Harmonic Inc (HLIT) 2007 Q4 法說會逐字稿

Good afternoon.

My name is Christian, and I will be your conference operator today.

At this time I would like to welcome everyone to the fourth quarter 2007 Harmonic Incorporated earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) Thank you.

And now we would like to turn today's call over Mr.

Patrick Harshman, President and CEO.

Thank you, and good afternoon everyone.

I am Patrick Harshman, 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 fourth quarter and year end 2007.

It was an excellent quarter and an excellent year for Harmonic.

We established a very strong market leadership position in advanced video delivery technology.

With our new products and solutions being deployed across multiple customer markets and geographies.

We did a great job building and strengthening strategic relationships with key customers around the world, and succeeded in anticipating our customer's needs, and delivering compelling first-to-market solutions for advanced video services and applications.

Our solutions were selected to power many of the highest profile digital video deployments around the globe in 2007, driving our strong top line growth and continued revenue diversification.

Our team has also significantly strengthened our internal execution and operational efficiencies, further enabling consistent improvement of our gross margins, and driving strong bottom line growth.

While we are very pleased with our 2007 results, we are even more excited about our strong market position heading in to 2008.

The fundamental strength of our business, and our pipeline of powerful new products position us extremely well, to take further advantage of the grow breadth of opportunities in the global video delivery marketplace.

Opportunities that span our traditional cable and satellite markets and also newer markets, such as telco broadcast on the Internet.

From watching the Super Bowl in High Definition this coming Sunday, to watching user generated content on the latest video iPod, video services have never been more relevant to more consumers than they are today.

Competition between providers of video services has never been more intense.

It is a great time to be working in this market, and we believe we are very well-positioned to continue to lead.

With that introduction, I will turn it over to Robin to cover the financial aspects of the quarter, and I will then review some of our recent business developments, and strategic initiative in more detail.

Robin?

Thank you, Patrick, and good afternoon, everyone.

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

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

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

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

Please also 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 posted on our website, and filed with the SEC on a Form 8-K.

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

Today we announced results for the fourth quarter and year ended December 31st 2007.

For the fourth quarter, we reported net sales of $88.4 million, up 17% from $75.3 million in the fourth quarter of 2006.

For the full year, our net sales were $312.2 million, up 26% over 2006.

We saw sequential revenue growth in both domestic and international markets.

International sales represented 43 and 44% of revenue, for the fourth quarter and for the full year respectively.

Our largest customers in the fourth quarter were EchoStar, Comcast, and Cox, representing 18%, 13%, and 11% respectively of our total revenue.

By market, cable customers in the fourth quarter accounted for 54% of total revenue, satellite 24%, and telco and others 22%.

For the full year, cable was 60%, satellite 21%, Telcos and others 19%.

In-line with our strategic objectives, we are very pleased to see our revenue coming from these diverse geographies and markets.

By product category, video processing product represented 48% of our revenue in the fourth quarter, Edge and Access 34%, software services and other 18%.

As we saw in the third quarter, this mix of a higher proportion of video processing shipments, combined with an increase in our services and software product lines, had favorable effects on our gross margins.

Non-GAAP gross margins in the fourth quarter were 48%.

In addition to the benefits from the product mix, the strong sequential increase from the third quarter, was due to ongoing reductions in product costs, and of course the absence of an inventory write-down, which we took in the third quarter.

As we anticipated on our Q3 call, our non-GAAP operating expenses in the fourth quarter were up on a sequential basis, about 1.5 million.

First we continue to invest in people to grow our business, particularly in R&D, and in international sales, marketing, and support.

In addition the higher revenue and profitability levels, lead to higher expenses for incentive compensation across the Company.

We also had a full quarter of Rhozet expenses in Q4.

Our total headcount at the end of the year was 658, up by 14 from the end of September, but actually a net increase of only 19 from the end of 2006.

For the full year, our non-GAAP operating expenses grew over the prior year by 5%, compared to a 26% increase in sales.

During the fourth quarter, we completed a follow-on public offering of 12.5 million shares of our common stock, for net proceeds of approximately $142 million.

Mainly due to the financing, our interest and other income grew to $3 million in Q4.

I should point out that this income includes interest received of approximately $650,000 for customer project financing, which we provided a few years ago.

There is no more interest to be received from this customer, so this item will not repeat itself in Q1.

GAAP net income for the fourth quarter was $13.3 million, or $0.15 per diluted share.

Up from $5 million, or $0.07 per share, for the same period of 2006.

For the full year, GAAP net income was $30.1 million, or $0.36 per diluted share, up from $1 million, or $0.01 per share in 2006.

Excluding excess facilities charge of under $500,000, and also non-cash accounting charges for stock-based compensation and the amortization of intangibles, our non-GAAP net income for the fourth quarter was $17.1 million, or $0.19 per diluted share, up from $9.9 million, or $0.13 per share, for the same period of 2006.

For the full year our non-GAAP net income was $43.3 million, or $0.52 per diluted share, compared to $13.9 million, or $0.18 per share for 2006.

Our recent public offering and strong operating performance has considerably strengthen our balance sheet.

At the end of 2007, we had cash, cash equivalents, and short-term investments of $269.3 million, up from $99 million at September 28.

The increase in our cash of course includes the financing proceeds, but also over $25 million of cash generated from operations.

Our receivables were $69.6 million, with DSOs of 71 days, down from 76 days in the previous quarter.

We are pleased with the continuing positive trend in our DSOs.

Our net inventory was $34.1 million, down from 36.3 million at the end of September.

This reduction mainly reflects our success in selling the new products, for which we had invested in up-front inventory earlier last year.

Though is it possible that our inventories could fluctuate in future quarters, our greater focus on inventory management shows in the improved inventory turns during last year.

Finally our capital spending in the fourth quarter was 1.7 million, and 5.9 million for the full year.

With respect to the outlook, we go in to the next six months with strong momentum.

We had backlog and deferred revenue of approximately $98 million at the year end, an increase of about $8 million from the end of the third quarter.

Although we expect to see the typical seasonal slowdown in first quarter bookings, we believe that our market position is strong, and provides a solid foundation for continued growth.

We currently anticipate that our net sales for the first half of 2008 will be in the range of 165 to $175 million, and gross margins will be 47 to 48% on a non-GAAP basis.

Excluding stock-based compensation, and the amortization of intangibles.

We expect the GAAP gross margins for the same period will be in a range of 43 to 44%.

I also want note that in the first half of 2008, we do not anticipate any significant changes in our tax position.

In other words, we expect modest provisions in the first half that will be in the range of 5 to 10% of pre-tax income.

We will, however, continue to evaluate each quarter, the potential release of our valuation allowance.

Clearly, if we continue to be consistently profitable at these levels, we will eventually reverse the allowance.

At that time we would expect to have a more substantial tax provision going forward, even though we would not yet be paying significant cash taxes at that point.

We will continue to provide you with updates on this topic, as we move throughout the year.

In summary, we are extremely happy with our results for the fourth quarter and the year, and we remain optimistic about our opportunities for profitable growth.

Our strong performance and sound financial position give us an excellent foundation to grow the business, and continue to pursue selective acquisitions.

Patrick?

Thanks, Robin.

Underlying our strong financial results as been the diversification of our business across a broadening range of products and solutions, customers, and geographies.

As we move in to 2008, we believe we are very well-positioned, with the broadest and best product portfolio the Company has ever had, and the strongest global presence and reputation that the Company has ever had, at a time when the global video delivery market is the most dynamic it has ever been.

for cable operators worldwide, there is intensifying competition from direct to home satellite players, IPTV providers, and new internet based video services.

Cable's competitive response is more High Definition programming, more and easier to access On-Demand content, and higher speed data access, that can flexibly support IP-based and video services.

Harmonic's powerful new solutions for these applications are setting us apart in the market, enabling us to deepen our relationships with existing customers, and realize good success in penetrating new accounts, with significant new customer wins recently in Europe and in Asia.

The MPEG-4 ABC High Definition encoding deal we announced this morning with C&M in Korea, the first such cable deployment in Asia, is a good example of our expanding geographic and technology leadership footprint.

Beyond ultra-efficient High Definition encoding, other new solutions we see gaining good traction in the global cable market, include our new software-based solutions for On-Demand content preparation, management, and delivery, our edgeQAM based solutions for switched digital video and modular CMTS applications, innovative new WDM solutions for bandwidth expansion, and web content management applications for web to TV integration.

We have also continued to see our competitive position strengthened in the satellite direct-to-home market, where we have been very active with the leading satellite operators in both the U.S.

and internationally.

The cornerstone of our competitive success in this market continues to be our market leading Electra MPEG-4 High Definition compression solution, encompassing state-of-the -art encoding, [YDR ESTAT] muxing, and IP-based service management.

And we see substantial opportunities with the ongoing global migration to MPEG-4 based High Definition services in 2008.

We also continue to see our solutions driving new kinds of video services and business models for satellite operators.

We recently announced the Trinity Broadcast Network has employed our High Definition, and standard definition encoders, and statistical multiplexing, to help them serve their television and cable affiliates worldwide, via 54 satellites, and we are having good success supporting a number of satellite operators beginning to deploy new On-Demand services.

More On-Demand video delivery, and web to TV integration, are also key service drivers in the emerging IPTV market, where we further strengthened our leadership position with new customer wins around the world, as well as with significant follow-on orders from our established telco customers who are expanding their video offerings.

We continue to see IPTV as a gradually maturing business, but one that is steadily moving forward, and putting real competitive pressure on competing cable and satellite operators.

With our expanding list of blue chip internation IPTV customers, we feel very well-positioned to continue to benefit as this market grows.

Our solutions also continue to be deployed by an expanding range of new customers working in other parts of the video delivery value chain.

Broadcasters, content aggregators, and content preparation companies.

During the quarter, we announced that TBN, a leading aggregator and distributor of On-Demand content, deployed our High Definition encoders for ClearCut offline content preparation software, for it's HD On-Demand assets, to support broadband cable and telco operators.

We are also extremely pleased that our newly acquired Rhozet video transcoding solution is gaining strong traction in these new markets.

As we announced Rhozet was recently selected by Screen Subtitling Systems, [Naviasat] Broadcasting, and Lifetime Networks.

This is exciting new business that validates the power of the Rhozet technology, and provides valuable strategic entries for Harmonic, into these new accounts and markets.

Our successful acquisitions of Rhozet and Entone, demonstrate how Harmonic is focused on expanding our position on the technological forefront of the evolving video delivery marketplace.

For example, you may have seen some of the present press coverage generated by our latest work in the area of internet to TV integration.

Work that leverages both Rhozet and Entone technology.

While our internal research and development team continues to develop great new products and solutions, our strong financial position will also allow us to continue to pursue selective acquisitions, to further enhance our technology and market reach.

In summary, 2007 was a truly outstanding year for Harmonic.

We are particularly pleased with our success in extending our customer base, across a wide range of domestic and international operators.

Our powerful and growing portfolio of new video delivery products and solutions have established us as a clear market leader, and driven our strong sales growth, improved gross margins, and increased profitability.

We entered this year very focused, and with the strongest competitive and technology position we have ever had.

The key trends toward more High Definition, On-Demand, and anytime/anywhere video, continue to intensify and reshape the video delivery marketplace.

We will continue to extend the breadth and depth of our product solutions, to address those major continents, working with our expanding global customer base, to take their video services in exciting new directions.

This concludes the formal part of our presentation.

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

Hello is our operator, Christian there?

(OPERATOR INSTRUCTIONS) Our first question comes from Brian Coyne with FBR Capital Markets.

Hey, guys.

Good afternoon.

Brian.

Good afternoon.

Nice job on the quarter!

Couple of questions.

First of all, I was wondering if you could talk about margins in the next quarter.

Obviously you see a little bit of seasonality there.

But I was wondering if you could help us out with what you see in terms of mix, both product and sort of customer-wise, and how much of an influence is that over your outlook?

And then secondly, I also want to talk a little bit about your telco outlook in particular.

Deutsch Telecom today announced, I think they are targeting around 500,000 IPTV subscribers by year-end '08, which is 4 times the subscriber growth of last year.

I was wondering about whether you see this as a big driver for your compression business with telco, or is it more or less just Deutsch Telecom adding subs to the infrastructure that they have already built out?

Let me handle the first question.

I will leave the second one to Patrick.

On the outlook for the margins, we have given a little bit tighter range than normal, 47 to 48%.

I think if you look at our two most recent quarters, the one we just reported and the third quarter, and you take out the inventory adjustment we had in the third quarter, we had a 47 and 48% quarter .

So we are really suggesting here a continuation of that level of activity.

You know, we see possibly some subtle changes in product mix over the next six months, but nothing so dramatic that it would cause us to suggest anything different from what we have suggested, which is essentially that we think we can maintain our margins now in the higher 40s, rather than the mid-40s, where it has historically been our

And regarding the telco question, first let me point out that last quarter was a quite strong quarter for us, the strongest that we had in 2007 for our telco and other customers.

And certainly going forward, we continue to see this segment as an important driver of growth for the business.

Just about, just under 20% of our revenue last year, we think it represents really a key part of our strategy of diversifying our customer base, and looking for additional growth drivers for the business.

I think as your question suggests, and as we have pointed out before, it is hard to overgeneralize when talking about the IPTV market.

You have a wide spectrum of operator, everything from our customer PCCW in Hong Kong which is very mature, and has about 50% market share, and competes head to-to-head with the cable operator, to obviously a whole raft of much less mature operations.

As you point out it is great to see Deutsch Telecom, our customer as well, their business, their experience with this business, and the business itself continuing to mature and expand, and we certainly see the expansion of the existing customer's business that we have as an important driver of growth.

In fact, the revenue that we have seen in the last two quarters from the telco segment has been roughly equally balanced between follow-on orders from existing telco customers, as well as revenue derived from new customers that are just establishing service.

Do you think during 2008 you might be able to see a telco customer hit 10%?

A single telco customer?

Yes.

Probably not.

All right.

Which frankly is part of the beauty of the market.

There are so many of them doing so many things around the world.

Okay.

That is fair.

One other quick one, regarding Rhozet and the transcoding opportunity, specifically with cable operators, and the broadcast, MPEG 2/MPEG-4 issue.

How big do you think this really could be?

And maybe if you could give us a sense as to, is there an urgency that you are detecting on the part of the cable operators, to address issue with HBO and some other guys, move more toward MPEG-4 broadcasts?

Certainly in the case of real time transcoding dealing with incoming signals and MPEG-4, turning around those signals, so translating it from MPEG-4 to MPEG-2, is an important application, most of what we are doing in that area is real time.

And actually the Rhozet technology is not being targeted for that application.

Rhozet is being used more for the offline file-based world.

And there the big thrust is around initiatives, which cable is becoming very interested in, which is appropriating and pulling in web and internet-based content, and delivering that to set-top boxes, so people can watch it on their televisions.

Great.

Thanks, guys.

Thank you.

Our next question comes from the line of Vivek Arya with Merrill Lynch.

Thank you.

Patrick, my question is as I look at your first half '08 outlook, it is about 20%, if my math is right, about 20% growth compared to first half '07, and actually an acceleration from your Q4 of 17%.

Where is this acceleration coming from?

Where is this upside coming from?

Is it organic?

Is it based on some of the acquisitions?

I am just curious, you know, where are you seeing this upside from?

You are right, it is year-over-year upside.

Another way to look at it, and the way we are currently facing the market in the short-term, it's a continuation of the strong momentum we have seen in the second half of '07, and there from our perspective really the beauty of what we have seen, is very balanced revenue.

I mean cable last quarter 54%, satellite something over 20%, telco and other just over 20%.

And so there isn't a one customer or one specific application that I would point to, but really a continuation of the strong global momentum, across different customer types, and across different applications.

And to go one level deeper, as you point out part of this is for us being facilitated by the expansion of our product offering, which has certainly been facilitated by the acquisitions we have made, and us actually spinning new versions of that technology into broader products and solutions, marrying it up with other things that we are doing for our existing customers and markets.

I can't put my finger on it, and tell you, gee, it is what happened in Q4, and I think as the results show, is derived from any one specific application.

I see, and do you think, based on the visibility you have so far, do you think this kind of trend can continue in the second half of '08, and if not, why not?

Well, I think it is a little early for us, and one of the reasons we haven't given full-year guidance is that the second half of '08 is far out, and one of the reasons we have been sticking with the rolling 6-month guidance.

Now I would say it is clear us, the fundamentals underlying the market.

When these worldwide transitions from MPEG 2 to MPEG-4 from standard definition to High Definition, to service providers offering more than just video to television, and video to a whole raft of different video consumption devices large and small, these are very real.

And the intensifying competition for subscribers between the service operators, those are also very real.

Our two-year view is these trends actually continue to accelerate and intensify.

We don't see any stepping down from any of the major players from this intensifying battle.

And our goal and what we continue to work towards and execute against is benefiting from the breadth and the depth of this intensifying battle.

One question for Robin.

Robin from your comments, it seems like gross margin can actually hold on quite strong, and I'm surprised, because I thought that as you start recognizing some of your cable revenues, that is going to put some pressure on gross margins.

Is that coming in the second half of '08, that's why, you know, we haven't discussed it?

Or when do we start seeing some impact from the cable, or did we just overestimate that impact to begin with?

Oh, I think some, certainly some people may have overestimated it.

I think I have always tried to portray it as having, there is more upside potential to margins than downside, and clearly not everything we sell is going to be above the corporate average, but I think certainly the history of the last two quarters, and as we see our backlog and our pipeline, and we have fairly good visibility certainly into the next six months, as we look at that, we simply see that the gross margins are sustainable, we believe, at these levels, and so you are right.

I mean certainly we are looking for growth in, really all over the cable sector, but in certain product lines that have lower margins, but when we add everything up, the net effect is still very positive.

All right.

Just a last question, if I may.

How do you see OpEx trending through the year?

You know, I think your long-term target is to get to I believe around 20% or so operating margin on a non-GAAP basis.

Do you know we stay at current levels?

Do you see upside to this 17% or so operating margin you reported in Q4, or how do you see sort of the trajectory of OpEx during the year?

Thank you.

Okay.

Certainly as I pointed out in the prepared remarks, we had a pretty exceptional year last year, where we grew revenue at 26%, and operating expenses at 5%, and I think realistically we can't assume that the growth rates are as different as they were in 2007, so I do think that you should expect to see operating expenses with continuing modest increases as we step through the year.

Clearly we will modulate our hiring in particular, depending on business conditions, how good or how weak they may be, so I don't want to put a stake in the ground much again beyond the next six months, but I think for that period, I would say it is reasonable to expect some modest increases in operating expenses over the next couple of quarters.

Thank you.

Our next question is from the line of Greg Mesniaeff with Needham & Company.

Yes, thank you.

Congratulations on a nice quarter, guys!

Thanks.

Two general questions.

Looking at the satellite business, as a percentage of total revs, it was down versus the third quarter, and yet one customer, namely EchoStar was disproportionately large.

I am just kind of wondering if you can address the general lumpiness of that business, and how that could play out in '08?

I mean, do you have good visibility right now on the satellite book of business?

Or is that kind of like we will see how the order patterns shake out?

Well, first, Greg, it is important to recognize that the satellite business itself is, worldwide is a relatively small number of large players.

Statistics tell us there is not an inherent lumpiness in that satellite business.

For that reason we don't tend to look at what happens in one quarter as a microcosm for the overall business.

We feel like we have had a very strong consistent year working with our customers, because of revenue recognition, et cetera.

Some quarters actually turn out to be relatively larger than others.

So with the understanding that satellite operators globally are relatively few in number, relative to cable operators, and IPTV operators, with that understanding, that being an inherent part of the business we do with them, the business has been fairly strong and consistent, and we have got fairly good visibility.

We have done very well with the U.S.

operators this year.

We expect that to continue to maintain the close partnerships with the U.S.

operators.

But equally we have seen strong and growing traction with large operators internationally.

Particularly ones who weren't originally our customers.

As they have gotten to see our new technology, we have really been breaking in to some new accounts.

As we think forward, we continue to be excited about the satellite market.

We think there will probably be a stronger international flavor to the business that we do in '08, and yes, quarter-to-quarter there may be some variation, just going back to the inherent nature, the large size and relatively small number of these operators.

Great.

That is very encouraging as far as the visibility that you are seeing.

Turning to the cable business, I guess my question is the two greater than 10% customers you named, Comcast and Cox, was that mostly the edgeQAM products, or were there some optical node business there as well?

I don't think we want to talk specifically about what products went to what customers, but I will say in general, and one of the reasons why we like the cable space so much, and why we think we are so well-positioned there is, what we do actually covers a broad range of products.

No particular order, obviously High Definition is a big deal in cable, we continue see good results from our High Definition encoding and processing products in cable, we continue to benefit from a strong market leadership position in edgeQAM.

Here it is VOD has been the main historical driver.

We are also very encouraged by the outlook for the newer applications, so switch to video is an important future driver that we have talked about, and increasingly modular CMTS business.

We have been very pleased with the traction that we have seen in the Modular CMTS applications.

We think our product is particularly strong for that application.

We have had some nice wins recently.

And perhaps of all of those application on a quarter-over-quarter basis, that third area is the one where we have become even more encouraged from an edgeQAM perspective.

HFC continues to be a strong business for us.

Last year was our strongest year in HFC in quite a while, very strong business, and I also mentioned some of the new video products where we are seeing some good success, the On-Demand video streaming, content management, some of this new web-to-TV integration.

We have got a lot of irons in the fire with cable, all of them are actually generating a lot of interest with cable operators, in a given quarter different things are happening with different cable operators.

But in aggregate a broad-product portfolio that is seeing good traction with our large cable customers, domestically and internationally.

Thank you.

And Robin, just a quick clarification on the OpEx comments you made.

In the fourth quarter SG&A was up as a percentage I think over 200 basis points sequentially.

I was wondering how much of that is due to year-end, commissions and sales payouts?

And how much of that is just new expense levels associated with the acquisition, and just expansion?

It is a bit of everything, Greg.

I think as I look at the first quarter, certainly some of those elements will probably fall off, including the incentive compensation one, which was clearly having an influential in both the third quarter and the fourth quarter.

At the same time the first quarter is a relatively long one.

There aren't have many vacations, the FICA taxes kick in, and there are a lot of sort of mechanical and structural things that tend to push first quarter expenses up.

We are continuing to hire.

So I wouldn't say there is any one huge factor.

It really is a combination of a number of things.

Okay.

Just what was the D&A in the quarter?

In the fourth quarter?

I have got it, let's see, I think it was about 1.5 million.

And I am just talking about equipment, and so on.

I am not talking about intangibles, and so forth.

Right.

Right.

Maybe a little bit north of that.

I actually don't with the number quite at hand, but it is probably around 1.5 million, maybe a little higher.

Great.

Thank you.

Our next question is from the line of George Notter with Jefferies & Company.

Thanks, guys.

Just wanted to ask you a question about the guidance.

In that guidance, I guess I am trying to understand what was included for the edgeQAM opportunity around Comcast for SDV.

I think coming out of Q3, you mentioned that you guys really hadn't built it into the rolling six-month guidance.

I guess I am trying to figure out if it's now built in to the rolling six-month guidance at this point.

And as part of that I was wondering if any of that is starting to show up in backlog or deferred revenue?

Thanks.

I don't want to get in to too much specific detail on any one customer, or on any one particular project of that customer, but I think it's fair to say it is consistent with what we had talked about before, we had seen, and we spoke about having seen orders in the second half of last year.

We had talked about making shipments in the fourth quarter, which happened.

We did not have significant revenue recognized in the fourth quarter, and so there is definitely some deferred revenue being carried over in to the first quarter of the year.

Got it.

Is it --

And our expectations of course are factored in to the six-month guidance that we have given you.

Got it.

Okay.

Fair enough.

Thanks very much.

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

Hey, good afternoon, guys.

Hi, Marcus.

Good afternoon.

First thing I wanted to ask, and I understand your comment about your liking to stick with the six-month rolling guidance, and certainly that has been a very effective way to communicate with the Street.

If I remember, though, during the course of Q4 you mentioned in some conferences and some webcasts, feeling that the addressable markets for the Company could grow 15 to 20% for '08, and I am just wondering, it seemed like you were kind of saying that was a reasonable target for the business, because you didn't you were losing any market share.

And I was just wondering if you could kind of help us understand how we should think about those prior comments relative to certainly your laying out some guidance in the first half of the year?

And I have a couple of follow-ups after that.

I would say those general are our outlook, and those general numbers haven't changed.

It is hard to measure these things, and we try to find as much independent outside research, or analysis that does that.

And to the best of our understanding, our expectation is that certainly for the traditional core products, we see the overall spending, I think 15, maybe to 20%, seems like a reasonable number for the growth of the industry.

And I will reiterate the comment that we think in that context we should be gaining market share.

Okay.

That is very helpful.

In terms of the commentary, the telco business and broadcast had a very big spike-up in Q4.

In the past we said telco was the key driver, broadcast is still not critical enough to the overall sum, is that still the case?

Also do you think [vi to am] is just largely driven by telco and do you expect it to be lumpy, or did something change in the environment for telco, where you start to feel better about the growth trajectory of that sub-sector of your business?

Yes, to the first point it is mostly telco business as we pointed out, we are making some in-roads with some of the content providers, and terrestrial broadcasters as well, but the majority of the revenue in this segment is from telco space.

You know, we have commented before on the fact that we have multiple projects under way at any one time, none of them in 2007 were particularly large, certainly compared to what we might have done in 2006 with someone like Deutsche Telecom.

So we have a relatively large number of reasonably small projects.

We happened I think it really is just more coincidence, we happened to get a lot of them closed out and signed off in Q4, enabling us to recognize revenue on them.

So I think the good news about the telco business is that there are, we have a lot of customers, and as Patrick indicated, more and more of them are coming back for expansion, so I do agree that I think over time we are going to see continued growth in the market.

It may be a little bit erratic from quarter-to-quarter, but overall we are feeling pretty good about the way the market is developing.

Okay.

And if I could just clarify, just in terms of the overall corporate leverage and targets, I mean your gross margins getting up in the higher 40s, I would think that that can help to drive, you know, the higher teens operating margins.

You keep your OpEx below 30%.

Are you finding ways of getting more leverage, is OpEx going to stay around 31 to 32% of revenue on a non-GAAP basis?

Yes, as I said earlier, we got a lot of leverage in '07, because we were able to keep our operating expense growth very low, and that I don't think is something that you should count on for us to be able to repeat, at least on that scale.

So I think to be able to support the growth opportunities that we see, we are going to have to continue to selectively add people as we have been doing for most of the year, so I think, getting below the 30% operating expense, getting below 30% for that ratio is, I would say, is something at this point I don't think I want to put out there.

I am, as we have said, we are pretty confident that we can get gross margins, keep gross margins in the 47 to 48% range.

So even at 30% then, that should give us the capability to be somewhere between 15 and 20% in operating margins.

Thank you very much.

Sounds great!

Our next question is from the line of Eric Buck with Brean Murray.

Good afternoon, guys.

First of all the on the Rhozet business, one, can you give us a sense of how large that was in the quarter?

And then secondly, we have had a number of deals that have been announced by them.

Can you kind of scale, smallest to largest, in terms of what the magnitude of any of these individual deals can be?

Well, I think the important thing about Rhozet, Eric, is that Rhozet is taking us in to what for us is relatively uncharted waters, in areas where we are not as intimate with customers, and don't have as good of an understanding of what they are doing.

I think that really is the significance you should take away from the press releases.

Rhozet has only been shipping product for a little over a year, and from a financial point of view, the direct impact on our P&L at this point is relatively modest.

I think the significance is really more in where they are taking us with respect to new customers, and also where we are take the technology and the products, with respect to existing customers, and I can let Patrick expand on that if you would like.

But as I say the significance of the press releases, and we have had several, I think again is really more the areas that we are now engaged in, where in many cases we were just simply not there before.

So we are measuring these deals in the hundreds of thousands, not in the millions?

Yes, I think that is a reasonable observation, yes.

Okay.

And then the other thing is, you guys have pretty good visibility on the cable side of the equation, in terms, in both the issue of bandwidth recapture through whether be it switch-digital video or compression, and on potential for bandwidth expansion for adding, going to 1-gig or higher networks.

What is your view, or what are you hearing from the operators today, in terms of where their priority is between those two methods of gaining capacity for their video and higher-speed [digital] data?

Well, I think Eric you hit it on the head, that those are our key technologies that are being evaluated and/or deployed, and there really isn't a one-size-fits-all answer.

For those operators whose most pressing urgent need is to try to quickly get out more High Definition programming, I would say switched digital video, or even existing analog channel reclamation, is probably the fastest path forward.

However, for those who are more systematically looking at the longer-term improvement in the network, and thinking about high-speed data services, we have seen those two technologies be used in parallel, with a strategy of node segmentation, and/or expansion to 1-gigahertz.

And I should also back up and clarify, and add better compression as an additional tool that is being used.

In particular, with the significant strides that we continue to make in both MPEG-2 and MPEG-4 compression, just better compressioning and using less space for both the existing and High Definition programming is also an important lever, that we see our customers exercising.

If I look at your edge and access business, it has been relatively flat the last several quarters, and presumably a growing share of that has been QAM business, as opposed to traditional optical, versus the video processing that is growing much faster.

That would seem to imply that your emphasis is more on the video processing side, or do you think you might be losing share in the traditional access business?

We don't think we are losing share on the access business, I would say that the main driver for the overall growth of the video processing, is actually the additional growth in businesses outside of cable.

You know, but if you look actually within cable, the growth of video processing, as well as in edge and access is relatively consistent.

Okay.

Also I would add Eric, you are correct in saying that the last few quarters have been relatively flat, but if you look at 2007 compared to 2006, I mean, we did approximately 126 million in edge and access in '07, and 109 to 110 million in '06, so there is still some pretty decent growth there.

But I assume a lot of that was edgeQAM, which was really a traditional access.

No, that is not correct.

It is both, edgeQAM was very strong for us, but as I mentioned earlier, we saw strong growth in the HFC area as well.

Okay.

Good.

Thanks.

Thanks.

Our next question is from the line of Amitabh Passi with UBS.

Hi.

Can you hear me?

Yes.

I had a couple of housekeeping questions.

What was the backlog in book-to-bill in the quarter?

The backlog, total backlog in deferred revenue at the end of the quarter was 98 million, and I said that was up 8 million from the end of Q3.

Got it.

So that equates to the positive book-to-bill in the fourth quarter.

Yes.

And then any sense of, can you provide any color on just the makeup of your backlog either by end market or product segment?

Well, I commented earlier on one question, that we didn't see any dramatic changes in the mix as we were thinking about, particularly as we were thinking about gross margins for the next six months, so I think it's fair to say the backlog in deferred revenue probably doesn't look too different from what have seen over the last couple of quarters, which again, is one of the reasons that we feel fairly comfortable with targeting margins in a relatively tight range over the next six months.

Got it.

And then Robin, as far as the tax rate, when is the earliest you think you may revert to a higher tax rate?

Would that potentially be an '08 event, or more likely an '09?

Well, it's very hard to predict, because it's clearly dependent on what kind of results we continue to have, but I would say if our results, it is all consistent with what we have been doing recently, and then taking our guidance into account as well, then there is certainly some point in the next 12 months I would guess, when we would be faced with the release of our valuation allowance.

It is not something we can really predict in advance, because clearly we have to do these analysis each quarter, based on the most recent information and the latest forecast, so I guess I would say, if you are thinking, just for thinking about it, that I think it is pretty certain that in 2009, we will have a more substantial tax rate, and it's possible it could happen towards the end of this year.

Got it.

And finally, Robin again, regarding the cash on your balance sheet, certainly we have seen interest rates trend down, just wondering is something like a 3.5 to 4% return on your cash a reasonable assumption?

Yes, I think two comments I would make, and just in case anyone missed it in the prepared remarks.

I did point out that our interest income included about $650,000 of interest from a customer that we have recovered, as a result of project financing we had given some time ago, so first of all you need to take that out of the number.

I mean you are absolutely right, rates have come down, and so I think if you assume something like 4%, you would probably be okay.

We have a very conservative investment policy, and I think that serves us well, so I wouldn't assume anything more than 4% going forward.

Great.

Thank you, and good luck!

Thanks.

As a reminder, ladies and gentlemen, (OPERATOR INSTRUCTIONS) Our next question is from the line of Paul McWilliams, Indie Research.

Hi, guys, congratulations on not only a great quarter, but a great year!

Got just a few questions here.

Now, on the web to TV integration, I have been reading about our Gator user interface.

That looks really exciting, to me that is the way things need to go.

What kind of feedback have you had from customers on that interface?

And your concepts of how to go about this?

Yes, these are some relatively new ideas, and prototypes that we are showing.

In fact we haven't formally announced any of this as a product, but it is the kind of thing where we have had success in earlier products working very collaboratively and closely with customers.

So we are following that approach here, and so far there has been actually tremendous interest, and very positive feedback, so we really feel as though we are barking up the right tree here.

Very good.

Do you see anybody that might deploy something along these lines, any of the major cable companies or telcos?

I think it is probably premature for me to speculate on whether something might get deployed this year.

I think it's possible, but we are still relatively early days, in terms of the product maturation and the discussions.

Going back historically looking at '06 and '07 growth second half over first half has been, was 26% in '06, and 20% in '07.

Would you say that is a fairly typical pattern?

It certainly has been for the past two years, you want me to say that is going to happen in '08 and you find out it is not.

Which is I guess another reason why we are still begging off the question of getting too specific about the second half of '08.

You know, our visibility for the first half of '08 tells us it's going to be much like the back half of '07, so from that extent the pattern is holding true.

I would, again, say more broadly, because we think about everything that is happening worldwide from a technology point of view, us bringing out new products and technologies, like the ones we have just discussed, as well as what we think is a really strengthening footprint internationally, and growing penetration with new customers, we continue to be quite optimistic about our opportunities to continue to expand the business.

Very good.

I was just trying to think of a different way to ask that question, and you were consistent with your answer.

First half OpEx.

Should I model that as about like the OpEx for the second half of '07?

I think in terms of absolute dollars, I would take it up a little bit, I think consistent with what I said in the answer to a previous question, that we are continuing to hire, and the trend of operating expenses is up.

We have kept it pretty contained so far, but I do think we are going to see some increases in the first half.

Do you think modeling it at maybe 1 million would be appropriate?

A million up?

I think the first and second quarter steps will be smaller than that, but perhaps in total, a million dollars wouldn't be unreasonable.

Okay.

What shall I look at for fully diluted share count, presuming a share price is somewhere in the low to mid-teens?

Yes, that is a good point.

Our share count in the fourth quarter, clearly reflected the offering that we completed at the beginning of November, but because it was the beginning of November, it only reflects essentially two out of the three months.

So the weighted average share count for the first quarter of the year, and the rest of the year will certainly be somewhat higher.

I would estimate, and this is not a scientific estimate, that we will probably be somewhere around 95 million shares on the calculation that is used for EPS.

Okay.

And you ended up selling a total of 12.5 million in the deal?

That is right.

Okay.

Just couple on DOCSIS, I have seen some people announcing some preliminary DOCSIS 3.0 approvals, and I have not seen any come around for Harmonic.

Is that because maybe the DOCSIS spec is a little immature, your customers aren't going to require those approvals?

Help me understand that a little bit.

Paul, I regret I don't have a good answer, and I simply don't know the details of where we are exactly with cable apps.

I will tell you that our product is gaining great traction in the market, and I think we are well integrated, and I know we are working closely with cable apps.

I regret I don't have a specific answer for you on where that process is today.

Service contract revenue, when you guys sell a system, I presume you engage in a long-term service agreement?

In many instances, but not in every one.

Are you seeing that revenue, that part of your revenue picture grow fairly steadily?

Well, we have two principal sources of service revenue.

There are certainly maintenance and support contracts that we have with many of our large customers.

But we also provide integration services, and installation services.

and the like, and that of course, tends to fluctuate a little bit more with the nature of the deals that are going on.

But I think the overall trend in that business, revenue trend is upwards, it's a combination, really of both, more activity around integration and installation, particularly on the telco front, as well as greater numbers and greater dollars on support contracts, particularly of course, as we move towards a little bit more of a software/firmware orientation as well.

Is it getting to be a fairly sizable piece?

Is it something that you might be willing to break out at some point in time?

I think we are obliged to break it out when it becomes 10% or more of revenue, so when that is the case, we would do that.

Okay.

One last real quick one here, and maybe something we will have to tie up on after the call.

Goodwill and intangible out of your other assets, can you give me a rough percentage of what that is?

You mean the total dollars compared to the total assets?

I'm not quite sure I--?

You showed other assets on the long-term assets, and didn't break out your goodwill and intangibles out of that.

Was wondering if you could give me just a rough cut as to what percentage of other assets are goodwill and intangible?

I don't have the numbers at my fingertips.

I believe the goodwill and intangibles represent the majority of the dollars there, but I simply don't have the numbers handy, and I'm sure we could follow up on that, certainly to the extent that we regularly disclose the breakdown.

Okay.

Very good.

Again, thank you and congratulations!

Just wonderful work.

Thanks, Paul.

Our next question is a follow-up from Brian Coyne with FBR Capital Markets.

Hey, thanks, again, just again on the cash, you have had this for a quarter or so now, or getting in two quarters, wondering if maybe you can give us an update on your thoughts potentially around M&A.

Are there some areas where you could bulk up?

Or would it be more along the lines of sort of getting in to sort of new or more parallel type businesses?

Well, I mentioned favorable, our positive experience with Rhozet and Entone, and those from, both a financial as well as a strategic point of view, have been good deals for us, ones that we have integrated well, and the technologies have been well accepted by our existing customers, but in both cases both have also opened doors to new customers and markets for us.

Entone in the case of IPTV, and telco where their business had been focused, and Rhozet of course working with major internet players, as well as people in the broadcasting production content space.

In general, we continue to look for opportunities like that.

Things that are Best-in-Class technology, that really fits who we are, and how we want to define ourselves in this market, obviously around video delivery.

Ideally, technology that we can bring to our own customers, but at the same time, businesses that bring new relationships that can significantly strengthen, or begin a footprint in adjacent market segments.

And I think we haven't been, and we probably won't be more specific than that, in terms of pinpointing exact technologies, but obviously it is continuing work we do.

We look at where the market is going.

How we are situated where we see good growth opportunities, and also as I said where we see interesting targets.

That is great.

Thanks.

I thought my pregnant pause might tease a little bit more out of you, but that is good.

Thanks.

All right.

Our next question is a follow-up from Marcus with Lehman Brothers.

You have had very strong success this year in your domestic satellite business.

They talk about a fixed number of units, some of us trend model by units.

It leave some of us assuming that, without international really coming on strong in '08, it is tough for the domestic satellite business to have a lot of growth in '08 from '07.

Is that a generalization that we can make, or should we assume you are planning on a lot of domestic satellite growth in '08?

You know, to grow 15 to 20%, or are we making a mistake here?

I think that is a fair assumption, Marcus, we have had, I think by any measure an exceptional year with U.S.

satellite operators, and we don't think about that, if you really want to narrow it down on that, we don't think of driving significant sequential growth in that one sector.

That is one of the reasons why we have been focusing very strongly throughout the year, and talking to you about the great traction we have been getting overseas.

This is a market where it is really less about relationships at least initially, it is really about Best-in-Class technology selection.

We believe the same drivers that allowed us to recapture customers and relationships in the U.S.

are doing the same thing for us in major accounts overseas, and we have been focused on laying the ground work in '07, and we do expect to reap the benefits in '08, from fairly strong growth overseas.

I don't have anything more to ask, because that was extremely helpful.

Have you been awarded the contracts?

Or where are you in terms of securing that business with some of those international opportunities?

It is kind of all over the map.

We have been awarded some nice projects, including ones we have not yet been able to announce, on the other hand we are in the midst of discussions with other accounts that we are working hard to penetrate.

And also as we have seen in the U.S., these deals are not one-shot deals.

There is ongoing business.

It is important to point out that while our High Definition coding is usually the thing that is getting us in the door, once we are in, we are finding great opportunities to bring along the broader portfolio of other things we are doing, particularly around our On-Demand content management, over the internet streaming applications that we talked about.

A very important strategic driver for satellite operators, is they work to compete with cable and IPTV.

And we see that as an incremental technology driver for us in the satellite sector in 2008.

That is great.

Thank you for explaining that out, that helps a lot.

All right.

Thank you.

(OPERATOR INSTRUCTIONS)

Okay.

Christian, why don't we then wrap it up, if there is nothing else.

Okay.

There are no further questions at this time.

All right.

Well, let me, again, thank you all for participating in today's conference call, and we look forward to speaking with you all again soon!

Good day.

Ladies and gentlemen, you may now disconnect.