Harmonic Inc (HLIT) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Harmonic fourth quarter and year end results for 2006 conference call. [OPERATOR INSTRUCTIONS] This conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Patrick Harshman, President and CEO.

Thank you and good afternoon.

I'm Patrick Harshman, President and CEO for Harmonic.

With me in our headquarters in Sunnyvale California are Robin Dickson are Chief Financial Officer and Michael Newman our Investor Relations Spokesman.

Today we a announced our results for the fourth quarter of 2006.

We are pleased with our strong sales and earnings growth in the quarter.

Driven in large part by the reinsertion of our technology leadership.

In a growing number of intensely competitive evaluations, our powerful high-definition video and coding products for both MPEG-4AVC, and MPEG-2 have won new business.

We saw increased shipments to domestic customers for are a wide rain of our products including our high-definition encoders.

We also continued to win new business in the IPTV and satellite markets worldwide. the success of our next generation of coders and other new video delivery products confirms our belief that we have the products a the right time.

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

Thank you, Patrick, good afternoon, everyone.

During this call we may make projections or other forward-looking statements regarding future events of the future financial performance of the company. we must caution you that such statements are only predictions, and that actual results or events may differ materially.

We refer you to the documents that we filed 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 in our projections or forward-looking statements.

On this calls, we will provide you with financial metrics determined on a non-GAAP or proforma basis.

These items together with the correspondable GAAP numbers and the reconciliation to GAAP are contained if today's earnings press release, which we have posted on our web and out filed with the SEC on a form 8-K.

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

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

Today we announced results for the quarter and year ended December 31, 2006.

For the fourth quarter, we reported net sales of $75.3 million, up 20% from $62.9 million in the previous quarter, and up 18% from $63.7 million in the fourth quarter of 2005.

Strong growth in sale reflects increased shipments of a broad range of our new video delivery solutions to domestic cable customers, and new international Telco and satellite customers.

Domestic sales were notably stronger in the fourth quarter compared to earlier periods in 2006 with U.S. at 59% of revenue in Q4.

For the full year, the company had higher international sales in 2006 compared to 2005.

International sales represented 49% of total sales for this year, compared to 40% for 2005.

This year over year growth in international was quite broad-based.

While most of the headlines that we made were in Europe, we also had strong performance in both Latin America and in Canada.

By market segment, cable revenue in the fourth quarter was 71%.

Our satellite customers represented 11%, and Telco and others 18%.

Our largest customers in the fourth quarter were Comcast and Time-Warner.

Representing 18% and 12% of our total revenue respectively.

We saw strong increases in orders from our U.S. cable customers in the fourth quarter.

While there might have been some modest amount of budget flushing, we believe that this spending in the fourth quarter reflects a more sustained shift of focus to spending for more band widths and new video services.

We're very pleased with our improved operating performance and profitability this year.

In the fourth quarter, our non-GAAP gross margins were 44%.

Down from 48% in the previous quarter, but up substantially from 35% in the fourth quarter of 2005.

As you may recall, we predicted a sequential decline in gross margins in the fourth quarter.

In Q3, we had a specific benefit arising from successful progress on a major project, and a particularly favorable product mix.

In the fourth quarter, our Edge and Access products represented 43% of revenue with video processing at 40%.

Essentially, the reverse of the third quarter.

Included in our edge and access revenue in Q4, are significant shipments of our NSG [inaudible] devices.

They had their strongest quarter of the year driven by growth and on demand activity.

For the full year, our non-GAAP gross margins were 43%, up from 37% in 2005.

The improvement was primarily due to higher margins from new products, and an increase in the proportion of net sales from software and services.

In addition, we have reduced sales of lower products to a major TELCO customer, and also third-party products, both of which represented a more substantial portion of our 2005 revenue.

We continue to focus on controlling operating expenses.

While our non-GAAP operating expenses in the fourth quarter were up about a million dollars on a sequential basis, this increase was mostly the result of increased variability compensation expense as a result of higher fourth quarter sales and earnings, and also the inclusion of approximately one month of additional operating expenses from the acquisition of the video networking software business of Entone technologies which we closed in other December.

Our headcount at the end of December was 639.

That's up by 58 from the end of September, with about 45 of that increase resulting from the Entone acquisition.

Our cost reduction initiatives in 2006 resulted in a $3 million drop in operating expenses on a year-over-year basis.

In an effort to continue to control costs and improve operating efficiencies, we have decided to close our manufacturing operations in the UK.

This resulted in a $2 million -- I'm sorry, a $2.9 million charge in the fourth quarter, including an inventory charge relating to a discontinued product line, as well as the impairment of intangible assets and charges for severance.

In the first quarter of 2007, we expect to report an additional smaller charge related to vacating buildings and other costs arising from the closure of this manufacturing facility.

Our improved gross margins and restructuring actions drove our return to profitability in 2006.

Excluding charges for restructuring and impairment, stock based compensation expense, and and the amortization of intangibles.

Our non-GAAP net income for the fourth quarter of 2006 was $9.9 million, or $0.13 per diluted share, compared to a non-GAAP net loss of $1.8 million, or $0.02 loss for the same period of 2005.

For the full year 2006, our non-GAAP net income was $13.9 million, or $0.18 per diluted share, up from a non-GAAP net loss of $3.2 million, or $0.04 per share for 2005.

GAAP net income for the fourth quarter of 2006 was $5 million, or $0.07 per diluted share, compared the a GAAP net loss of $2 million, or $0.03 per share for the same period of 2005, and for the full year of 2006, we had GAAP net income of $1 million, or $0.01 per share, up from a GAAP net loss of $5.7 million, or $0.08 per share in 2005.

Our balance sheet remains very solid.

As of December 31st, the company has cash, cash equivalents and short term investments of $92.4 million.

This compares to and $110.7 million at the end of September and $110.8 million at the end of 2005.

The decrease in Q4 reflects the use of $26.3 million of cash in the fourth quarter for the acquisition of Entone.

This was partially offset by positive cash generation from operations and from interest income.

Our receivables were $64.7 million, with DSO's at 77 days.

Up slightly from 75 days in Q3.

I feel that the DSO number is a little bit misleading.

We shipped an invoiced substantially more product than we recognized in Q4, as you can see from the $6 million increase in deferred revenue on our balance sheet during the fourth quarter.

Our DSO suffers when measures against reported revenue rather than shipments or billings.

Net inventory was $42.1 million, up from $35.6 million at the end of September.

Reflecting increased production of our major new products to address both existing and anticipated customer demand.

Our capital spending in 2006 was just over $5 million.

And we expect it to be in a similar range of about $5 million to $6 million in 2007.

The first quarter is historically the slowest period in the year, but we had strong bookings in Q4 and entered 2007 with good sales momentum. we anticipate our net sales for the first half of 2007 to be in a rain of $135 to $145 million.

Gross margins are expected to be in the rain of 44 to 45%, subject as always to the usual vagaries of product mix.

We expect to hold our operating expenses in the first half of 2007 more or less flat with the Q4 level, notwithstanding the addition of Entone and some compensation pressures due to the active job market these days in Silicon Valley.

Should also point out that our interest and other income in Q4 was unusually high, and I expect it to decline substantially in Q1.

We benefited from exchange get rate gains in Q4 which we do not expect to see repeated in Q1, and coupled with a lower cash balance, other income should drop.

I expect that we will continue to have a fairly nominal tax charge in 2007 as a result of our U.S. operating loses.

However we could see a slightly higher charge in due mostly to the new FIN 48 accounting rules which are also likely to cause quarter to quarter fluctuations, and simply making the tax charge much less predictable.

In summary, we are pleased with our sales and earnings growth, our improved operating efficiencies, and our strong cash improved operating efficiencies, and our strong cash position which continues to given us plenty of flexibility.

That's all for me.

Patrick.

Thank you, Robin.

As you can see, we are very encouraged by our performance in the fourth quarter and the fundamental strengthening of our business in the second half of 2006.

The key theme was the reassertion of our technology leadership, and the continued expansion and diversification of our business.

In several intensively competitive evaluations our powerful high definition and standard definition video encoding products for both MPEG-4 and MPEG-2 were the key ingredient in winning new business.

In addition, video stream processing and IP networking solutions for video, our customers across the board have expressed strong interest in our new content ingest distributed content management and video streaming solutions.

These new capabilities, the result of our recent acquisition, allow us to offer a uniquely powerful and for are the emerging on demand network.

The cable market, we saw significant increase in shipments as cable operators moved forward on new developments. and deployments of high definition programming, video on demand and band width enhancements on [inaudible].

Specifically, we saw strong demand for our MV-500 high-definition encoder, our NSG Edge and ProStream video stream processing solutions.

We were very pleased to recently announce that together with Time-Warner cable and a couple of other partners -- Harmonic won an Emmy award for the development of Time-Warner unique start over service.

A new on demand architecture that offers a true network based time shifted experience to subscribers.

With new on demand and high definition services consuming bandwidth, we continued to see a healthy demand for our HFC optical access products.

During the quarter we announced the [inaudible] the largest pay TV operator in Portugal is using our HFC broadband access solutions to optimize bandwidth efficiency.

Including deployments of our high performance Metro Link and Max Link transmitters and receivers, Power Blazer [inaudible], and our newest return path solutions.

In coming periods, we remain well positioned to benefit from continuing HFC network segmentation and bandwidth expansion products in the U.S. and around the world.

In the emerges IPTV market we continue to be very successful in developing strong leadership position.

Today we announced the PTCW, the world's largest IPTV operator with more than 700,000 subscribers is deploying our new standard definition MPEG-4 AVC encoders for its Now TV channel line-up.

The addition of new channels and the transition to on demand services is driving PCCW's need for industry leading MPEG-4 compression, and we are pleased to have been selected by this innovative and market leading operator.

Also during the quarter, [inaudible] announced that they were working with Harmonic to help Singapore telecommunications , Southeast Asia's largest telecommunications operator deploy it's IPTV on Microsoft's IPTV software platform.

The service will include broadcast TV and video on demand in high definition, as well as user friendly features like instant channel change, multiple picture in picture, and personal video recorder functionality. [inaudible] is using our high definition and standard definition MPEG-4 AVC encoders, our clear cut offline storage encoding solution and [inaudible] digital service manager.

We also announced an exciting new relationship with FCSAmerica where we are providing key components of their new IP Prime, IP TV distribution service.

This new service will enable Telco operators in the U.S. to deliver top quality video programming to the customers and open this doors for us to develop additional new business with these U.S Telco's.

With our growing position in IPTV, our continuing innovations in MPEG-4 encoding and stream processing and delivering video over on IP infrastructure in the addition of the most deployed solution for IPTV video on demand, we expect to continue to win new Telco business worldwide.

More over we see our existing Telco customers making plans to increase their overall channel offering, expand the number of HD channels and offer more on demand services in the coming year.

In the satellite direct to home market, we continue to win new business with operators around the world, with our new encoders and leadership position and IP networking proving to be decisive despite fierce competition.

During the quarter we won new MPEG-4 based standard definition and high definition international satellite business in Europe and Asia and a major domestic satellite operator selected our new MPED-4 AVS high definition encoders for deployment.

Our new products are also helping us win exciting new projects with terrestrial broadcasters.

During the quarter [inaudible] Madrid deployed our ProStream 1000 stream processing platform, Electra 1,000 encoders and our [inaudible] to power the world's first single frequency network broadcast transmission over an IP network.

We also announced that KXII TV in Texas our MV-500 MPEG-2 high definition encoders, and the MV-100 MPEG-2 standard definition encoders, [inaudible] to launch the worlds first live ATFC service with two high definition channels and one standard division channel in the allocated 19.4 mega bit per second spectrum.

We're very pleased with our growth in recent quarters.

We continue to look for ways to improve our operating efficiencies.

To further this effort, we recently announced the appointment of Charles [inaudible] as Vice-President of Operations.

Charlie brings outstanding experience in high tech manufacturing and supply chain management [inaudible] and Sun Microsystems, and we're very pleased to welcome here him to the Harmonic team.

If summary, we dramatically improved our competitive position in 2006, by introducing great new products, expanding our custom base, and improving our operating performance.

While the first quarter is historically the slowest quarter of the year, the strong bookings and sales momentum in the fourth quarter positions us well as we move into 2007.

Going forward we will continue our focus on profitable growth while offering the most advanced and compelling solutions that enable our customers to provide more high-definition programming, and more multi-platform, multi-service delivery of video.

This concludes the formal part of our presentation.

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

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Nikos Theodosopoulos from UBS.

Please proceed.

Yes, thank you.

A couple of questions.

Robin, on the OpEx guidance, so basically you are looking for flat OpEx in the first half of this year, versus what you reported in the fourth quarter, but adjusting it for two more months of Entone? did I hear that right?

Well, yes, I mean -- when I say it's flat, that includes an allowance for Entone, so we've got some benefits that will happen, or are happening from some of the cost reduction efforts we've taken in 2006.

So when I say it's flat, that includes Entone as an ad, but there's also some reductions, as well, so Entone is in that number.

Okay.

All right.

And can -- do you -- can you comment on how meaningful you think Entone will be in '07, or just to give us a sense of what it's going to add on a revenue basis?

Well, Nikos, I'll take that.

Let me first come at it strategically.

We continue to be very excited a bout the addition of the Entone business.

And you may recall that a big part of our strategic rationale was not only stand alone revenue, but also them ability to put together really a unique end to end offering for cable, IPTV, as well as satellite for on demand offering, and certainly looking for it as a lever to further strengthen our position in IPTV.

So with all of that background, if you pull out and look at Entone just on a stand alone basis, the revenue that we expect from most products is in the neighborhood of $10 million U.S. for the -- for 2007.

Okay.

And then I guess, you know, there's been additional M&A in the sector recently in addition to the last year, Cisco and Scientific [inaudible] I just wanted to get your view on what if anything that means is your desire to make additional acquisitions next year, or to consider merging with an equivalent or larger company to counters this, or do you see this not really impacting customers buying pattern or your strategic plans? thank you.

Well, we're very pleased with the momentum that we have in the market.

We think that our new technology, our new products have been very well received by our customers large and small, and we think we are increasingly looked on by our customers in cable, increasingly in telecom and certainly in satellite as a key strategic technology supplier.

So from that perspective, we continue to feel good about our position in the market, and in fact increasingly good about the way we're valued by our key customers.

That being said, we have stated and we continue to state that we plan to be more aggressive than we have historically in terms of looking for acquisition opportunities and adjacent technology spaces.

Although we've completed the Entone deal, we continue to have that stance going forward, and beyond that, we feel fairly well situated in the market, and what we're excited about heading into 2007.

All right.

Thank you.

Your next comes from the line of Jason Ader from Thomas Weisel Please proceed.

Thanks, guys.

So on the Entone, just to finish up that thought, are you still expecting it to be accretive in '07?

Yes.

Okay, should we be thinking about it at somewhat back end loaded to $10 million?

Certainly the second half is stronger then first half.

Maybe to put a little bit of color on that, we certainly expect continuity, and continuing good traction in the IPTV part of the market.

There's a little bit more work to do to fully integrate the system into a -- into the cable infrastructure.

We've already begun that work, but we're also in the midst of a -- we think really a technology shift and architecture shift in the way cable operators are looking beyond demand architecture, so in cable in particular we do see greater opportunities in the second half of the year than the first half of the year, so it's not all digital, but we do see sequential revenue growth there for us throughout the year.

Okay.

Again on Adelphia, it looks like, you know, everybody had a got a Good quarter during Q4 in cable, and I imagine some of that had has to too with Adelphia.

Could you at all quantify or give us a sense of how much impact Adelphia is having on the business?

I think it's helpful for us to understand that only because-- we want to figure out how sustainable, especially on the optical access side-- your business is right now.

Well, undoubtedly, Adelphia and the work in the Adelphia systems is part of the equation.

We -- I don't have the specific number for you, but we don't feel it is all the predominant part of the equation.

We really feel that -- we believe in what we observe is happening in the HFC network is broad based, and it's across systems that has nothing to do with Adelphia.

The increasing amount of high definition content is putting a lot of pressure on band width.

The increasing demand of on demand traffic is also putting pressure an the network.

The increasing amount of bandwidth that needs to be allocated to ever--higher and higher [inaudible] access speed in HFC to further to compete with fiber to the home or other high-speed offerings is also putting pressure on the network in both the forward and return path.

So we see these pressures and the result and investment in the NHFC as being the real fundamental drivers, and certainly Adelphia is part of the next-- but not all predominant, and we see a systematic driver.

The reason I asked is because if you look at the guidance for the first half of the year, you know, just takes $70 million per quarter as the mid-point, you know, you just did $75 million, so, in a sense, you know, it seems like, you know, there may have been some budget flush, or I think you mentioned budget flush, and I'm just trying to get a sense of how much, you know, of a spike there might have been in the December quarter.

Well, I think there was some.

As I said earlier, I don't think it was a major factor in the results for the quarter.

I think we do feel, as Patrick said, it is more sustainable.

At the same time with respect to the first half of the year, don't forget that the first quarter is typically a light quarter, usually the lightest in cable, certainly.

Until and so we've taken that into account in thinking about the first half.

It's just simply the year usually gets off to a slow start, budget flush or no budget flush.

Do you expect to get any revenues from the major DBS operator you talked about in the first half of the year

Oh yes, yes we do.

Is that going to be meaningful?

Yes, it's meaningful.

Again, we're -- we're trying to be a little bit conservative, because year not exactly certain of the exact timing of deliveries and revenue recognition and the like, but, yes, it's certainly meaningful.

The last question, and you know, it's -- I don't need a long winded answer, just want you to maybe rank for us the growth rates of the three end markets, let's say in '07.

Well, relative -- relative to '06, certainly the satellite markets would be number one, we see growing investment around the world including in the U.S. we see HD as being a big driver.

And we -- we've won several probabilities as of late.

Regretably haven't announced any of them yet, but we have good momentum in the market at home here and abroad.

And that's number one.

I think -- I think we had a very good year last year in IPTV.

And for us IPTV is perhaps the biggest enigma.

There's increasingly little doubt that video is here to stay as a very real driver for all major telecommunication providers worldwide.

That being said, we continue to struggle a little bit with the exact spending plans and the expansion of the foot print of the existing systems and the timing with which operators who haven't yet entered will enter, so I probably put that, at least in terms of our internal thinks and planning, we're perhaps most conservative about if the growth of IPTV, and that's really because of lack of visibility and how that will happen to the extent spending happens we feel very well positioned competitively.

And cable is somewhere in the middle.

That's the biggest nut.

We see reasonable growth in cable, and we continue to see that we're winning more than our fair share of the investments that happens around -- around video delivery.

So an overall growth rate of somewhere in the 15 to 20% range for the business seems pretty achievable, you think?

I think that's reasonable.

All right.

Thanks, guys.

Your next question comes from the line of Marcus Kupferschmidt from Lehman Brothers.

Please proceed.

Good afternoon, guys.

Marcus, good afternoon.

Just kind of wanted to explore a little bit about the gross margin in the fourth quarter.

Know that's there's always many moving pieces within the sales mix.

You know, it was a little -- it was kind of more in the middle of the range of -- I thought you said you looked for a 43 to 46% range, which is down slightly from 3Q, but as I look at it, I'm wondering, you know, could it have been better, were there any higher margin products that slipped out into later periods within that deferred revenues, or did you take age costs are without recognize something related revenues during the fourth quarter?

I think it's more -- it's really a function of product mix.

The Edge and Access products which typically have lower margins that our video processing products where in the majority in Q4, which is the reverse of Q3, so it is that product mix, to a large extent, much of which we saw coming when we gave you guidance at the end of Q3, and certainly I think you are right to point out that the billed and deferred revenue that we have is mostly, not entirely, but is mostly around video processing projects, projects and products, and so it is likely, if you look at the deferred revenue, that, you know, the mix of margin therein is -- I haven't done this analysis in depth, but it's probably higher than what we reported in the fourth quarter.

So it is partly a function of the product mix, and just in terms of the orders and shipments, and what we were able to recognize.

Okay.

So then within the guidance of 44 to 45, how should we think about what kind of sales mixture assuming, because based on what you said, it sounds like we've got some better satellite opportunities here in the first half.

You know, IPTV unclear, and I'm wondering, do you expect that a mix in the cable, or what should we think about as being the biggest factors in the first half?

Well, I would expect that in the first half we should see -- we should so some improvement, so, you know, the 44 that we reported in Q4 is the bottom end of what we think for Q -- for the first half, for Q1 and Q2, so 44 to 45, so we do expect to see some improvement.

I think it will come again, the biggest driver really is product mix, and given the substantial deferred revenue we have, and the significant number of projects that we have in progress that we expect to realize during the first half, that, I think, is what would drive the margin up.

There is certainly -- you know, I don't mind admitting, there is some up side to it, particularly if the software products kick in harder than we're currently, you know, estimating, but, you know, at this point, I think 44 to 45 is a decent range, given, you know, the back log and the deferred revenue that we see.

Could you maybe quantify how much of the -- of guidance of 135 to 45 revenues would be Entone in the first half?

Well, as Patrick suggested, with $10 million, the $10 million number for the year, and with, perhaps, the stronger effort come being in the second half, that's -- you know, that would suggest, you know, three to four, maybe, in the first half, and, you know, six to seven in the second, some break down like that, given the sort of color that Patrick put on it earlier.

Okay.

And just to be clear.

The guidance for '07, for revenues, thinking potentially business could grow maybe 15, maybe 20%, something like that, and that's including in the Entone, that's not an organic growth rate?

That's all in, yes, that's everything.

All right.

And I'm sorry to keep this going on.

One last question.

Previously on the third quarter call, we talked about the business having a growth rate.

I believe that was an organic growth rate, and this was including a little bit of Entone? is there anything more to talk about within that?

I'm sorry, Marcus, anything about more to talk about in terms of the organic growth rate?

Yes, should we think a bout this as are you guys being more cautious about conversion of revenues, or is it just a little less clear a bout where the IPTV TV market is growing versus --

Well, we are specifically focusing on the first half, and that's where we--I think we have the greatest visibility, even though it's not perfect visibility into what our customers spending plans are and that's why we've given guidance for that, and I think we haven't given guidance for the full year in terms of revenue or specific, you know, year or year growth rate, because the second half of the year still remains somewhat fuzzy for us in terms of the amount of investment that we've made in the different spending.

I mean fundamentally, we believe that the space has grown.

Be believe video delivery is increasingly important, and so we tend to believe that this market is continuing to strengthen and grow with time.

We're reluctant, and have a difficult time quantifying that for the second half of the year.

Okay.

Thanks for the extra time with the questions.

I really appreciate that.

Sure.

Thank you.

Your next question comes from the line of Tim Savageaux from Merriman.

Please proceed.

Great quarter.

Congratulations.

Don't know if we're not allowed to say that anymore or what, but nice job.

Thank you.

You are welcome.

Couple of questions here.

You mentioned, do you think satellite could double, you could see triple digit growth in satellite in 2007? first question, and then I'll have a couple more follow-ups.

I think it's possible.

Okay.

So do I. Secondly, you know, you've made a lot of references to bookings and back log.

But you haven't really explicitly guided down for Q1 seasonally, although I guess we would expect that to occur.

I wonder if you can give us any more details or granularity on a book to bill, you know, a coverage ratio for first quarter, or something to maybe get us a little bit more granular about the degree of your strength in order bookings, was it one big fat satellite order that drove an order number, or was most of the cable book shipped, et cetera.

Just looking for a little more color there.

I think it was actually pretty broadly based in the fourth.

There was certainly a component that was cable book and ship, but, you know, as you've seen from some of the things we've discussed here, you know, the U.S. satellite broadcast, but some of the other wins that we have talked about on this call, today's PCCW announcement and so on, I think it's fairly broad based.

So wasn't one big lump that took us up, or -- we'll publish back log in deferred revenue number in our -- in our 10 K once we've thoroughly scrubbed it.

But, the way we see at the end of the year, back log number deferred revenue or approximately $70 million.

We certainly go into the year, I think, with a lot of coverage.

Some of that revenue clearly won't get recognized until at least the second quarter, depending on the nature of the project, but I do think it was -- it was more broad based. the order intake was a little bit more broad based than perhaps the revenue where it was, I think as I said earlier, 71% cable.

There are a number of satellite and Telco projects that I think are going to carry us through the first half and maybe even into the second half of the year.

I'll do a quick follow-up here and pass it along, and hope to come back later, but cable -- yes, looks like it was up almost 40% sequentially, something like that, 30 something.

Kind of a step function up, and this question has been asked a couple of different ways, but do you view that as more of a blip, or something we could start thinking about your cable business being sustainable around the $50 million level per quarter.

For the near term, we think that cable is quite strong.

On the other hand, we all know that historically cable has never been steady at any one number.

It's one of the reasons why we're actually excited about the strengths that we have these other markets to really, I think, more substantially than before moderate the corresponding variation in revenue.

That being said, we -- the strength that we see in cable, we don't so as a one quarter kind of thing.

So certainly we see continuing strength in cable into the first half of the year, and more broadly, and this gets to more of a qualitative, or overall view of the market.

But more broadly just look for what's happening out there competitively in the United States and else where that the competition is doing nothing but becoming more fierce between satellite, cable, and increasingly Telco operators, so one hand.

On the other hand, you know, the consumers interest in new services, new band width consuming services, penetration, adoption of video on demand, penetration, adoption of wide screen televisions that correspondingly demand higher quality and high definition pictures etc.

All of those are fundamental trends that we think drive the entire industry and we think will drive the entire industry through 2007 and beyond.

Congratulations again.

That's a lot of progress over two quarters, and I'll pass it on.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of Brian Coyne from Friedman Billings.

Please proceed.

I wanted to follow up on a point I think Patrick made earlier about satellites tripling in 2007.

Does that suggest like a $100 million revenue business for you this year?

And if so, can you guess what sort of market share that might imply?

In terms of market share, no, I wouldn't.

I wouldn't.

The satellite, as we think about the satellite, it's wide flung, we're seeing a lot of activity, we're doing lot of business in Asia, in Europe I think the quarter before we announced a deal in -- we announced deals in eastern Europe and Australia.

It's a somewhat fragmented market and I regret that I don't have good numbers in terms of overall spending and I don't have something to quote for you in terms of market share.

We do see broad based activity around the world, not the least of which is here in North America, United States and Canada, and we do see with a lot of activity in cable, a lot of activity in IPTV, we do see a real competitive imperative for all direct home satellite operators to -- to more aggressively than before invest in high definition, and also invest or explore ways of offering on demand solutions to remain competitive with what the wireline guys are doing.

We see the overall market moving up and then of course we see our competitive positioning having -- being strengthened significantly by what we see as really a winning portfolio products, led by the new high definition MPEG-4 encoder.

Got it.

And the revenue in 2006, satellite was about 11% of our total revenue, which would puts it about $26 to $27 million, so even if it were to triple, it would fall short of a hundred.

And you would say that, you know, I guess when you're talking satellite globally, you still have a fair a mount of MPEG-2 demand out there.

And I don't mean to dwell on this too much, but would you think that there's a split between MPEG-2 and MPEG-4 in that outlook? or what do you see the market between MPEG-2 and MPEG-4 for satellite?

Well, you're right.

Most of what is out there is in fact MPEG-2.

Certainly our large effort installed base is MPEG-2, but we see the MPEG-4 wave increasingly moving internationally, and we we think there's a big move, and particularly for high-definition.

MPEG-2, high-definition, it consumes a lot of band width.

Certainly our largest installed base is MPEG-2, but we see the MPEG-4 wave increasingly moving internationally, and we we think there's a big move, and particularly for high-definition.

MPEG-2 high definition consumes a lot of bandwidth and there's a huge satellite transponder space imperative for moving to MPEG-4.

We see MPEG-4 as being the predominant way that people will roll out HD and directive home satellite systems.

Okay.

That's good.

I guess -- and one more I'll try, I guess.

Backing up.

On the encoder market in generally, less so your sales since you're probably -- you're point in the curve is probably different than others in the market, but, you know, what -- do you see in terms of -- you know, either dollar values or units, you know, is there on a way to rank HD MPEG-4, versus HD MPEG-2?

I guess maybe that's hard because you're kind of crossing customer lines as well now.

Well, I think it's actually an interesting question.

Through last year, though certainly there's a lot of interest in MPEG-4, again, the lion's share of the business we did with IPTV was with MPEG-4, and overall, by virtue of the fact that cable is still MPEG-2, the biggest piece of the business for us was actually still MPEG-2.

Going forward, and it's an interesting question in high-definition.

Obviously satellite and IPTV is all going to be MPEG-4.

On the other hand, we really see an acceleration of HD channels being encoded in cable.

So I -- off the top of my head, Brian, I think maybe it's a fifty-fifty mix, between MPEG-4 and MPEG-2, and really splits along the cable and non-cable lines.

Okay.

And then just a couple of quick follow-ups on some custom stuff you mentioned.

On PCW, I think you mentioned in your press release that you supply to all of their channels, and think I just saw on one of their websites, it's about 120 in total? is that right? and then any sense as to when that's likely to ship? assuming its in first half?

Yes, just from a timing perspective, the project is well in process, and, yes, that's in our first half numbers.

And I'm sorry, probably got 120 channels, think? is that what they're offer?

You know, Brian, we don't want to preempt them in terms of their communication to their customers and observers in terms of how many MPEG-4 channels are going to launch.

This is part of their communication campaign as well, and we don't have the approval to discussion how many channels they're launching.

I understand. thought I would try anyway.

Okay great.

Thanks, guys.

Your next question comes from the line of Allen Bezoza from Oppenheimer.

Please proceed.

A couple of questions.

I know a lots been covered.

But first on the U.S. satellite market you know direct TV has been very aggressive in terms of what they've been planning for HD, and Echo Star has been a little bit more cloudy, they kind of talk about but yet I never believe half the things that they say they're going to do.

So can you give us the timing that you see in the U.S. satellite market? , are you expecting one or both to really start moving this year? and I have a couple of follow ups.

Our expectation is -- you know, they have to speak from themselves, but from the outside looking in, we expect both of them to move substantially in HDTV this year.

We think there's a great market opportunity for them, and that they're well positioned to take add van tag of pit.

That's helpful.

And then on the bookings you mentioned a couple times about the strong fourth quarter bookings.

I know that you have said typically you don't give those numbers out, but maybe you could give us something or other to just hold our hat on than just good.

And the reason I ask that had is because you've had good numbers, your outlook is a little tepid given what we think is in the market as analysts, everyone has been asking about the conservatism, but wanted to hear if maybe you could give us some more color on the hard numbers.

Yes, the book to -- book to revenue was about 1.2 in the fourth quarter.

Okay.

That's very helpful.

And my last question is on competition and pricing.

You're in a market set up that are pretty heavily competed in every one of your markets, including the encoding and you seem to be getting more and more intense.

Just can you give us -- certainly with Hamburg, there has been a tit for tat with you guys recently in the market place of investors of who's winning this and who's winning that.

But overall can you just give us a sense on competition is it getting worse or better and where pricing is and where you think it's going?

Certainly in the coding space.

There's no doubt that competition is very intense, and it's one of the reasons that our confidence in our product by virtue of the success we've had in this these competitive situations, our confidence has grown.

That being said, when you're rolling out HD, the importance of video quality ask the importance of bandwidth conservation, I mean that's what is king.

So so we're not seeing tremendous price pressure around that.

It really is more about who has got the better solution, and who can help the operator save a ton of money in terms of the network infrastructure, bandwidth, or alternatively position themselves with pristine video quality.

So while we've seen intense competition, it's really been on the technical basis and the encoding sphere, particularly in the high definition encoding sphere and not so much in terms of pricing.

So put differently, we're very pleased with the introduction of our new products, not only from a market acceptance point of view, but also from a pricing and gross margin point of view.

You mentioned some other products, probably will other classes of products, or we see a little bit more of pricing in the mix, in terms of the whole competitive mix, but by and large,we -- we don't see anything that is not in our plan or that kind of outstrip our thinking in terms of our models for the way pricing deteriorates.

And certainly as we've said, one of the thicks we like about the new products we've introduce is $not only better performance and better capabilities, but they also command higher margins and give us more room to work with in these competitive markets.

Okay.

And when you look on the competition for cable then, specifically with but also on the giga either stuff, and V done very well recently and continue to seem to be doing well the next couple of quarters, so why is it that you're seeing a decline, or some are seeing as a decline some are seeing it as cable.

Is it the NSG server they did some work with the caller and it's ticking back down? is there something that we're missing that seems to be taking off?

I know the seasonality, but seems it's not that strong for most people.

Well, I think it's in part maybe we're over estimating it, but, you know, I've been doing this for quite a while, and it's a pretty common phenomenon that the first just gets off to a slow start in the cable business, so we've certainly factored some of that in.

I then the other uncertainty that Patrick mentioned is on IPTV, and it's not a bout is the business going to happen, it's more about the specific timing of particular projects and our ability to complete them, recognize return, and all of those sort of things.

So I think that's -- that may be the source of -- those, I think, are the sources of, you know, if we are being conservative, I think those are probably the areas where we are being so.

Okay.

That's fair.

And then the last one, and I'm sorry to also hug the call a little bit, but Entone goes in what section? is it video process?

No, we'll put it in software.

All right.

Great.

Thanks a lot, guys, appreciate it.

Your next question comes from the line of John Anthony from Cohen and Company.

Please proceed.

Good morning, gentlemen.

I apologize if someone some of these questions were asked.

I was jumping on and off.

In terms of the price environment for MPEG-4 HD, it sounds like your saying that the evaluations and decisions are still being based primarily on technical merit.

Have you to any new entrance in the market in the last few months? and is that -- first of is that statement fair? secondly if that statement is fair, is that a function of the fact you are one of a couple of players out there with product, and do you expect that's going to change anytime soon, or do you expect the pricing to be fairly constant through '07?

We see the same cast of characters in the market.

I guess the first statement.

So we have not seen any new entries in the last couple of months.

It more than two, but it's a handful of player, and seems to be the same cast of characters playing there.

I think we've come to expect in high technology that the price erosion happens over time, so we do.

So we do expect some amount of price erosion to happen every over the course of 2007, so certainly don't expect flat pricing over 2007, that said we don't expect any type of precipitous falling price.

Particularly in the area of high-definition, really the driving imperative of the customer is really around the quality of the video, of the band width efficiency of the video, et cetera.

Okay.

And then from the standpoint of the increase in the cable business, I know it's hard for you to say right now, but how much of that do you think was kind of seasonality versus possibly a sustainable trend here?

I think we've tried to answer that couple of ways already.

I think that it is -- sustainability is the -- is the more important element than budget flush.

I mean, I think there's no question that there are a lot of things going on in cable, and while no doubt there was some amount of budget flushing, I think the strength in cable was really more about the fundamentals.

And lastly, are you seeing inevidence of increased bundled pricing where some of your competitors are coming in and trying to sell multiple platforms and multiple elements at once?

Certainly that happens, but we have not seen any increased incidents of that.

Great, thanks, guys.

Thank you.

Your next question comes from the line of Eric Beder from Brean Murray.

Please proceed.

Thank you, good afternoon, guys.

First for Robin. [inaudible] and mapping from the GAAP to proforma on this amortization of intangibles. $1.2 million of that is charged to the gross profit line and then you had $200,000 to expenses in addition to the 291 separate line item is that correct?

Yes.

Let me just double-check.

That sounds right.

Okay.

So 291 will be kind of the ongoing intangible amortization, or does that kick up a little bit with four quarters worth on [inaudible]

No, that will become -- those numbers will become bigger as we go forward with Entone, because we only closed if December.

So this is only a portion of it, of what would be the normal quarterly charge.

And the other thing that I should point out as we said in the press release, we're still finalizing the purchase accounting on Entone, so some of the numbers there could change the valuation of the intangibles, so could change between now and the time that we file the 10-K.

Okay.

Secondly, you know, with the release of the HD MPEG-4, which, you know, was an area you were lagging, could you quantify at all how much that has actually helped you since its release?

Well, I think it's been an important product for us.

I can't tell you that, you know, since the -- since the release of the product we have over 20 customers that we've received orders from and shipped to, so, you know, that in and of itself, I think is important.

In terms of significance, the revenues, are we at material levels now in terms of recognized revenues, or is that still to come?

Not to any great extent.

There's not a lot that we've recognized so far.

Most of these orders, and certainly the shipments were made relatively late in the year, and many were made as part of ongoing projects where the revenue is more likely -- or will be recognized most likely in either Q1 or Q2, so not a great deal of revenue in Q4, but, as Patrick said, a growing number of customers and unit shipments.

Okay.

And then finally, with the [inaudible] proposed merger assuming that goes through, can you take about what the opportunities or risks might be from that combination?

Well, I -- you know, I don't -- we don't see a big change to our positioning in the market one way or the other tremendously.

In cable, think all three companies are really very well known to the leading cable operators a round the world, and our sales are by virtue not of the size of the company, but on the strength of the technology, we really tonight see that situation changing, and I guess more generally, we see that we've got a tremendous amount of positive momentum, positive competitive momentum, and we think our customers recognize this, and we see thats a being the big driver of our business, and we don't see any substance of change in -- we don't anticipate any substance change in the competitive environment.

Okay.

Great.

Thanks.

Thank you.

Your next question comes from the line of Paul McWilliams from Indie Research.

Please proceed.

Hi, guys.

Thank you have, and great year for your first year there, Patrick.

You do expect to have second half growth over the first half if I understood you correctly.

Is that right?

Qualitatively, yes, but the truth is, and the reason why we're not giving specific guidance is we don't have a good handle on our customers' spending budgets, et cetera.

So my qualified answer is really on the context of we look at the market fundamentals, at the competitive imperatives, the services that we think are going to be rolled out, and we like what we see.

Do we have, you know, budget data from our leading customers to put behind that model until unfortunately we don't.

Okay.

Last year, or 2006, you showed 26% growth first half to second half.

Is that unrealistic to even dream of that this year?

I don't think it's unrealistic, but I think last year was a little bit unusual, and simply the fact that as we said from the beginning of last year -- at the beginning of last year, we still saw cable not completely, but very much preoccupied with the rollout of their voice flat form, and I think to good effect, and we really saw a dispute back to focus on video in the second half of the year.

We anticipated this throughout the year, and it kind of played out that way.

We don't see any kind of such a -- a dramatic change in focus, and investment in 2007.

We do see fairly consistent focus on video as part of the overall initiatives within the cable industry in a more sustained fashion throughout the year, although again with the caveat that we have less visibility into specific plans for the second half of the year.

So if I just model, just for my modeling purposes, 10 to 15% first half to second half, that would probably be reasonable?

You know, I wouldn't disagree well you, but I -- I -- I think I have to say that I -- I'm not sure.

Okay.

Thank you.

I didn't mean to put you a corner on that.

I was just trying to get a good feel there.

On the Time-Warner, I've heard that they're going to expand their start over program, their Emmy award winning program.

Is that a second half event, or a first half, or do you know yet?

I don't feel comfortable or in a position to comment exactly on what their plans are.

I mean, we will say that in general, we believe that the general -- the notion of the model of time shifted television and the expansion of the video on demand models to allow you to do all kinds of things with time shifting even regular broadcast television is a powerful paradigm that we expect to see more and more of with increasing frequency, not only from Time-Warner, but from other major operators throughout the year.

It's part of our whole philosophy and steering much of what we do towards promoting general on demand services. [inaudible] behind our acquisition of Entone [inaudible] solution with our offline storage encoding, et cetera.

So we -- it's definitely something that we think will be a major growth factor for us in 2007 and in 2008.

Okay.

So it's not on the books and schedule, can I take that from your comments right now, the expansion? they have announced the expansion of it, and I was just trying to get it if it's something already on your books.

No.

Okay.

OpEx, was that flat as a percentage, or flat in dollars, Robin?

I'm sorry, I should have made it clear.

I was thinking in dollars.

Got you..

You came in at I think 33% proforma OpEx for Q4.

Is that a reasonable target for 2007, or do you think that you'll be able to cut that down a little bit more?

I would like to see us cut it down a little bit more.

We certainly were trying to position the first half, and certainly the first half and probably in the whole year as one in which operating expenses grow by less than the rate of growth of revenue.

That's very much a goal.

There will somebody gives and takes if there, but I would like to see it come down closer to the 30%.

Now, what's your GP target for 2007, just a rough number or range.

Well, in terms of percentages, you know, I think -- I still think it's our stated model, and remains our stated model for now, is that gross margins should be approximately 45%, and operating expenses in is in the low 30's, and ideally at 30%.

I mean, that's -- that's the model we're -- you know , we've had for some time.

And while I think there is some opportunity to increase the gross margins over time, as the product mix begins to undertake some structural shifts, I guess I'm not quite ready to go out and proclaim that yet.

So at this point, I would say 45%, and operating expenses somewhere in that low 30's, that low 30's range.

It looks like of you got the foundation to do that.

I think we do.

I do think that, yes.

I'm very pleased with the progress.

I wasn't just an idle compliment there.

Two real quick questions on satellite, having to do with the PCCW and the U.S. contract.

Is there any way that you can give us a rough order of magnitude on those contracts dollar wise

No, I think not.

Okay.

By virtue of what we've heard that the targeted value of the two U.S. satellite companies spending would be in Q4, do you feel like there's more to come yet in the first half from the two U.S. satellite companies?

Yes, we do think that there's more to come.

Let me augment on that or expand on that a little bit.

I think earlier in the fall, we and much of the market were anticipating, you know, kind of single blockbuster decisions and deals happening in the second half of the year.

And we -- I think our understanding changed.

We understood better, and I think we publicly communicated in the webcast that we've subsequently understood that there would be -- that these blockbuster decisions, and you will, were probably more likely not going to happen, and instead we would see smaller, if you will, segmented decisions.

Probably extending over a period of six months.

And at least so far, that's the way we've observed it playing out.

So we're pleased with having been awarded some of that early business, and in that context, and we still do see additional good opportunities into the first half of the year, and we feel very well positioned for those.

Excellent.

One last one here, and Patrick, I think you'll like this question.

What kinds of new technology would you like to develop or buy in 2007?

Well, is it going back to the beginning of your question?

I mean, we were talking about on demand and time shift to television.

We're very interested in the entire flow of video traffic over a distributed IP network, and particularly what happened is that network evolves from a broadcast to an on demand delivery platform, and everything that we're doing internally organically is certainly aimed at facilitating that transition.

And you can just imagine there's a whole variety of things from encoding to stream processing, all the way to the edge of the network that we're involved in.

And that's the big focus of our engineering, of our advanced development groups, and I use the phrase adjacent technologies.

We think there are a lot of things that are beyond what we have the resource to do internally, so we continue to look at adjacent things that support more localized, more on demand, more personalized video delivery, and so both organically and from an acquisition perspective, that's the strategic theme.

We think it's an area where there will be a lot of investment a lot of growth opportunity and, we're looking externally and internally to grow the company.

Thank you and congratulations again on building a great foundation.

Can't wait to see what comes of it from this year.

Thank you.

Your next question is a follow up question from the line of Nikos Theodosopoulos from UBS.

I'll make this roll quick.

Robin, paced then comments you made about backlog and deferred being $70 million, can I interpret that to mean that back log specifically ended the year at $40 million, up from $35 in '05?