Harmonic Inc (HLIT) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by, and welcome to the Harmonic, Inc. first quarter 2006 earnings conference call.

My name is Carlo and I'll be your coordinator for today's presentation. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's conference, Anthony Ley, Chairman, President and Chief Executive Officer.

Please proceed, sir.

Thank you, Carlo.

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 2006.

We had strong international sales driven by new deployments with telco and satellite customers, particularly in the European telco markets.

The success of our new digital video products has helped us further penetrate the emerging IPTV market, and we saw improved sales of our video-on-demand products in the cable market.

In the second half of the year, we expect our cable customers to continue to move forward with video-on-demand and other new digital projects, and we're planning the introduction of new solutions for our satellite customers in their migration to new video compression technology.

We remain very encouraged by the business fundamentals, the intensifying competition among operators, the strength of our customer relationships and the potential of our new products.

At this point, I will ask Robin to cover the financial aspects of the quarter, and then I'll review with you some of our progress during the period.

So Robin?

Thank you, Tony.

Good afternoon, everyone.

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

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

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

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

Please note that 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 also posted on our website 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 in a recorded version of this call on our website.

Today we announced results for the quarter ended March 31st, 2006.

For the first quarter, we reported net sales of 56.2 million, compared to 63.7 million in the immediately previous quarter, and 72.9 million in the first quarter of 2005.

Our international sales represented 54% of total sales for the first quarter of 2006, compared to 41% for the previous quarter and 36% in the first quarter of 2005.

Our performance in Europe was particularly strong, especially in the telco market, as Tony will discuss in more detail later.

While our international revenue was up strongly over Q4, our domestic shipments declined, in line with the typical seasonal pattern.

This was especially the case in the cable market and occurred across most of our product lines.

However, we did see increased sales of our video-on-demand products compared to recent quarters.

We also had lower first quarter revenue from Verizon as we had expected, as we gradually wind down this activity and shipped the remaining backlog.

Although the U.S. was slow in you what, Comcast was our largest and only 10% customer, representing 11% of total revenue.

By market segment, cable revenue in the first quarter was 54%, satellite customers represented 11%, and telcos and others were 35%.

Our satellite business was marked by important wins in Latin America and a major deployment in Eastern Europe.

For the first quarter of 2006, our non-GAAP gross margins were 36%, up slightly from 35% in the previous quarter.

We still have much work to do here.

Q1 margins were hurt by the lower sales volume compared to Q4, and the ongoing although lower sales of lower margin products to Verizon.

In addition, one of our European telco projects has terms that required us to defer much of the revenue in the first quarter, while recognizing all of our costs incurred to-date.

This accounting effect depressed our non-GAAP gross margin by about 150 basis points, but it should reverse itself in a later quarter once the project is successfully completed.

As 2006 progresses, we expect that growing shipments of our new products will contribute to improving gross margins.

Turning to operating expenses, our non-GAAP operating expenses were essentially flat with Q4.

However, our recent consolidation of our broadband access and convergent systems divisions should allow us to reduce operating expenses in coming quarters.

Our headcount at the end of March was 601, down from 618 at the end of December and 647 at the end of September.

Compared to the fourth quarter, we had the usual effect of higher payroll taxes in Q1.

And in Q4 we had the benefit of the 10 days of holiday shutdown, and consequently, lower payroll costs.

These factors mask the trend towards reduction in expenses arising from our lower headcount.

For the first quarter of 2006 our GAAP net loss was 5.1 million or $0.07 per share compared to net income of 1.7 million or $0.02 per share for the period of -- the same period of 2005.

The GAAP net loss for the first quarter of 2006 includes $1.6 million of share based compensation expense, in accordance with FAS 123(R).

The prior period GAAP results did not include the effect of these new rules.

Excluding the non-cash share based compensation expense and non-cash charges for the amortization of intangibles, our non-GAAP net loss for the first quarter of 2006 was $3.3 million or $0.04 per share, compared to net income of 3.4 million or $0.05 per share for the same period of 2005.

Our balance sheet remains very strong.

At the end of the first quarter of 2006, we had cash, cash equivalents and short term investments of 108.6 million, down slightly from 110.8 million at the end of December.

Receivables were 43.3 million, with DSOs at 69 days, higher than the 61 days in Q4, and attributable principally to the higher international sales.

Net inventory was 31.2 million, down very significantly from 38.6 million in the previous quarter.

Our capital spending was 1.6 million in Q1, and we are on track for CapEx to be around $6 million in 2006.

With respect to the outlook, we expect strengthening revenues as we progress through 2006 as the result of anticipated orders for our new products, stronger cable business and continuing success in IPTV.

However, it remains difficult to predict the timing of quarterly revenue, particularly in light of the number of international projects and progress, many of which involve new customers, new products and installation or integration services.

So for the full year we now anticipate sales to be in the range of $242 to $257 million with a return to profitability for the full year on a non-GAAP basis.

Including the - excluding -- I'm sorry -- excluding the impact of non-cash share-based compensation expense and the amortization of intangibles.

So in summary, we're focused on expanding our customer base in order to drive revenue, continuing new product introductions to improve gross margins, and reducing our operating expenses.

Our strong cash position gives us plenty of operational and strategic flexibility.

Tony?

Thank you Robin.

During the first quarter of 2006 we maintained our strong competitive position by penetrating new markets worldwide and by extending our technology leadership.

We continued to be very successful in new international IPTV markets, particularly in Europe.

A number of European IPTV operators have ordered our headend systems for deployment in the coming quarters.

This week we announced that HanseNet Telekommunikation is using our digital video [inaudible] to deliver the first large-scale IPTV service in Germany, with over 100 broadcast channels.

By using the low bit rate capabilities of the new [Electra] 5000 HanseNet is able to provide video over ADSL and is bundling the TV service with data and voice.

By adopting the Electra 5000 HanseNet is in the position to be able to offer other important services such as picture and picture, multichannel mosaics and video to the provide.

During the quarter, the independent multimedia research group reported that Harmonic is currently the leading provider of digital video encoders to top tier telcos worldwide.

They found that Harmonic's high performance encoders already power more than 2,300 standard in high definition channels for top tier operators, which is nearly twice the combined total of the two main competitors.

And they stated that our growth prospects going forward in IPTV are very strong.

We believe that our IPTV customers, will be among the first to use our technology to expand distribution to new platforms such as PCs and mobile devices.

In addition to take market share from the present incumbents, they'll be among the first to offer new features to our subscribers, such as the picture in picture and from our customize mosaics.

Although we're only in the beginning of the telcos entry into video services, we believe Harmonic is well positioned over the long-term.

Given the power and breadth of our video product line and the number of important wins in Europe, we expect to continue to win new business for IPTV systems worldwide in this year and beyond.

While our domestic cable revenue slowed, which is often the case in the first quarter, we did see increased pickup in demand of our NSTsolutions for video on demand.

In coming periods, we believe that VOD subscribers and on demand content will be on a growth track and we expect shipments of our Edge QAM solutions to increase as the year progresses.

This will be aided by the fact that NSG is the only Edge QAM that meets operators' full requirements.

As it incorporates privacy mode, the conditional access technology for Motorola.

In addition, last year we established the leading position in digital simulcasting among the domestic MSOs by winning the great majority of projects.

We continue to be a leader in the transition to all digital systems in cable and we expect more orders as cable operators deploy new digital simulcasting programs in 2006 driven by the need for bandwidth reclamation and the move towards a more digital world.

We did see a pause in this simulcasting systems in Q1, but the activity is now picking up.

During the quarter, we won more orders foe our satellite business, especially in Europe and Latin America.

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

We announced that DirecTV, the world largest direct to home satellite television provider selected our MV100 standard definition encoder for new MPEG-4-based video services.

DirecTV is also deploying our market leading DiviTrackXE statistical multiplexer and NMX Digital Service Manager, our unique service oriented video infrastructure monitoring and controlled system.

Satellite's migration to next-generation compression standards is now getting underway but it will take many years to complete.

During the course of this year, we will be introducing a new class of encoders that we believe will represent a significant advance for many satellite operators, particularly for large scale HD MPEG-4 deployments.

Our customers are expressing strong interest in the availability of these new products.

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

In addition to penetrating new markets, we've been actively maintaining our technology leadership by continuing to develop and introduce outstanding new products.

This week at the very upbeat NAB show in Las Vegas, we announced two important new digital solutions.

Our new MV 500 encoder can significantly improve MPEG-2 high definition compression efficiency and further enhance the picture quality.

In particular, it will allow four high definition channels to be multiplexed together in one 6 MHz cable channel, which is a great interest in cable.

And also in terrestrial broadcasting applications .It is the industry's first MPEG encoder with native IP support and integrates seamlessly with our DiviTrack IP statistical multiplexer.

We also introduced the MV 60 mobile video encoder for delivery of broadcast and on demand services to sell phones and hand-helds or for high quality streaming video to the PC.

And at the same time we've continued to roll out new optical products for our cable customers.

During the quarter, for example, we introduced the new Power Blazer HLM, a compact high output power node designed to facilitate the construction and the expansion of deep fiber networks.

So in summary, we are encouraged by the continued diversification of our customer base worldwide, particularly in the emerging IPTV markets and the strong potential of our new products.

We believe that television is undergoing a fundamental transformation to a new anytime, anywhere viewing model.

We are helping to facilitate this transition with versatile solutions that enable competing operators to deliver a personalized digital video to TVs, PCs, mobile phones and other mobile devices.

In the second half of the year, we expect increased demand from our cable, satellite and telco customer and as a result, stronger sales.

We believe our sustained investment in innovative new products will drive our return to profitability and our long-term growth.

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

[OPERATOR INSTRUCTIONS] And sir our first question is from the line of Jason Ader with Thomas Weisel.

Good afternoon.

Thank you.

So just a few questions, if you can quantify for how big Verizon was in the quarter, first, and second of all could you tell us if you shipped into [T-online] in the first quarter?

On the Verizon question, Jason, yes, we shipped somewhere between $4 and $5 million of product to Verizon.

And as we said earlier, we expect it to have continuing backlog in Q1 and we will also have some in Q2.

Okay.

I'm afraid on T-online, I can't comment.

I'm sorry.

Okay.

And then, on the gross margin, Robin, I guess, as Verizon becomes a smaller customer for you, should we assume that gross margins are going to pick up?

Well, yes.

I mean, I think, we believe our gross margins are going to pick up, that's one reason.

I think there are others too.

Some of our expense reduction will be in cost -- will be in and is in costs of sales.

That's a contributing factor and I think also, as we've said the new products are a very important element of improving gross margins.

Okay.

Last question is, who do you expect to be the big simulcast customers for you this year?

Well, as you know Comcast, I think, has just done a great deal.

And I think Harmonic's are going to have to do very well with the other big ones during the course of this year.

And is there --

I think you can assume, in some -- just one shipping projects to all the big ones

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] And sir, our next question is from the line of Nikos Theodosopoulos with UBS.

I had some very quick questions.

First on the option expense, Robin, do you think that stays at the same level throughout each of the quarters this year or does it change?

Frankly, that's a difficult question.

And to be honest it's not one we studied in great depth.

The rules are very complex.

We don't have a perfect model for forecasting all this stuff.

I -- it is possible that we will see the expense creep up as we go through the year, but I'd be the first to admit it's not something we're spending a lot of time trying to forecast.

Okay.

And you mentioned the deferred revenue, although you're incurring the cost on this European contract.

Can you comment on how large your deferred revenue balance is?

Yes.

It's on the order of 15 to 20 million.

Let me just -- yes, it's at in the press release we showed at least the current portion of deferred revenue, anything recognizable within 12 months, and that's 17.2 million as of the end of March.

Okay.

But it actually -- in looking at that it actually declined sequentially, so can you just talk about the dynamics there?

If this project was deferred in there, I guess, something came out and just went in the narrow --

Well, sure, Yes, I mean there is always a lot of movement in the deferred revenue bucket.

A lot of our projects, the vast majority of our projects have some form of deferred revenue component and then -- so it's not unusual to see the number move around.

But I think within the last several quarters it's been in that $15 to $20 million range.

But the movements in any different quarter are a combination of lots and lots of things.

This one I'm talking about was an element of that, but it's a relatively small element out of a $17 million balance.

Okay.

And this contract in Europe was that a contract that was won direct with the end customer?

Did you win through a partner and are there additional costs that could incur, let's say, in the second quarter before the revenue starts being recognized?

I think what I'd say is that generally our IPTV wins in Europe have been in association with one or other partner, either directly in terms of selling through that partner or at least in close association with someone.

That's certainly true of the majority of them.

From a cost perspective, the overall deal is a good one.

It's just that the accounting forces us into a position where we have low margins in the beginning and high margins towards the end as we complete the project.

It's -- this particular one is somewhat unusual in that respect.

Most of them don't have this type of feature.

But I don't -- absent any significant over run our problem and anything we shouldn't see any unusual costs as we complete the project.

Okay.

And when will that revenue on that contract begin?

It already has begun.

It began in Q1.

Although we had to -- we have some revenue we recognized and some portion had to be deferred.

And again the mechanics are in such a way that the overall margin on the early part is not very good.

But again, it should reverse itself because the overall project has good margins.

Okay.

All right.

And just one last question.

When does Verizon's revenue fall to negligible -- less than a 1 million a quarters, is that going to happen this quarter or--?

I would expect that to happen in Q3 from -- to the best of our knowledge today.

Okay.

Thank you.

And sir, our next question is from the line of Brian Coyne with Friedman, Billings, Ramsey.

Hi, guys.

Just a couple of questions.

First of all, focusing a little bit more on the margins.

I think Robin, you had mentioned, for example, the new products are one driver of the expansion that you see through the year.

And I know in prior calls and other conversations, I think, you've talked a little bit about how a lot of what you've been selling so far has been a new products, particularly, if it's into the telcos for example that were introduced, sort of, at the last quarter or two of 2005 and the very beginning of 2006.

And at the same time, there obviously there's been some probably some mix issues and some other things going on there, but I was wondering if you just, kind of, comment or what about the new products?

You just kind of -- the conference for the new products which maybe I'm not mistaken that have been out there for a little bit of time, but yet we still had some margin pressure here.

And how that's still going to be driver?

Well, we've got -- we certainly have some new products that are already on the market.

We have others that are in the works.

And we expect we'll have -- be released shortly, and will have an impact of the second half of the year.

So it's a -- it is a continuum, it's not like everything is out there yet.

And in fact much of what it is out there -- I think, a good example is our Electra encoder, many of those sales are still in progress.

And so while we're beginning to see some of the revenue from those, for example in some of these IPTV projects, we haven't seen the majority of it yet and so the full margin impact hasn't been seen yet.

Can you talk a little bit about maybe the margin on some -- maybe qualitative, I guess, on the margin on some of the things that you're doing in Europe, particularly as, you had mentioned that there is a service or installation component along with that.

How does that change things?

I think overall, we feel good about the margin profile of the business we're doing.

I mean, each deal is different.

I think what we've been able to demonstrate is that we can win and have been winning many of these deals because of the -- because of what we offer both in terms of the individual products, the system solution and the expertise that we bring to the table.

So I think these are the things that customers are looking at and while pricing is always an issue, I think we're winning these deals because of our new products.

The full impact of the benefit on margins I don't think has been seen yet, because the full benefit of the revenue hasn't been seen yet.

And we will see more of that as we go through this year.

Does that help or --?

Yes.

I think it does.

One other think I want to touch on quickly is, I guess, I think you said about 35% of the total revenue were in telco and other category?

Yes.

So coming down I guess about 20 million on a dollar basis.

I was wondering if you could just talk qualitative a little about how that broke out among, I mean, I know there are some different things going on in there, some broadcasting and telco specific things.

And if you can't speak obviously specifically to the numbers, I was wondering if you can just talk relative to your expectations.

How that did, did one portion kind of grow maybe a little bit faster than you thought, a little bit slower and maybe the impact of the slower, perhaps, revenue recognition even though you're performing on the contract from some of the stuff in Europe, how that's running through?

Yes.

There is quite a bit of stuff in there.

I mean first of all it is telco and other, so there are some other customers in there.

I mean one example I can give, I can't give names or dollars, but one significant piece of that is Scandinavian power company, which is deploying broadband.

I mean we shipped our optical products in there.

So that's one example of the other.

We had a very significant commercial services win also in Europe for a major telco.

So that's not -- strictly speaking that's not IPTV.

So it is, I mean, the encouraging thing about the 20 million and of course that includes the residual Verizon revenue as well, it's a fairly diverse base of customers and product sales.

So while the IPTV component is certainly growing in there, it's not just IPTV.

I mean I'd like to give you customer names and so forth, but we're not in position to do that at this point, but there is some pretty significant wins in there.

Some good names.

We've talked about HanseNet and hopefully on the next call we can talk about a lot more.

Okay.

And then just one, I guess, quick to wrap up.

Again specifically about whether it's a win in Europe or elsewhere, it just about the opportunity for -- again some of these new products whether it's on the -- again obviously different architectures.

But are there opportunities that you see perhaps in any way for some of the other types of products, like I'm just thinking about the edge QUAMs.

And probably not necessary in those cases, but NMX and I think you maybe touched a little bit on those.

But what's really opportunity for some of those other things sort of beyond the other core video products that you're shipping in there, where you see an opportunity?

To go forward, we are very confident about the volumes of edge QUAMs.

They are going to be significant at some point, because they're relevant to all this on-demands stuff.

They're also relevant to few areas such as a switched video broadcasting, which is extreme case of video on-demand if you will.

So much of the thinking that's going on in the cable world just to give you an effective view of channel so actually you need edge QUAMs.

So the volumes over the next year or so could be -- start to get very significant.

And then we've been delighted with the response to - if I come back to encoders for a moment, the MV 500, which lets you put four high-definition digital channels where you had one analog TV channel.

That really helps the operators as they -- they're going to have provide a lot more HD to deal with the satellite operators over the next year or two.

And our totally new MV 60 which is the device for feeding the signals you need for the mobile devices and so on, that's stirred a lot of interest from the major operators.

So we feel pretty good about the way things are moving on the new products.

And those are the ones we've announced.

We've just came off a very exciting show at the NAB where we let a few of our key accounts look under the kimono and we all came back very fired up.

Sounds great.

Thanks again.

And sir our next question is from the line of Drew Burke with Century Hill Advisers.

Yes.

Good afternoon.

Good afternoon.

Just in terms of - I have a few questions.

In terms of the revenue mix, you said that cable was normally weak first quarter -- domestic cable.

Do you feel like this -- can you give us an idea as to how that would come in for the year and fundamentally do you feel like the revenue mix picture has changed or could you give us some ballpark for those three product categories cable and satellite and telco and other?

Yes.

It's certainly been our stated goal for some time to diversifying and broaden the customer base and so to see the telco and other piece as significant as it. is is good.

At the same time I would be -- I certainly expect to see the cable business picked up as we go through the year for the some of the reasons that Tony has mentioned.

First of all Q1 is traditionally light although, I think, also I wouldn't like to put all of the blame on that.

I think some of it is -- that some of the MSO was very focused on other parts of their business at the moment and maybe less so in some of the areas where we're most actively involved.

But as we go through the year certainly in dollar term I look to see that the cable guys start to play a more significant role in the revenue.

And that's really where the -- if you take Q1 as a baseline I think the growth comes from continuing success in the telco space.

The cable guys certainly in dollar terms pick up from where they were in Q1 and I think towards the end of the year on the satellite front although things are fairly quiet right now.

I think what we've go in terms of new products are going to be very significant in the whole satellite equation.

So cable I think does get better from here on.

Okay.

And then as far as the revenue picture going forward, on your last call you had talked about 115 to 125 million in sales the first half, do you still feel like those numbers are -- are you going to come in within that range and as we look through year does it get sequentially a little bit better each quarter or is it more in the second half?

As I said in the prepared remarks, IP is strengthening revenues as we go through the years, so I would be looking to sequential increases as the year goes on.

We're trying to -- really we do want to try to get away from quarterly guidance.

And so to answer your question of course we didn't -- would be giving quarterly guidance and I am a little bit reluctant to do that.

But we certainly look to strengthening business in Q2 and for the rest of the year.

Okay.

And then another.

Could you talk a little bit about your competitive position with Scientific Atlanta now that they're part of CISCO and kind of where you feel like the industry is shaking out with that major change?

Well of course, it's very early days.

Cisco is running I say as a separate operation.

We have seen very little change in their profile as a result of that.

And it's -- it may help us over the long term -- particularly I think the cable world does not like to have to do with very large and powerful suppliers.

So over time in fact it may be quite a positive move for certain parts of our business.

Okay.

And then this last thing, I don't think you've really outlined this but in terms of gross margin progression, just talk about -- what your target gross margin is perhaps for end of the year?

There is no question we have to get back over 40% as a Company in order to do things the way we want to do them and I think they way you want to see us do them.

So obviously as I said, we've got some -- we've still got some ways to go.

Q1 was certainly not where we'd like to be in part that's just because we think this is going to be the lowest volume quarter and that certainly has been the fact as someone pointed out.

We've still got somewhat of the relatively low margin Verizon business that we are taking care of.

So I think the combination of new products and new solutions as we go through the year is really the key to the gross margin story.

It is -- I hate to sound like a broken record but I think it's new products and creative solutions to our customers problems that would get us back to where we've historically been, which as I say has to be north of 40%.

Okay.

And can you tell us what bookings were?

Are you reporting that?

We don't report bookings on a quarterly basis.

It's just not something we do.

So I'd rather not get into it.

I would say that the Book-to-bill was not dramatically different from one.

Okay, thank you.

[OPERATOR INSTRUCTIONS] And sir we have a question from the line of Paul McWilliams from Indie Research.

Hi guys.

Hi Paul.

The question the gentleman just asked was probably the most important question that everybody would like to hear here and that's that first half guidance.

When you give it once and then you come in with a number it'd be awfully nice to say yes, we were -- reiterate what we said.

But I guess that's not going to happen, correct?

Well let me put it this way.

I do expect we will be within that range.

But again I would prefer to focus on the year as a whole and get away from the quarterly guidance business, particularly, in a business like ours that is very project driven and the timing of deals and revenue recognition and so on has such a big impact.

I appreciate that as much as anybody.

Possibly just doing a rolling 6 months might be helpful for us as we try to model.

Looking at the full year guidance, you guys increased that by $5 million.

That's nice and makes me feel a little bit better.

And it implies that you're looking at an average quarterly revenue going forward for the next three quarters of about 65 million per quarter at the midpoint.

Now if we assume that we're going to see some sequential increases it implies to me that we're going to see a quarter comfortably into the '70s, maybe a $75 million quarter.

Is that a reasonably good assumption?

It's certainly not impossible.

We've done that sort of numbers before.

And we do think the business has got some very strong fundamentals.

Okay.

Now getting to this if we were to assume a quarter in the '70s, 70 to 75, just to toss out a number what sort of OpEx percentage would you expect there in a few months because we're going to assume this quarter happens or a few quarters out?

Okay, it's hard for me to calculate in my head.

But basically most of our OpEx will remain reasonably constant during the year.

The thing that will change -- we start to have some big quarters, maybe our expenses for sales commissions go up.

But otherwise OpEx is, we would not expect OpEx to change dramatically during this year.

Okay.

That's right.

In fact, in the short-term, with the head count reduction that we have had over the last six months done in total about 45 or thereabouts that is already actually showing up in our numbers and I would expect to see it hopefully come down a little.

I mean as Tony says, if revenues start to pick up then we could see some higher variable sales costs and possibly some additional hiring if we felt very confident about the business.

Okay.

R&D was pretty flat, between this quarter -- Q1 last year and Q4 last year.

Should I model that fairly flat going forward then?

I would suggest that's probably correct.

Yes.

Okay.

Then SG&A was 14.9 this quarter.

In Q1 of '05 when sales were roughly 73 million, it was 15.3.

So it really didn't drop as much as I expected it to considering the restructuring.

Can you comment to that?

Well, as I said, we did have some -- I mean Q4 was maybe

I'm going Q1 to Q1. 15.3 Q1 '05 to --

I'm sorry I thought you were talking about Q4.

Yes, I wanted to go Q1 to Q1 so I could take that payroll tax out of that painfully sensitive to that from running a business myself.

One of the things in Q1, for example, last year we had late in the quarter we had an acquisition, the BTL acquisition which wasn't a big company but it certainly added to our expense base -- actually both in R&D and on the SG&A side.

So that certainly is one structural piece that we -- for the most part, I think it was one month we had seen the quarter in last first quarter.

The other reality we're dealing with is the continuing high cost of being a public company and those costs, as you'll see from recent filings, I mean the cost of audits and the like are not really coming down much as we we'd all like them to, so there's a particularly high cost.

I haven't done the quarter to quarter comparison so I have to admit that's more of a top-down statement than one backed by bottoms up detail.

But certainly some of those costs are not going away.

So while we have reduced some of our own headcount, some of the out of pocket stuff, is persistently high.

How much do think that restructuring will save you for this year?

I think it's a $3 to $4 million number just in terms of the numbers of people and salaries and so on.

You could argue there should be some on top of that from discretionary costs and so forth, but I'd want to be conservative - I'd say $3 to $4 million.

Okay.

That's about where I had a model that I just thought more would come out this quarter.

Not all of that will be in operating expenses.

The vast majority of it is but there's a piece of that should be in cost of sales as well.

Okay.

My fault -- I didn't model it right.

Now, just a couple of quick product questions, and I'll roll them into one here, maybe give you a chance to brag a little bit.

Can you help me understand what is so unique about the Electra series, number one?

And then, can you comment about the new trend towards network PVR and what that might do for you in the [narrowcast] area?

Well, the Elektra is the first product that has been on the market that gives for the same input video, it encodes it at different bit rates at the same time.

So you get multiple streams coming out of it.

In fact, it all comes out as one IP signal, but you'll have within one frame if you want it the full blown resolution for your television and then the different requirements in terms of resolutions and other parameters that you need for mobile devices, PCs, the sort of picture-on-picture that we do and so on.

So instead of the operator for this having to have multiple boxes, he gets one of our very small 1-RU unit that makes all this work and greatly eases the complexity of a system the way he manages it, and the inter-connectivity of the boxes -- the cabling and so on.

So that has been very well received by the market.

And it's something we really pioneered.

And it's very successful.

In terms of the move to network PVRs, of course, this does open up to the market for edge QAMs in the same way as switched digital broadcasting, but even bigger.

You are seeing signs now of the network PVR movement getting underway.

Cablevision announced their trials.

And many people in the industry believe this is going to be a very powerful indeed for cable.

And the opportunities that that brings about are such that we see other products that we can put into these systems that will greatly simplify the architectures for the -- for the operator.

So we find these moves very encouraging and should help us grow the business substantially over the next couple of years.

Thank you, Tony.

Are you involved in that Cablevision trial?

Let's see.

I believe we've shipped edge QAMs to Cablevision.

I'm not sure - we're not involved directly in that trial, but we're following it very carefully.

Okay.

Wonderful.

Thank you for your time, gentlemen.

Thank you.

And sir we have another question from the line of Brian Coyne.

Thanks, again.

I was wondering also if you could just comment a little bit about sort of your share for the video products within cable.

I mean obviously has been some encroachment by some others.

But it seems to me that you guys have done a relatively good job of sort of maintaining a good portion of your footprint there.

I was wondering if you could just give us a quick update on what you're seeing along that front?

And how you kind of see that going over the rest of the year, not only for the spending, but share opportunities?

Thanks.

Thank you.

Well, I'll take it in two pieces, in the digital simulcasting, I would put our share very high, well over 60%, 70% of the total market.

We've got a tremendous number of installations of now across the big operations.

And I think we've clearly dominated that market.

In the edge QAM business, again our share is very high outside the -- we can't play where people use the Scientific-Atlanta encryption, but in everywhere else and that's an awful lot, we think we are well again win to very high percentage numbers in installation.

And in fact, we've had a very significant win during this quarter where a major operator, in fact, has taken out our competitors' equipment put ours in.

And this is a fairly large working system.

And one of the reasons, of course, was that we have this -- we have now built-in, the Motorola encryption, which I think operators are going to need more and more as we go forward in an on-demand world they will want to protect the content.

So I think in our position in - particularly in US cable, I think is extremely strong.

And we intend to keep it that way.

And sir we have another question from the line of Drew Burke.

Yes thanks.

Robin mentioned the high cost of being a public company and in my previous question, I asked you about Scientific-Atlanta competitively.

And everybody is expecting consolidation in the industry.

I mean what do you guys do with so many small players and one 800-pound gorilla out there?

Do you need to get bigger, absorb a bigger revenue base?

Can you talk about that a little bit?

Well, I think everybody would -- could make the point that it would be better to be bigger.

But the way -- you know, clearly we would prefer organic growth or acquisition of smaller companies that will enable us to provide a more complete system capability.

I'm not sure the 800-pound gorilla in cable is going to be very effective.

My own belief is that Cisco's interest was really in the set-top boxes.

And it would be very nice if they paid less attention to the past of the business we're in, which in many ways I think are too small to be of great interest to a company the size of Cisco, as a combination.

They have to think in terms of billion dollar markets all over the place.

And when you add up our business, it's just going to grow.

But it's still a long way from being a couple of billion dollars.

And if you're in a very big corporation, you can only think in terms of markets of that size.

You haven't got the time to worry about the small ones.

So although at first sight, it could give rise to other concerns.

When you think about it, it could in fact be quite good for us.

We've always found, [SA], to be I think the one competitor that we take very seriously from a technical point of view.

They've relatively -- they looked a lot bigger when we had 20 people in the Company, I can tell you.

And I think we've managed to live very successfully in their presence.

And we don't see that changing.

We stick to our fundamentals, which is better technology, more innovative products and superior service to the customer.

I'm very confident we can prosper well.

Is there any evidence of them focusing more on the set-top box?

I think it's very early days to have seen anything as yet.

But we certainly see no evidence that they're focusing more in our sector?

What about pressure in digital simulcasting from them?

Well they're very active in this area, but I think if you talk to our customers, you'll find that even in that traditional accounts, most of the systems that have being built are built by Harmonic.

Thank you.

And this concludes the question-and-answer portion of today's program.

I'd like to turn the presentation over back to Mr. Ley for any further comments.

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

And we very much look forward to speak to you again.

Good day.

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

This concludes your presentation.

And you may now disconnect.