce operating overhead.

We expect to see the full benefit of the cost reductions in Q1 amounting to several million dollars on an annual basis.

As a result of eliminating the two divisions we will not be breaking out our CS and band revenues in our 2006 financial reporting.

Our non-GAAP operating expenses, including the severance charges, facilities credits as well as the amortization of intangibles, were 24.3 million in the fourth quarter done sequentially from 24.6 million.

Our headcount dropped to the end -- sorry, it dropped to 618 at the end of 2005, down by a net 29 people from the end of September.

We increased our tax provision by about $400,000 in the fourth quarter to cover additional foreign tax provisions, mainly, as a result of establishing new foreign entities during the year.

Our GAAP net loss for the fourth quarter of 2005 was $2 million or $0.03 per share compared to GAAP net income of $10.2 million or $0.14 per diluted share for the same period of 2004.

For the full year, the GAAP net loss was 5.7 million or $0.08 per share in 2005 compared to net income of 1.6 million or $0.02 per diluted share in the previous year.

Excluding the effect of a non-cash accounting charge for the amortization of intangibles, severance costs as well as the credit for the excess facilities reserve, our non-GAAP net loss for the fourth quarter of '05 was 1.8 million or $0.02 per share compared to non-GAAP net income of 12.7 million or $0.17 per diluted share for the same period of 2004.

Our cash position improved again in the fourth quarter with cash, cash affluence and short-term investments of 110.8 million at the end of December.

So in spite of a loss in 2005, our cash position improved by $10.2 million from the balance at the end of last year of 2004.

Receivables were 43.4 million with DSOs down significantly to 61 days.

Net inventory was 38.6 million down sequentially from 43.1 million in Q3.

Our capital spending was less than $6 million in 2005 when we expect it to be in the range of $6 to $7 million in 2006.

So with respect to the outlook of the visibility at this time of year of course is typically less than clear.

We came into the year with lower backlog than we had at the end of Q3.

Nevertheless, we've had a very good start to the year in new orders.

And we also have a number of international telco projects in progress.

Since many of those involve new customers, new products and installation and/or integration services, it is difficult to predict in which quarter revenue will be recognized.

So as a result we will give you guidance for the first half of the year in which we expect net sales of approximately 115 to 125 million.

We expect strengthening revenues in the second half of 2006, mainly coming from additional anticipated orders for our new products.

For the full year we expect that sales will be in a range of 10% lower to flat compared to 2005.

This is due in large part to the expectation of substantially lower shipments of third party products and FTTP products.

However, as a result of these anticipated favorable changes in product mix, increasing new product sales, and recent cost reductions, we expect improved financial performance in 2006.

We have not yet fully evaluated the impact of the new stock option expensing rules, which apply to us from January 1st.

However on a non-GAAP basis, and excluding the impact of expensing stock options we expect to return to profitability for the year.

So in summary, we are focused on containing new product introductions in order to drive revenue and to improve gross margins.

We've reduced our operating expenses and our strong cash position gives us plenty of operational and strategic flexibility.

That is all for me.

Tony.

In 2005 we believe we significantly strengthened our competitive position, extending our technology leadership and penetrating new markets worldwide.

During the year, we introduced a number of significant new systems.

Building on the worldwide success of the MV100 encoder, we broadened the line with the MV3500 HD encoder and the [Elektra] 5000.

The Elektra is an advanced multicode Kodak platform for MPEG-2, MPEG-4 and VC1 with multiple outputs for applications including mobile video and PC streaming as well as television.

It has won wide acceptance in the IPTV world.

The [divitrack] IP is being recognized in the market as a revolution and statistical multiplexing as it enables encoders in separate geographical locations to be multiplexed into a common transport stream.

Benefits include flexibility in channel lineup and significant bandwidth saving for the operator.

We increased our focus on software solutions in this last year.

We extended the capability of our NMX Digital Services Manager; but in a new departure we introduced two important systems solutions.

Our new storage encoding solution called [Clearcut] provides highly efficient low-bid for a digital video stream capture for ad insertion and video on demand -- both standard and high-definition.

More recently we announced our ProStream 8000 which provides an enhanced viewing experience by displaying a mosaic of channels simultaneously on the television screen and these channels can be configured by the operator or by the subscriber.

Our implementation fits cable, telco, and satellite; and initial reaction from all three types of operators has been enthusiastic.

Turning now to the specific markets.

We consolidated our position in cable by winning the great majority of digital simulcasting projects with the domestic operators.

Of these, one of the largest has mostly completed deployment and two remain very actively in deployment.

In the fourth quarter Time Warner was our major customer for simulcasting.

We expect the other operators to follow suit during 2006.

We continue to be a leader in the transition to all digital systems in cable.

In the coming year, we believe our cable business offers us major opportunities.

VOD and on-demand content are on the growth track and we expect to see increased shipments of our leading QUAMs solutions.

The edge QUAMs are central to the new architectures being considered by the cable industry to combat the threat from telcos.

And the quantities required scale with a number of subscribers using the services.

In addition the combination of the need for high reliability for the rollouts of VoIP, the move to high data rates and the increase of interactive services should lead to increased demand for networking enhancements, with no splitting as the central feature.

We also expect to see more emphasis on the deployment of commercial services both here and overseas.

While we have lower revenue from our satellite customers in 2005, we fully expect satellite to remain a major business segment for us in 2006.

Our satellite customers around the world continue to work with us to provide more standard definition channels and increase the deployments of high-definition on local channels.

We believe the migration to next-generation in [question] will take several years to complete.

Although we do not have a significant role in the early introduction of HD MPEG-4, in the coming periods, we will be introducing a new class of encoder that we believe will represent a superior choice for many satellite operators when large-scale deployment gets underway.

As a result, we expect increased satellite business in the second half of 2006.

While it is only in the initial stages of the telcos' entry into video services, we believe Harmonic is well positioned over the longer-term with one of the most comprehensive range of solutions for enabling and delivering broadcasts quality video services over DSL networks.

We have been very successful in international IPTV markets.

During the year, many more telco customers began deploying our high-performance headends in Europe, Canada, Asia and Latin America.

One of our customers in the UK [V&L] became the world's first revenue-generating IPTV service, delivered exclusively using MPEG-4.

We also believe that our IPTV customers will be among the first operators to use our technology through our four customized mosaics and expand distribution of their digital video to new platforms such as PCs and mobile devices.

Moving into 2006 given the power and breadth of our video product line and the number of recent important wins in Europe we expect to continue to win new business for IPTV systems worldwide.

In summary, we are encouraged by the continued diversification of our customer base worldwide and the tremendous potential of our new products.

We've focused our resources on flexible solutions that will help shape the future, where operators of all kinds can provide multidimensional video services through a multiplicity of end user devices.

We believe our cable, satellites, and telco customers see us as a key partner and technology leader with best of breed systems and software that can help extend their revenue streams in many directions.

Even the established operators are finding new distributions for video content including to a range of mobile devices.

We continue to invest in developing and introducing interconnectivity solutions to address our involving marketplace.

And we believe our sustained investment in groundbreaking new products will drive our long-term growth and a quick return to profitability.

So this concludes the formal part of the presentation.

Robin and I will be pleased to entertain any questions you may have.

(OPERATOR INSTRUCTIONS) Steve Kamman with CIBC World Markets.

One major question, first in terms of the guidance to the second half.

Where does your confidence come in terms of the numbers and I'm not necessarily asking for specifics but is that international sales?

Is it U.S. (technical difficulty) satellite business.

Can you just give some color on where that is coming from?

I think it's pretty widespread.

For us it is definitely the increase in satellites in the second half.

I believe the IPTV will keep -- will be very strong throughout the year and probably accelerate things towards the end of the year.

I think the new products and particularly the edge Quams DOD, in that area, will be stronger in the second half from the first.

Likewise it sounds like the mix will be (technical difficulty).

Where do you see this driving that access (technical difficulty) over the course of the year in terms of mix?

I'm sorry.

You are breaking up on us but I think you said that implies more systems solutions in the second half.

Yes.

More -- the mix seems to be shifting towards convergent systems.

Is that a fair approximation?

I do think the gross will be greater in the digital video line but we are looking to a strong year in the fiber optics, as we do think that the -- let's call them enhancements to the cable networks are going to be required both to support the changes that are going on with VoIP and the interactive services, as well as the fact that the -- some of the networks that the telcos are building, of course, are of much greater capability and that is making the cable operators look to their networks.

Last question if you can hear me is, in terms of then sort of end of year gross margin, that should be trending up from a mix perspective.

Again I don't need a hard number.

That would seem to be the trend.

Is that fair?

Yes, absolutely Steve.

That's right.

For many of the -- for some of the reasons I outlined in the prepared remarks.

The -- not having the same volumes of third party products and some of the low margin optical products that went into the telco space.

Marcus Coopersmith with Lehman Brothers.

I wanted to, basically, first understand a little bit more about your assumptions.

You talked about how the cable market has had very attractive opportunities so I assume within your '06 outlook, you assumed the cable revenues would be up year-over-year in '06?

Yes.

Can you -- I would assume -- I guess the question is do you expect a nice uptick in satellite?

Is it possible satellite could end up being [black] or do you still expect satellite to be down within this guidance range you have given us?

I think that's one of the bigger uncertainties in the 2006 assumption.

First of all, just because it's further out I think as we said we expect relatively modest satellite business in the first half of the year.

And so that really then becomes a question of timing as to when it starts to kick in.

It's certainly conceivable it could be up next year but depending on when it kicks in, it might, yes, it could be relatively flat.

So I think you're telling us -- just to clarify, you are assuming then the guidance you are taking a flat perspective for the business.

No I think we are taking a very cautious view of the guidance.

Which I think is sensible to do.

But we do have a lot of opportunities from satellites.

They are not just for encoding but with the other products that I talked about.

There of course, it is difficult to predict when that stuff will kick in.

Sure and can you help us understand when you talk about third party sales going down,do you think that by the end of -- as you go across '06 are you not going to be selling any or is it going to be very minimal or will we still have a 5 to 10% of revenues in the given quarter which is still a lot less than what you did for the full year of '05?

We assume that we will have some continuing ongoing third party business in the sort of the normal historical range which I think it's fair to say is about 5 to 10% of historical revenue.

So yes there is an assumption, there will be some ongoing business.

But it's really -- it's, in fact it's been at that level those levels in the last couple of quarters.

It's really just the first half of 005 where it's spiked up considerably.

Just to be clear I guess a quarter ago we talked on the call about your third party sales, Tellabs, and you thought it was going to end precipitously at the end of the year.

Am I right, it seems like you're saying it might continue on a little bit more into '06?

Can you clarify that for us?

I think your assumption is right.

It's continuing on.

It's very hard for major telcos to change direction instantaneously.

So yes we've got some -- there is some assumption for Tellabs built into the guidance for the first half of '06 but certainly at lower volumes than we saw in the third and fourth quarter of '05.

(OPERATOR INSTRUCTIONS) [Brian Cohen] with Friedman, Billings, Ramsey.

I apologize if I am treading over old territory but could you just give us a bit of a sense as to -- as the new MPEG-4 products tracking and just customer response and where you see opportunities?

I know you touched a little bit about satellite but qualitatively where do you think we are in terms of how they are looking to deploy this?

Are we kind of still at the aggressive or getting more aggressive phase or is that going to be a little bit more evenly spread?

I got a couple other questions to follow up after that.

If we start we have these three areas of satellite of telco and cable.

So in the case of satellite as they move to more HD in order to conserve their bandwidth, they would really like to go to MPEG-4.

But I think everyone is realizing that the end subscriber demands is not going to (indiscernible) and it's going to taken care longer than I think was initially thought for demand for these operators to build up.

So it is going to take quite a -- this rollout is going to take a very long time.

In contrast, the telcos who start with an absolutely green field and virtually all except one are two telcos, of course, are using DSL.

They are so constrained with the bandwidth from the last mile that they go straight to MPEG-4.

And of course the majority of what they do is standard definition and they have -- in the typical deployments there were very few HD channels.

It's 95% standard definition.

And finally you get to cable.

Particularly domestic cable with the way that they are organized to the bandwidth and capability of the system, in fact they could move to switch broadcasts.

They've got many things they could do.

They will stay for appreciable time to come on MPEG-2.

So when you add it up, the massive deployments of MPEG-4 is taking place on standard definition in telcos.

And given our considerable stream of successes at winning these deals, I think the conclusion is we are very well placed in the MPEG-4 world at this point in time.

All right so you say just in terms of customer response it sounds like a lot more positive obviously from the telco side.

Are you still kind of -- how far down the path with regard to these satellites for acceptance and so on?

The decision is clearly made that when we go HD and satellite it's MPEG-4 for HD.

And so you know they've made some initial decisions and as you know, we were not part of that.

But I think the real attraction comes on much later in the year and, of course we intend to be there for that.

Secondly then, of the new products you went through and you described a little bit the services manager, the NMX, the mosaic channels -- could you give me also the characterization of where you are spending probably out of all those, are you focused on one?

Or is it just kind of generally across the board in terms of the new products?

And where is the investment?

And where is the -- you kind of see the customer response?

I think what we look at when we spend a lot of time with our solutions group looking at what's the architecture of these systems can look like as you go out, one year, two, three -- three years and there's much more as we go forward than just encoding.

I think Harmonic's great strength is being able to combine certain classes of hardware and then build the software solution around them to create much greater functionality.

So a clear example, I mean, an example would be our Clear-cut storage encoding solutions which you need an encoder to grab the real-time information as it comes.

But then you have to able to put it on the server and store it and massage it, make sure it's in appropriate form where the operator can manage it and play it out later.

I think we are doing very well in these areas.

We found these two initial products of mosaic and Clear-cut to be creating a lot of interest among our customer base.

And we intend to focus more over our sources in that area going forward.

Great and then just kind of finally before one quick housekeeping question coming from that.

What -- could you just talk a little bit about the changes that you made the realization of mining the project side?

Are you getting in a boost also from the sales and marketing side by combining the two divisions?

Do you see any kind of better ability to sell the product on an enterprise basis to any of your customers by -- does it get that much more, I mean besides the cost-savings -- do you get that much more efficiency on the sales traction you might get by, by presenting one product facing side?

Yes I do think that is very important.

Of course it primarily applies in cable because, clearly, we don't sell fiber optics to the satellite world.

Telco is sort of half and half depending on whether they're doing FTTP or not.

Of course this is really cable which is still the greater part of our business and there is no question in my mind.

By combining we present a more organized face for the customer.

We are often selling to the same chief engineer on the accounts.

They now are exceedingly well in the fiber business because of the length of period that we've been leading that industry technically and obviously we have a tremendous presence now with the video.

And when we put together the two together I think we just look more organized and more sensible.

Then if I could beg your time for one more quick one, just this housekeeping.

On your adjusted cost of goods sold, I think you've got 41.3 million in press release.

Just to make sure that's not adjusted for the $2.8 million impact.

Is that correct?

Yes this is the housekeeper speaking.

That is correct we have not attempted to adjust for that.

Bill Choi with Kaufman Brothers.

This is [Julianne Roberts] for Bill Choi and most of my questions have been answered but you had mentioned that you anticipate further cable operators to be involved in digital simulcast initiatives in 2006.

I was wondering if you could give us a sense of what you are seeing in terms of timing?

If the [sequencers] are expected in the first half versus second half, how aggressive or not their deployments and schedules are?

I'm not sure I would describe what is going on as tremendously aggressive.

I would say it's simply one of certainty the great deal of the rest of the industry will do it during this coming year.

I don't think it's just a first half phenomenon.

I think it's all these operators are in different stages and how they look at the world and how they are evaluating the technology.

I think the overwhelming majority will be in place by the year-end.

Is it fair to assume then that the benefit that you guys would see from these implements with be more in the (indiscernible) state across 2006?

I think for my point of view it looks pretty uniformly distributed.

Marcus Coopersmith.

A couple more clarifications I want to understand.

First, could you give us a sense of what kind of contribution you are expecting from the new products in 2006 within your guidance?

I'm going to defer to Robin but I would say on the video side of the business, most of what we had that we were selling I think in 2006 would have been introduced right there in the last six months or during 2006.

Yes we didn't.

To be honest, Marcus, we really didn't think of it that way or try to slice it that way but I don't think there's any doubt particularly in the telco segment,and I think to a large extent the satellite segment.

There was a very significant amount of new product there and I don't mean to suggest there isn't in cable either because if you go back to things like our Clear-cut and ProStream mosaic and so forth, there is a lot of activity there, and some of the things we're not quite ready to talk about either.

So I don't think it's possible to put a number on it, but I think as Tony said, a lot of what we are selling in '06 will be product that has been introduced or will have been introduced in a very short period of time.

So in part, some cannibalization of older products, too, at the same time?

Yes again we are trying to manage, we're trying to do a better job than we've done in the past toward the end of life.

Obviously timing of these transitions is quite difficult; but we do believe we have been very busy in R&D; and we are introducing new products to, of course, stay very competitive but also to retain the margins and the world that we are in.

Where we used it most successfully when we move the new products in and getting margins back to where they should be.

So as you're getting these new products out, should we expect that R&D may start to decline over the course of the year?

I'm not sure we want to cut back, particularly in R&D.

We have as a result of this -- the change we have been making and combining the divisions, we have in fact reduced our R&D somewhat but it's not an area that we would rather get cost-savings out of the rest of the machine if we could than out of R&D.

Because R&D is the growth engine.

I doubt want to split hairs so tell me if this is too specific a question but if I adjust for the gross margin to exclude the written off -- the inventory charges, the gross margin grew about 150 basis points sequentially.

During the guidance, the guidance you assumed you know roughly flattish, is there anything that was different than what you expected that helped your gross margin?

I think our product margins were a little better than we expected just as a function of mix.

And I think to some extent of some of the new products that are already being -- that have already been introduced use and are being sold to customers so I think that was part of it.

The other thing is I wouldn't adjust the full 150 basis points.

It is inevitable in a business like ours that there is always some level of ongoing inventory obsolescence, particularly as we introduce new product.

So I don't think it's fair to take that number to zero but I would discount the 150 by maybe a quarter or a third.

Something like that.

[Sajoor Maum] with (indiscernible)

You got for increased settle of revenues in second half of 2006.

Just wondering when do you expect your HD MPEG-4 encoding product to be commercially available in the market?

We have for right now although I don't think any of us would say that it's a spectacular success; but we do believe that later in the year, that situation will change dramatically.

Your target in the market is just something commercially in this audience?

No, that's not what -- if I can repeat it.

We do have our product.

It's not quite at the level of competitiveness that we would like and it's certainly not getting the lion's share of the market.

But we do believe, those results of the technology that we have in hand, that the new products that we intend to produce later in the year will change that situation.

Later in the year, second half.

We said second half.

(OPERATOR INSTRUCTIONS).

Paul MacWilliams with Indie Research.

I guess you would classify this as housekeeping.

Your guidance for the year is flat to down 10%.

Your guidance for the first half is 115 to 125.

If I take the low side of that guidance and subtract it from 90% of 257.4, I come up with 117 which is certainly technically larger than 115 but from the way you are talking I would expect that the second half is going to be up more than a couple million dollars from the first half.

Is that a fair assumption?

It's very hard to put things even into six-month buckets especially into three-month buckets.

I think there are still even some uncertainties in the first quarter in both directions.

This is not a time of year when we have the best visibility as I think most companies in our space would acknowledge.

So there's a lot of uncertainty.

What I can say is, we came into the year with backlog that wasn't as strong as let's say a year ago.

At the same time, just in the last couple of weeks we've seen some very good incoming orders in terms of volume and numbers of orders.

So it's hard to say.

I mean, we took the best shot.

We want to be somewhat conservative as is usually the case.

And, hopefully, we will come out with stronger things in the second half.

Some of it obviously is dependent on new product introductions which are not always either perfectly capable of being scripted as to when they are going to happen so, given all the vagaries, we took our best shot.

Fair enough though that you have a pretty high confidence level the second half will be better than the first.

Yes I think so.

That fits all the data I'm seeing as well.

What is your typical reserve for a quarter versus the sale of previously reserved materials?

Does it usually balance?

Generally not.

We generally take reserves because we think we need them and in most cases we're proved to be right.

Often we do manage to sell product that has been previously reserved, but it certainly doesn't -- no, I wouldn't say it balances.

I don't think that is right.

So the reserves will generally run noticeably higher than the sale of previous reserves?

Yes.

Do you happen to have any of your MPEG-4 HD encoders under evaluation with either of the major U.S. satellite companies at this point?

Evaluation isn't the right word.

They are very much part of our plans, they know exactly what we are doing and we consult with them on what is going on very frequently.

I was just wondering do they have any of the boxes in-house looking at them or --?

I think at the moment they've had boxes in-house but I don't think we've got any there today.

Two last little ones.

On Clearcut, how does that compete isn't really the word I'm looking for.

But how does compare to the functionality of cherry picker?

Does it duplicate any of that functionality?

To my knowledge, not really.

You had mentioned insertion.

No, yes, it does it's -- it lets you take a live stream and you encode it and get it up on a server and you can manage what you are doing.

So it's really not the same function as (inaudible).

I thought you had mentioned insertion as being one of (MULTIPLE SPEAKERS)

We do use it.

The customers use it actually for taking their advertisements and changing the bit rates and putting it onto the server.

So they can look at an advertisement which is typically in the moment quite often in analog form.

They can play it through this thing and store it as a piece of video data on the server at the right bit rate to be inserted later with a program.

The last question here.

Can you give me any color on these new products?

I can't remember you say they are going to be released first half or probably a succession of products through the year?

We are just a bit reluctant for competitive reasons to explain what we are doing, but we are focused in two areas.

Wherever we have got particularly large volumes we're usually well ahead with the next-generation; and then we are increasing our focus on completing new things in the way that we have done the Clearcut and the ProStream.

One quick other housekeeping.

Do you think GP margins Q4 2006 will be back up in the '40s?

I think they have to be and should be, yes.

Very good.

Thank you very much.

(OPERATOR INSTRUCTIONS).

Sir, we have no further questions at this time so back over to the group for any further comments.

Simply want to say thank you everyone for participating in today's conference call and we look forward to speaking to you next quarter.

Thank you and good day.

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

This concludes your presentation.