Harmonic Inc (HLIT) 2008 Q2 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the second quarter 2008 Harmonic earnings 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, Mr.

Harshman, you may begin your conference

Thank you and good afternoon.

I am Patrick Harshman, President and CEO of Harmonics.

Mark, with me at our headquarters in Sunnyvale, California are Robin Dickson, our Chief Financial Officer and Michael Newman, our Investor Relations Spokesman.

Today, we announced our results for the second quarter of 2008.

We're pleased with our strong revenue growth, operating performance and our momentum moving into the second half of the year.

Our sales growth, strong gross margins and increasing profitability not only demonstrate the strength of our production and business, but also the ongoing success of our global strategy.

One of the key pillars of our long term strategy is differentiated technology leadership in the dynamic vide delivery marketplace.

I'm pleased to see our technology continue to distinguish itself from our competitors for its ease of deployment, innovativeness, flexibility, cost effectiveness, scalability and delivery of unmatched picture quality.

This renewed technology leadership has allowed us to execute another key component of our long-term strategy, namely to extend our customer base across different market segments and across different geographies.

Our award winning systems and solutions continue to be selected by both incumbent and emerging cable satellite, telco and broadcast operators around the world, for many of their highest profile and most innovative digital video deployments.

Moreover, our international business has been growing even faster than our domestic business and this quarter represented over half of our total sales.

Going forward, we continue to see strong momentum for the deployment of compelling new video services worldwide.

We continue to drove investment to innovative product development programs and work closely with our customers to roll out groundbreaking new products that address the major trends towards more high definition, on demand, and any time anywhere video.

We are also making the necessary investments to continue to successfully support our expanding global customer base, including a new support center in Europe.

We're very excited about our strategic progress and the opportunities before us.

Now, I'll ask Robin to cover the financial aspects of the quarter, and I'll then review some recent business developments and strategic initiatives 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 events or results may differ materially.

We refer you to documents that Harmonic 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 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 form 8-K.

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

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

Today, we announce results for the second quarter ended June 27th, 2008.

And for the second quarter of 2008, we reported net sales of $89.3 million, up 25% from $71.3 million in the second quarter of 2007.

For the first six months of 2008, our net sales were $176.6 million, also up 25% from $141.5 million in the same period of 2007.

Our strong year-over-year revenue growth is reflected across all geographies, product lines and markets.

The international performance was particularly strong, with international sales slightly exceeding domestic sales in the second quarter of 2008.

During the second quarter, we saw strengthening demand from our cable customers, both domestic and international, as they continue to expands and enhance their on demand and high speed data services as well as their high definition offerings.

Our largest customer for the quarter was Comcast, representing 18% of our total revenue.

By market, cable customers in the second quarter accounted for 64% of total revenue, satellite 13%, and telco's and others were 23%.

As we expected, satellite revenue was lower, and telco revenue was higher than the immediately preceding quarter.

For both these markets, the quarter-to-quarter fluctuations reflect the timing of complex deployments and revenue recognition considerations.

On the year-over-year basis, however, we seen revenue growth in both these market areas, and we expect to see revenue growth in both on a full-year basis.

And of course, as we discussed before, it's becoming more difficult to neatly categorize our customers into these market segments.

We have telco customers that also operate HSC cable networks, while other telcos are supplementing their DSL based IPTV networks, with direct to home satellite services.

By product category, video processing products represented 38% of revenue in the second quarter, edge and access products 47%, and software, services and other 15%.

The strength of our access products underscores the fact that our newest edge devices are increasingly being used advanced configurations for on-demand, switch digital, and modular CMTS deployments, both in the U.S.

and international.

We continue to maintain strong gross margins in the second quarter, with non-GAAP gross margins again at 50%.

The year-over-year improvement in gross margins reflects the success of our new products and solutions that provide exceptional value to customers.

Our newest edge QAM for example incorporate unique features, as well as a redesigned platform, both of which have allowed us to expand margins in the key product line.

Our small but growing software revenue has also strengthened our gross margins.

Additionally, our margins have benefited from cost efficiencies as a result of our sourcing strategy, higher volumes, and product design innovations, as well as net benefits from the weakness of the U.S.

dollar.

Our results for the second quarter of 2008 include charges of approximately $500,000 related to certain management changes and to some initial costs connected with planning the establishment of an international support center in Europe.

This new center will help us better support our growing business with international customers, as well as provide longer term tax benefits in future years.

In part, because of these costs, our non-GAAP operating expenses in the second quarter were up on a sequential basis by about $1.3 million.

As is typical with this time of year, we also had heavy trade show activity during the second quarter.

Our head count at the end of June was 674, up by only 2 from the end of March.

And, on a non-GAAP basis, our operating margin was 16% for both the second quarter and the year to date.

One item that negatively impacted our bottom line results in Q2 was a significant drop in our interest income of about $900,000, or approximately $0.01 per share compared to Q1.

Put simply, our cash investments are resetting to lower interest rates as they mature.

GAAP net income for the second quarter of 2008 was $25.5 million or $0.27 per diluted share, up from $6.2 million, or $0.08 per diluted share for the same period of 2007.

The second quarter includes a tax benefit of $15.1 million, arising from the reversal of the discrete portion of our valuation allowance against certain of our deferred tax assets.

Excluding this tax benefit, as well as charges for stock based compensation, the amortization of intangibles, and the charge for excess facilities arising from a revised estimate of sublease income, the non-GAAP net income for the second quarter of 2008 was $15 million, or $0.16 per diluted share, up from $9 million or $0.11 per diluted share for the same period of 2007.

Operating performance continues to strengthen our balance sheet.

At the end of June, we had cash, cash equivalents and short-term investments of $288.2 million, up from $278.9 million at the end of March.

Our receivables were $59.2 million, with DSOs at 60 days, virtually the same as the previous quarter.

We are pleased with the positive trend we've seen in our DSOs this year, although we still continue continue to see some pressure from customers for longer payment terms.

Additionally, our higher portion of international sales may also put some upward pressure on DSOs.

Net inventory was $32.1 million, down about $1 million in the quarter, with continuing improvements in terms.

And finally , our capital spending was $2.3 million in the second quarter, and we still expect to see CapEx of approximately $8 million for all of 2008.

Now with respect to the outlook, we have healthy backlog and deferred revenue totaling $84 million.

This is up slightly from March and reflects a book-to-bill ratio of around 1 in the second quarter.

While the current global economic picture is certainly challenging, we've seen so far that the competitive dynamics among our customers is continuing to drive them to invest in network upgrades and expanded services.

We believe that our own competitive position remains very strong, with our diverse customer and product base as a significant source of that strength.

Taking all of these factors into consideration, we currently anticipate that our net sales for the second half of 2008 will be in a range of $175 million to $185 million.

We expect to see non-GAAP gross margins in the 49 to 51% range for the next six months, and corresponding GAAP gross margins for the same period are anticipated to be in the range of 47 to 49%.

We anticipate some increase in operating expenses in the second half of the year, as we look to increase head count more substantially in order to accelerate some of our product development programs and to bolter other international sales effort, including our new support center in Europe.

We believe that it makes sense to take some of the benefits of our recent improvements in gross margins to reinvest more in our business, specifically in these areas I noted just earlier.

However, we are going to be very careful to modulate these investments with our ability to sustain revenue growth and to at least maintain our gross margin performance, so that the target for non-GAAP operating margin remains in a range of 15 to 17%, consistent with our 16% margin in the first half of this year.

Let me now turn to the tax impact of some recent developments.

Because of our consistent profitability in recent periods and our expectations of continuing profitability, we are using up our net operating losses.

In addition, as I noted earlier, we decided to reorganize the way in which we conduct our international operations.

As a result of our profitability and taking into account tax effects of this operational restructuring, we expect to use up virtually all of our remaining U.S.

NOLs and the corresponding valuation allowance during the remainder of 2008.

In the second quarter, we reverse the discrete portion of this valuation allowance, resulting in an one-time benefit of $15.1 million.

Net result of all this is that we expect to have a continuing nominal tax rate for the remainder of 2008, similar to the rate in the first half of about 6 to 8%.

In 2009 and beyond, we anticipate that this reorganization of our international operations will allow us to drive our tax rate lower than the combined federal and California statutory rate, which approximates 40%.

At this point, our estimates are still very preliminary, but we are looking for a 2009 tax rate in the mid-30s, with further reductions to the low 30s, or possibly even as low as 30% in succeeding years.

We will give more precise guidance on this topic in future quarters, but reorganizing our international operations is expected to not only lower our effective tax rate over time, but also to drive international revenue growth and provide enhanced support to our international customers.

In summary, we are pleased with our performance in the second quarter, and in spite of the global economic uncertainty, we remain optimistic about our industry and our opportunities for continuing profitable growth.

That's all for

Thanks, Robin.

Our strong financial results reflect a vibrant video delivery marketplace and the continued strengthening of our business, allowing us to take advantage of exciting opportunities across a broadening range of applications, customers, and geographies.

Let's look at some of those opportunities and developments across these market segments we address and some of our newest technology developments.

For cable operators around the globe, there continues to be demand for new services and intensifying competition from direct to home satellite, telco IPTV, and new internet based video service providers.

Cable's response is more high definition programming, more and easier to access on demand content, and higher speed internet access that can flexibly support IP based video services.

Our powerful new solutions for each of these applications continue to set us apart in the market, enabling us to deepen or relationships with existing customers and penetrate new accounts with significant new customer wins recently in Europe and Asia.

A key driver ever our global cable momentum is growing deployment of our edge based solution for VOD, switch digital video and high speed data, with high speed data applications representing an important expansion our addressable market opportunity.

A significant recently announced win in this area was with Hanaro Telecom, a leading cable and telco operator in Korea, to deploy our universal edge QAM for its wideband Docsis 2.0 modular CNTS service, capable of delivering 150 megabits per second or more.

In coming periods, we expect Docsis 2.0 and 3.0 modular CNTS applications in universal edge QAM architectures that marry high speed data and video services to be an important drivers of new business with cable operators worldwide.

Internationally, we are also continuing to see select cable operators adopt our industry leading MPEG-4 AVC technology to roll out premium quality HD channels.

We recently announced that Hot, Israel's leading cable provider, implemented a full suite of our IP based digital video solutions, including our HD MPEG-4, AVC encoders.

This follows similar MPEG-4 adoption announcements with cable customers in Asia and Latin America.

We expect our continually improving MPEG-4 and MPEG-2 technologies for high quality HD delivery will remain important growth drivers for us in the cable market.

In the satellite direct to home market, we continue to extend our market share position with leading operators around the globe.

The technology cornerstone of our success continues to be market leading MPEG-4 compression solutions for standard and high definition video.

We recently announced that Astro platform services in Germany and SKY Italia, two of the market leaders in Europe, have now deployed our market leading encoders and statistical multiplexing systems to extend their HD channel offerings.

These wins follow similar announcements we have made in the last several quarters about new or expanded relationships with leading satellite operators in France, the Netherlands, Norway, India Indonesia, Japan, as well as here in the U.S..

As more HD content becomes available and the satellite operator investment in HD and MPEG-4 technology grows, along with the deployment of new hybrid on demand and IPTV services, our increasingly strong global market share position in satellite puts us in a great position.

We also continue to be very pleased with our expanding customer and technology footprint in the emerging global IPTV market.

During the quarter, we won both new IPTV customers and follow-on business from existing telco accounts, with HD programming and on demand capabilities being key drivers.

With the Olympics almost upon us, we are particularly excited by the innovative ways our latest software solutions for delayed TV and network personal video recording are being deployed by several leading Asia telcos, to enable their customers to view the Beijing games in a more personalized an convenient way.

Underlying all this positive market activity and our strengthening gross margins, is our continuing drive to develop and deliver powerful and high value new video technologies and solutions that have application across video delivery markets.

For example, we recently announced new Octel technology, which doubles the capacity of our market leading universal edge QAMs.

We also enhanced our IP enabled ProStream stream processing platform with the addition of support for MPEG-2 digital program and ad insertion.

Furthermore, our technology continues to receive industry awards.

Broadband Report recently recognized our direct edge cable IPTV solution, media prism on demand content preparation software, new power link optical transmitters and ionic encoder for their technology excellent.

In summary, the second quarter was another very strong period for Harmonic.

We are pleased with our continuing success in extending our customer base across an expanding range of domestic and international operators.

Our powerful and growing portfolio of new video delivery products and solutions continue to sustain our market leadership and drive sales growth, strong gross margins and profitability.

We continue to invest in innovative product development programs, as we help our customers address the key trends towards more high definition, on demand, and any time anywhere video and new, creative and cost-effective ways.

As we move into the second half of 2008, we remain excited about our strong market position and the growth opportunities before us.

This concluded the formal part of our presentation.

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

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Brian Coyne, with Friedman, Billings, Ramsey.

Hi, thanks for taking my call.

Couple of questions.

First of all, Robin or Patrick, could you maybe just describe a bit of what you're seeing in terms of digital processing at the domestic cable customers?

Obviously, HD still seems to be a pretty intense battlefield among cable and satellite and increasingly on the telco side.

I was just wondering if you could just give us an update.

It seems like you shifted your focus perhaps a little bit on the edge QAM side, but maybe you could go back and run through that a little bit.

Brian, I'd says there's no substantial change in what's happening in video processing.

As you mentioned, as I mentioned in the prepared remarks, high definition video is certainly a big driver for the market.

There's more content, there's more consumers with wide screens looking to view that high -- that content in the highest quality way possibly, and we see all of our customers, and certainly including the cable operators making great strides in delivering high quality services, and we're certainly benefiting from that.

You also mentioned the activity in the edge QAM space, and that's particularly exciting, just because we see the range of applications we're addressing expanding.

Of course, edge QAM, home base for edge QAM is supporting on demand content, and certainly, continue to adding up on demand assets is another key driver of cable operator strategy.

In addition -- and we see edge QAM volume scaling with the scaling of more on demand content and more on demand transactions.

We also see switch digital video and, as I noted, high speed data starting to drive consumption of QAM channels as well, and the latter is a particularly important and exciting development and has been a big key driver, not only of our success with edge QAMs here in the States, but overseas where we see a lot of focus on next-generation high speed data services over the cable network.

That's helpful.

I mean, I was just kind of looking year-over-year, your video processing sales, obviously, have been -- have come up here about $6 million over the June quarter last year, and given the greater success that you've had on the satellite side, I mean, it seems like, I guess, maybe what your saying is there hasn't been probably too much change even year-over-year on the cable front.

Is that the right way to interpret it?

Would that lead you to believe that there might be another sort of push from the cable operators coming perhaps in 2009 on this front?

In broad strokes, we see all of our customer, both satellite and cable, I think making a concerted push.

As a practical matter, you don't see all these programs proceeding perfectly linearly.

And very often there's kind of a push, a deployment cycle, and then another push and certainly, more than cable, satellite business is characterized by cycles of investment across different operators and across different geographies.

I would say that we see the cable focus on HD being a little bit more consistent relative to last year.

We see relatively more activity in video processing, and going forward, we continue to see a lot, and probably growing activity in the cable space around processing, encoding, and personalizing video content in general and high definition content in particular.

Okay.

And then, Robin, I think you talked a little bit about some OpEx investments.

I was wondering if you could give us a better sense perhaps of how you see those rolling through over the next couple of quarters.

And then just on top of that, can you hazard perhaps kind of a qualitative outlook for 2009?

I mean there has to be something that gives you confidence right now to invest perhaps a little bit more aggressively.

What are the sort of maybe the two or three kind of big opportunities that you might be targeting?

I don't think, Brian, we want to speak to specific R&D programs that we plan to invest more aggressively in, but let me address a couple of the other points you raised.

I think we feel, as I said in my prepared remarks, that we've made a lot of headway in gross margins, and I think over time, we can continue to make some headway.

And I think it's appropriate to reinvest some of the fruits of that performance in accelerating R&D programs.

I think we found over the last couple of years that that formula works very well, so we're certainly looking at it from that perspective, that there is a return to be made from accelerating these investments, both on the top line and I think also in gross margin growth.

So I think that's what's -- that's really what's underlying the thinking.

With respect to specific numbers, the other thing we are going to be very careful about is, again, as I said in the script, this is not an intention to push the operating margin down any.

I mean we are absolutely committed to keeping that where it's been most recently in the range of 15 to 17%, and so as I said, we are going to modulate any spending we do as carefully as we can, with commensurate growth in revenue and gross margins.

On the numbers, in a way, I don't really expect to see a whole lot change in the third quarter.

In fact in the second quarter, we had a couple of unusual items, including as you know, the very heavy trade show activity that goes on in Q2.

And so actually in Q3, I don't see any -- necessarily any major increase in OpEx, but I do think that by Q4, that they could step up.

So if you think about the first half and our spending just under $60 million on a non-GAAP basis, I'm thinking maybe the second half ends up being somewhere in the $61 million to $62 million range.

Okay.

That's good.

And I guess just finally, bigger picture, you didn't mention any update on your script regarding sort of your thoughts around M&A.

And so I was wondering if there is any update on the thought there?

And obviously also you said your preference in the past might be for perhaps a smaller deal or one that might extend technology into perhaps -- towards different customers, different verticals, but could you maybe compare and contrast with the opportunity, if one were to present itself, maybe to do a bigger deal perhaps, to add some additional technology and something in an area where you already -- already have an existing presence that might benefit from perhaps rounding out a solution?

Thanks.

Well, first and foremost, business priorities on driving the business organically, and I think that's going quite well.

We have publicly stated that we are, I'd say, stepped up our interest and keeping our ear to the ground and looking out for interesting and intriguing opportunities that we think are complimentary with the way we are driving the business.

And while we're very pleased with a couple smaller deals we've done over the past 18 months and we like the way that they are contributing to the business from a solution point of view, from a margin point of view, and that probably is our initial bias as we look for other opportunities.

We certainly don't rule out anything larger, and that's not to say that we are looking for something larger, but if the question is would we be open to something that is a little bit larger that makes good sense from a financial sense -- point of view, as well as from a strengthening solution point of view, absolutely.

Just our experience and the way we've looked at the market so far, we tend to -- our perception is that there's probably more opportunities for us in the realm of smaller companies with focused technology additions.

But we continue to look at all possible angles and opportunities.

Great, thanks.

Thank you.

Our next question is from the line of Vivek Arya with Merrill Lynch Global Securities.

Thank you.

I think my question is really about the sales growth that you are projecting for the second half.

If I look at last year, your second half sales grew 20% -- roughly 20% compared to the first half.

This year, you're guiding second half to be roughly flattish, even though you are not really seeing any weakness in spending, so is this conservatism, is this related to any deceleration on the satellite side?

Can you please help us understand why you are expecting sales to be just flattish for the next couple of quarters?

Going back to -- you started off with talking about 2007, and I think we think 2007 was a little bit perhaps unusual with the way the business stepped up as dramatically as it did in the second half of the year.

And there was really a flood of activity in the second half of the year that was really out of balance with the first half.

As we head into 2008, we simply see -- our perception right now is the spending environment and the investment environment to be a little bit more balanced.

We've had a fairly strong first half of the year, we have -- we see the strength continuing, but right now at least, we don't see a dramatic step-up in the second half of the year, way we did a year ago.

Of course, we have to wait and see, and in the past, we've had upside surprises.

On the other hand, as I think Robin mentioned in his comments, there are some higher level global questions about where the economy is going, so putting all of those things together, we have to back up and rely a little less on history and a little bit more about what we see immediately in front of us.

And right now at least, we see by and large a continuation of the kind of spending, maybe just slightly stepped up from what we've seen in the first half of the year.

I just wanted to drill down as to you could be conservative because you see headlines being weak or you see the order trends being weak.

I'm just trying to differentiate what you're really seeing in terms of order trends versus just than the macro headlines.

Really, our guidance is based on what we're seeing in terms of orders and our discussions with our customers.

And frankly, we don't think there's really is that conservative.

There's a lot of market activity going on, we are very pleased with the business has unfolded this past quarter and continuing this business stepping up slightly.

It seems where the market is right at this moment.

And while we see -- we think that a lot of the trends have long term basis and we see investment in many of these areas continuing to not only be sustained but growing into 2009, as we take our initial look at 2008, the guidance we provided is our best assessment to where we think the spending is going to be specifically over the next six months.

Next question on your satellite sales, there was obviously a big downtick in the second quarter.

How should we read that?

Does it mean the cycle is over or is that just a temporary blip.

I believe Robin said that it was perhaps related to the timing of spending activity, so does that mean we see the satellite spending growth resume from the third quarter onwards or how should we read that?

I think -- I think we -- I tried to stress that looking at the satellite, and indeed too the telco basis, on a quarter-over-quarter basis is -- can be confusing.

And there's no question -- I don't deny that the number dropped quite a bit from Q1, as we've been pretty clear about for some time, that that was going to happen.

Nevertheless, we are still confident that we are going to show year-over-year satellite growth in the satellite business, which implies second half is certainly stronger than we saw in the second quarter, and is at least, at least comparable to what we did in the first half.

It is -- it is subject to deployment cycles, and deployment delays, and revenue recognition considerations as I've said, and any particular quarter can oscillate quite a bit based on those factors, so I think trend-wise, as I say, we're still expecting to see growth this year over last year.

Just the last question, Patrick, how do you balance this need for making acquisitions versus, for instance, considering stock buy-back?

Do you think you have the flexibility to perhaps do both or right now, the focus is just on making some small acquisitions?

I think there are really two separate thought processes.

In addition to just strengthening the overall position of the Company as another means of establishing our credibility and strength as we pursue business overseas, the other main reason why we strengthened the balance sheet and raised money last fall was to give ourselves the fire power to execute acquisitions.

We continue to see -- we continue to be very bullish about this market and the macro trends around video delivery.

We continue to see a lot of opportunities, a lot of need from our customers, needs that we think we can provide in principal, and so looking for complementary technology based acquisitions is a priority of the business.

That being said, we're not determined to do a deal to -- regardless.

It has to be a deal that is very good financially, a deal that is very good technologically, et cetera.

And as we follow that process wherever it takes us in parallel, in due time, if we find and we decide that our balance sheet is in a place where we don't have a better use for the funds, I suppose we could also consider paying part of the money back, buying some shares back.

That's currently not forefront in our thinking, but we don't rule that out either at some point in the future.

Thank you.

Our next question is from the line of Tim Savageaux, with Merriman Curhan Ford.

Good afternoon, guys.

Good afternoon.

Hey, couple of questions for you.

Maybe I should go one at a time here.

Last quarter, you noted that the cable industry especially in the U.S.

kind of got off to a slow start from an order standpoint.

Your performance and your commentary looks pretty strong across both U.S.

and international markets.

I wondered if you could update that commentary with regard to how the cable industry is looking in the U.S.

in particular.

It seems to have improved.

Yes.

Cable, the cable outlook, cable demand has rebounded quite nicely in our view, both domestically as well as internationally.

Any -- just getting the engine running throughout the first quarter into the year?

Are there particular drivers to that, sort of product-specific from your standpoint or would you characterize it as just an overall increase?

I characterize it as overall strength.

As you know, we do, we bring to bear a broad array of technologies and solutions to cable.

Perhaps the area of strength that we've highlighted in particular, if nothing else because it's an addition from the past is the strength of the edge QAM space, and in particular, the contribution that we are seeing from high speed data applications, in addition to everything we're doing, which encompasses edge QAM, switch digital video, VOD, encoding of both standard and high definition content, increasing work around on demand applications, and of course, our HSC access business, which has continued to do quite well in an environment where bandwidth is at a premium.

And just to follow up, it was previously mentioned, obviously the satellite business did come down a bit, yet gross margins performance was pretty strong and toward the high end of your guidance range, nearly what you did last quarter, despite an increasing cable mix and some weakness in satellite.

I gather that is a result of a little more telco and software business, but I wonder if you could give us more a little more color, and as aside, in mentioning Comcast, I assume there are no other 10% customers in the quarter, if you can give us more color on what's happening at telco, what drove that strength, and where the margin profile is relative to the rest of the business or, more broadly, how you were able to maintain that margin performance with such a dramatic drop in satellite.

I will address briefly the margin piece of it, and then maybe let Patrick expand, but on the margins, yes, I think in general, the business we do with telco is, does carry good gross margins with it.

I think we've historically seen that in most of the deployments that we've been involved in, so to the extent satellite falls off and telco picks it up, really, that doesn't have a significant overall effect on the business.

This is maybe a small part, but also in the other category of telco and other that is a fertile area for some of our newer software products, and although the revenues are still relatively small, the margins there are usually pretty, pretty good.

The telco business geographically was really all over the place.

We had revenue in Europe and Asia and Canada and Latin America, I think -- and even -- maybe not significant revenue, but even orders from tier 2 and tier 3 players in the U.S., so it's, it continues to be geographically very disbursed.

Okay.

Great.

Just one final question.

If you -- regardless of how we move from quarter to quarter here at the middle of your guidance range, or towards the high end of your guidance range, which is where you've been for the last several quarters, do you look to close out the year something, 15, 16, mid-teens type growth, and that with, as you mentioned, a very strong kind of ramp with EchoStar last year.

So arguably, that's kind of a below trend number.

We haven't had this conversation for a couple of quarters, so I thought I would bring it up, but from an overall growth rate perspective, as we start to think about 2009, coming off that kind of mid-teens growth year, I wonder if you could talk about -- with all of risks and opportunities in mind, and mindful of your decision to step up spending here, what sort of growth rate you think is -- remains reasonable for Harmonic.

I think you've talked sort of in the 15 to 20% range in the past.

Tim, I think that's still -- that's still the way we -- that's still the rough ballpark that we see as reasonable, given everything we know about the way the market is evolving, and the specific opportunities that we think that we can actually address.

And maybe just to highlight, we are talking here about revenue growth.

I think equally important is the fact that we're going to continue to push strong on strengthening the gross margins.

When we talk and when we think about R&D investment, we think about the fruits that that investment has recently delivered in terms of really delivering products that deliver higher gross margins.

And so I think it is too early for us to talk too specifically or quantitatively about 2009, but we continue to see opportunities to grow the base business organically in the range that we have spoken about previously.

And we additionally see the opportunity to grow some of the higher margin products under that umbrella at even a faster rate, so we are certainly targeting to continue what we've been doing on all fronts, not only the revenue growth, but also the continued strengthening of the gross margins.

Next question is from the line of Mark Dwelle with RBC capital markets.

Thank you.

Just on the customers in your assessment, how long will the digestion take for your satellite customers before the ordering resumes?

Should it be another quarter or are we thinking more the later part of the year?

One of the points that I made in the prepared remarks is with the addition of customers like Telecom Italia and other ones that we've been mentioning and announcing over the last six months, we're really working on executing in our strategy of making the tel -- excuse me, the satellite segment for us one that is comprised of not a couple, but actually tens of significant customers.

Now, some of the trends that have been playing out here in the U.S., particularly the heavy adoption of HD I think are trailing a little bit internationally, but we continue to see great and growing opportunity around this transition from MPEG-2 to MPEG-4 standard definition to high definition in international markets.

Additionally, we do see continuing growth opportunities here in the Americas with the number of operators.

So as we look to the next couple of periods, on average, we see the satellite sector revenue driving from both domestic as well as international customers to step up from the level that we saw here in Q2.

On balance, we expect the second half of the year to be equal to or greater than the total first half, and of course that puts us modest growth relative to last year.

The split between the third and fourth quarter, is that -- is the satellite business the major swing, considering that you should have steady cable growth and also strong telco growth that makes the third quarter slightly lower than the fourth quarter?

Well, one of the reasons we are giving I think six months guidance is we don't have perfect visibility on that.

So I -- if there is a significant difference between Q3 and Q4, I would agree that where satellite revenue falls could be part of that equation and I wouldn't be surprised to see significant contribution from satellite in the Q3 or, on the other hand, a bigger contribution in Q4.

I think we don't quite have that level of resolution yet, but in slightly broader strokes, a six-month period, we're quite confident that we'll see strong contribution from the satellite sector in Q3 and Q4 combined.

The other thing that's always hard to predict is what -- exactly what happens in the fourth quarter.

We've seen years with budget flushes, we've seen years where spending tails off pretty quickly after Thanksgiving and so it's always a little bit hard to call.

We've got pretty good visibility into Q3 right now on all fronts, and so if there are question marks, it's just about Q4 in general, and some of it is just typical spending, questions around the spending patterns that we will see.

And historically, what's been the book-to-bill going into the September quarter?

Oh, boy.

To be honest, Mark, I can't really remember off the top of my head, typically, you mean the book-to-bill of the second quarter?

Going into the third quarter.

You said it would be a book-to-bill with approximately --

It was about 1.

And I don't think that's wildly out.

I mean, to be honest, I don't remember all the numbers off the top of my head, but I don't think that's wildly out of line with what we've seen in previous years.

I mean, last year, we did have a very strong second half performance, but I do think much of that actually happened within the boundaries of the second half as opposed to sitting in our backlog of the end of June.

Got it and just lastly, just on interest income going forward, I guess this is the new level that we should kind of model?

Yes.

I admit, we may not have paid as much attention to that as perhaps we should have done in the last call three months ago.

But clearly, with interest rates having come down as our investments mature, we are generally -- we are resetting across the board at lower interest rates, and that really had quite an affect in Q2, so yes, I would say in general that that -- that going forward at the level we're at in the second quarter of somewhere around $2 million, maybe a little less, maybe a little more, is probably about the right number.

Okay.

That's helpful.

Thank you, gentlemen.

Thank you.

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

Thanks very much.

Wanted to ask a question about your NCMTS opportunity on the edge QAM side, certainly it increases the size of the edge QAM marketplace and I think it probably really improves the profitability of your edge QAM business also, but could you put any math around that?

Any sense for how much it increases your overall market opportunity as we pull edge QAMs out of CMTS systems?

And how much extra margin you can get out in that business going forward, just ballpark?

George, to be honest, we are still getting our arms around the Docsis related opportunity, it's a relatively new area from a market perspective, and an overall spending perspective for us, although I think we've -- we're doing a great job of mastering the technology and taking advantage of opportunities we've seen right in front of us.

In all candor, we're I think a little bit further behind in really understanding the longer term ramifications.

And to some extent, it is associated with how quickly we're going to see the industry move to modular CMTS and Docsis 3.0 application.

In very broad strokes, I ultimately see the opportunity being at least comparable to the size that we've seen heretofore for edge QAMs around VOD service.

And certainly looking forward, the customer demand for higher speed data for video that's going to be moving over cable links, it seems to be almost insatiable.

So it's truly an exciting opportunity.

And it's one that has had a material positive impact on the business, I think both the top line and -- and I think you're right, for us, we've brought new technology to bear running on the same edge QAM hardware which does help the margin profile of that business, unique capabilities there.

Other than that kind of high level qualitative view, though, I think we are not quite prepared to model the incremental opportunity yet.

So just to paraphrase, at least similar in size to the overall VOD opportunity you have on edge QAMs.

That's what we see in the mid-term, yes.

Okay.

And then just separately, on Comcast, obviously, there's an NCD roll-out going on there, you guys are involved.

I think last quarter, if memory serves, you said it was a modest contributor to your Q1 results.

Has that grown for you here in Q2?

And what's the outlook for that opportunity going forward?

Thanks.

We leave it to Comcast to speak specifically about what they are up to, but in broader strokes, we have -- we've identified switch digital as something that is of interest I think both to domestic and international operators alike, and it's one where we have seen modest contributions of revenue, and we continue to see that modest contribution in Q2, much similar to what we saw in the first quarter.

Or put differently, the contribution is still fairly well below that from edge QAM applications in VOD as well as the modular CMTS application.

Thanks.

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

Thank you.

I wanted to refocus on the satellite question, the sequential delta from Q1 to Q2, which as you said, Robin, was not unexpected.

But I'm wondering when you gave the guidance of 175 to 185 for the second half, I'm assuming you're kind of modeling a baseline contribution from satellite kind of in that 10 to 15% range of revenue.

Is that a fair assumption?

Yes, Greg.

I think, I think maybe you're underestimating a little bit.

We see a lot of activity in the satellite market.

We have -- we still have a number of projects in progress where we haven't either recognized any revenue or only part of the revenue, so there is a pretty decent pipeline.

I'd say we are looking for a number more -- maybe even a little closer to 20%.

I mean I did say, after all, that we still expect to see satellite growth this year, so that implies a dollar number somewhere approaching $70 million, which again based on the midpoint of the guidance we've given, would be closer to 20% of revenue, so I think it's somewhere in that 15 to 20% range.

Got you.

That's very helpful.

I guess we could also assume that the satellite business will follow the overall trend towards lesser dependency on the U.S.

Obviously with that --

I think that's right.

Patrick has already highlighted a couple of significant wins in Europe.

We've actually, more than that.

I think two press releases we've had recently in Europe as well as a number of other wins including the emerging markets.

We've talked about that before.

I will admit in the second quarter from a revenue perspective, we didn't have an enormous contribution from some of these emerging markets, but I think over time, we will see more revenue flowing through, so again I think it's -- you almost have to look at these kinds of numbers on a year-over-year basis, quarter-to-quarter is just too difficult.

Sure, and just the one more follow-up.

I'll keep it quick.

If you focus on the recent sort of rebound, if you will, of the cable revenue segment, and you kind of look ahead towards the second half of '08, could you talk a little bit about the high definition MPEG-2 encoder opportunity there?

We talk a lot about MPEG-4, obviously, but with cable still firmly entrenched in the MPEG-2 world, kind of wondering if you could just give us some time line scenario and how that's going to continue, and what you're seeing in the MPEG-2 HD encoder space?

We expect the U.S.

cable industry to be working in -- with MPEG-2 technology for the next several years, perhaps not exclusively.

I think there is some thought or some discussion that MPEG-4 technology may start to move in in certain places.

I think most people will tell you that operators will start to receive boxes that support both MPEG-2, and MPEG-4 later in the year.

But you are absolutely right that, by and large, the HD services in the U.S.

over cable networks will be delivered in MPEG-2.

And for that reason, Harmonic continues to invest quite significantly and do a lot of innovative work around very high quality next-generation HD encoding in the MPEG-2 domain, MPEG-2 encoding as well as more general stream processing and networking.

And there really is a lot of continuing room for innovation there and a lot of good resonance with the customers, who are looking to get the most out of their current investment in MPEG-2 boxes.

Great, thank you.

Thank you.

Our next question is from the line of Jack Monti with Lehman Brothers.

Thanks for taking my question.

Just wanted to touch up upon the seasonality that -- and the visibility you have into the cable segment going into the second half effort year.

I think that at times in the past, it's been seasonally down in the fourth quarter.

I was curious if that was a scenario that you viewed as being highly probable as we go into the second half of '08.

I tried to address a little bit of this earlier, there's always some level of uncertainty about the fourth quarter and perhaps cable spending or I'd say, more generally, our customer spending but often cable in particular.

As I said, we've seen budget flushes in some years, and we've seen the spending turn off at some point during the quarter, so that was the uncertainty over that, and it's too early really to have any good visibility over that.

But certainly one factor that we considered as we put the guidance together, we just really simply don't know at this point.

What is comforting is that we've seen a strong rebound in bookings in the second quarter after what was, by our admission, a relatively light first quarter.

And that seems to be continuing at least from what we can see in July, so that's comforting, but it's just a little early to be speculating on what happens in late November and December.

I was wanting to touch on the satellite segment again.

Is some of the uptick in the second half satellite revenues tied to some late second quarter orders?

Or would you qualify it as saying that there is a lot of finished good inventory for satellite waiting customer acceptance to be able to recognize that revenue?

How should we think about that?

Our satellite business for most of our customers is a business that we -- the way we recognize revenue typically over a number of quarters.

Most of these, to use our own definition, are projects and typically recognize revenue over several quarters, and we have a number of those in the pipeline.

So I'd say there is -- we tend to have more future satellite revenue sitting in deferred revenue than we do in our standard book and chip backlog, although we have both.

It is very customer dependent and sometimes even product-dependent, but as I mentioned earlier, we have a number of satellite projects in process at the moment, and that's one of the things that gives us comfort about growth for the full year in the satellite business, growth of the full year of 2008 over 2007.

And if I could touch on a currency -- there's some currency remarks made in the prepared comments.

I think 50% of the revenues was international.

How much of that is priced in dollars versus other currencies?

And also maybe if you could touch on the cost of materials there, U.S.

dollar based, just give us a sense for how we should think about that going forward.

We still have a relatively small but a growing portion of our international revenue is denominated in currencies other than dollars.

So the dollar is still our primary billing currency, but that is changing pretty rapidly in Europe, and as we move to put our European support center in place, I imagine that's going to accelerate, so we are certainly getting some benefit on the top line.

Most of our material costs are denominated in dollars, but clearly inflation in some countries and the rising cost of freight and fuel and some of the other inflationary pressures are having -- certainly having some impact on our contract manufacturers.

But at this point, I'd say that currency has been, at least so far, a net benefit.

Maybe not a huge one, but has been a net benefit to us.

And then one last question.

Also in the prepared remarks, I don't think it was mentioned, are the -- is Astro in Germany and SKY Italia, they are already ordering or they are going to begin ordering in 2009?

When will those project be expected to start?

Thanks a lot.

As Patrick has indicated, SKY Italia is a new customer for us, and we've already recognized some of the revenue from that.

Astro is an ongoing customer, and they -- this particular project was noteworthy, but they are an ongoing customer and they have been ordering from us for sometime, but much of the project that was discussed in the press release, that revenue, I think, I believe that revenue is already been recorded, or most of it.

Thanks a lot.

Thank you.

Our next question is from the line of Blair King with Avondale Partners.

Hey, guys.

I just -- one quick question.

Most of my questions have been asked, but I'm just going to touch on one that was previously asked, and that has to do with the edge QAM space.

There was some discussion around how you sort of prioritize the edge QAM sales relative to VOD, switch digital video and the CMTS platform.

Patrick, I was wondering if you might be able to put that in order, maybe it already is, but put that in order in terms of what you're seeing today in terms of edge QAM upgrades.

And then maybe a year out, do you see that mix changing at all or is it still the same mix in terms of how you would classify the opportunity?

Well, what I'm saying is today, certainly the VOD application continues to be number one in terms of the volume of edge QAMs that are deployed.

But coming up behind that, and frankly, faster than we had perhaps initially anticipated, we see these modular CMTS applications coming.

And I would say, third, in terms of volume of QAMs deployed is the switch digital video application.

Now I think it's important and I didn't mention it earlier, I think it's important to clarify that by design, these applications are and can somewhat meld together?

The industry coined a phrase called "universal edge QAM" and part of the idea is rather than have three side by side edge QAMs each dedicated to specific applications I just mentioned, why not have edge QAMs that can flexibly support any of the services?

So as we think about the overall opportunity, we think not only about these as discrete applications and opportunities, but we think about the evolution of the architecture to flexibly support all of these services.

And it's for that reason that we think -- and our I think unique support of all three applications that is putting us in a particularly strong competitive position today, and one of the reasons why we're pretty excited about the opportunity around this technology and these architecture directions going forward.

That's helpful.

If I could just make up a number, if I were to say that the edge QAM space today were in aggregate worth a $1 million, next year is it $1 million or next year is it $2 million?

From our perspective, we think it's growing in 2009.

I'm a little reluctant to put a number or percentage on it, but it's clearly growing.

We've talked for a long time, that we think more on demand content -- more content viewed on demand is just a fundamental driver of this overall business.

Additionally, more high-speed data.

Frankly, that's just another means of accessing personalized on-demand content and increasingly streaming video is also an application and a technology that's going to do nothing but scale.

So we put those two things together.

More and more on-demand content, high quality video, more and more broadband access, modular CMTS kind of stuff, we definitely see the volume and the amount of activity in the space growing in 2009 relative to 2008.

Is it fair to assume that the internet access business in your view would outpace the video processing segment?

No, I'm not comfortable saying that.

I think the growth will be there, but we're also quite bullish on what's going to happen around video processing, continue to invest a lot, not only in HD streaming and processing, but splicing, ad assertion.

A lot of the on demand capabilities on the front end actually feed into these same applications.

I talked about some of the exciting work we're doing in Asia right around the Olympics.

That's all software based, related to video processing capabilities, allowing us to take video, we format that video, store the video, play it back out at a network PVR or delayed TV, catch up TV kind of scenario.

We're seeing a whole lot of activity on that front as well.

So I think as we get closer to '09, perhaps we will be able to give you a little bit more nuanced guidance about the relative opportunities we see around some of these things, but in broad strokes, we are excited about both areas.

As we look forward, we extrapolate the current market trends to 2009, we continue to see a lot of good opportunities.

One last question.

There was a little bit of talk, but not a lot, on the software and another segment.

And obviously that's some pretty strong sequential growth there this quarter, so is there any more detail you can give us on just an update on those two business units that you have there?

Particularly, Entone and Rhozet.

More and more, particularly the Entone piece is kind of merging into what we do and blending into what we do around video processing.

I just gave you a couple of examples.

A lot of the delayed TV and catch-up stuff that I've mentioned is hybrid solution, depending on both kind of what was Entone and evolved versions of that software, together with some of the hardware based encoding and stream processing.

So that piece of things continues to go very well for us, and we are seeing a lot of success around bundled solutions there.

Similarly, the Rhozet business continues to move forward.

We've had a couple of nice announced deals, again, with operators in the U.S.

as well as internationally.

And we're -- we continue to be excited about that business, so we're still relatively small relative to the mothership, but it continues to make good progress.

And it's one that we continue to be quite excited about.

Thank you very much.

Thank you.

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

Thank you, just a few questions.

Patrick, the first one is for you.

As we look into the back half of 2008, wondering how we should think about trends in, say, your two major categories edge and access and video processing.

More specifically, do you think the edge and access business can grow again quarter-over-quarter and if so, it almost seems that by implication, that your video processing segment could severely decline in the back half.

Just wondering how to think about the two segments for the rest of the year.

So, we have to wait and see, I think a little how the things materialize.

We are excited with the way the edge and access business has stepped up.

I probably don't envision sequential quarter-over-quarter kind of growth similar to that, but six months as a whole, back half, front half, I think we will see edge and access a little larger.

On the video processing piece, I definitely expect a stronger second half than we saw in the first half.

We're a little bit of uncertainty about how big that step-up will be.

Okay.

That helps.

And then just wondering if you could maybe provide a little more color, specifically on the access subsegment of edge and access, just very high level, what sorts of trends did you see in the quarter?

I believe you said in the first quarter, there was sort of modest year-over-year growth.

Wondering if anything changed in the second quarter.

No dramatic change.

Are you talking about the HFC access piece of our business?

Right.

It continues to be I'd say a solid contributor.

We've acknowledged in the past that, from a macro over time perspective, we probably don't see quite the same growth opportunities we do elsewhere.

That business tends to be a little bit flatter than other pieces of our business.

It continues to move along and it continues to be an important part of our overall portfolio for cable customers and a solid contributor, but not the fastest growing product.

Got it.

And then this quarter first time you hit the 50/50 split international versus domestic.

Curious if see this as being sustainable or if you think we should revert back to being skewed more towards the higher proportion of domestic revenues versus international?

Again, it's a bit like some of our market segment data.

These numbers tend to move around on a quarterly basis, depending on which projects we've made progress on/or completed, so my guess is that international is going to run domestic pretty close in the second half, I'm not sure it's going to be 50/50, but my sense is it's going to run pretty close.

At least 45 and maybe closer to 50.

Got it.

And then Robin, just a couple of quick once for, you did you say anything about the tax rate in the back half of '08?

I heard your '09 and beyond commentary.

Yes, we basically said no change from what we've been doing in the first half of '08, which is a pretty nominal rate.

I used like a range of 6 to 8% for the remainder of this year.

Okay.

So, yes, no significant change.

And then finally, as we look into '09, just wondering if you could could give us some sense as we look at your business model, should we expect OpEx in light of all the comments you made, to grow generally at the same rate of revenues, if you think there is again enough leverage that perhaps it grows at half or some portion of revenue growth?

Just wanting any insight you can provide in terms of how we should think about the model into '09.

Well, I think -- I'll give you my perspective on it, and then Patrick may want to add something.

I think we see investment and operating expenses really on two major -- in two major directions, one is in accelerating certain of our R&D programs.

And clearly, we're not doing that without the expectation that at some point, that's going to pay off in the future, in some combination of higher revenue growth and higher gross margins.

That definitely underlines what we're trying to do, so I could see that perhaps maybe not in the first half, but maybe in the second half of '09 that could begin to pay off in terms of a higher revenue growth rate.

The other thing we're doing is the establishment of an international support center in Europe which has double benefits.

It's -- by providing better support to both our internal people as well as to customers, internationally, I think that's going to be good for revenue growth in due course, and as we said, also again over time, probably provides us with some worthwhile tax benefits.

I don't see fundamental changes to the model in '09.

I can see some improvements in gross margins, as we continue to roll out knew products and new products with a major focus on improved gross margins.

And we were asked the question earlier about revenue growth, and I think as Patrick said, 15 to 20% is possible next year and we're going to do everything we can to keep that operating margin above 15%.

Okay.

Thanks.

That's helpful.

Our next question is from the line of Larry Harris with CL King & Associates.

Yes.

Thank you.

Today, we had an announcement from both DirecTV and also Verizon in New York relative to offering 100 or more HD channels.

Certainly, it appears that the U.S.

cable operators are lagging like the DirecTV and Verizon, even EchoStar, Dish.

Are you seeing increasing interest in HD from the U.S.

cable operators in terms of their purchases, or is it a pretty consistent purchasing pattern?

Well, we agree with the top level assessment, that the market is doing nothing but getting more competitive.

I think cable customers are very aware of what's happening in the market.

I think they are very shrewd as well as prudent in what they are going after, and we don't see any marked adjustment in their strategy or their approach to HD, but we believe that they're fully cognizant and fully prepared to respond to what's happening competitively, directly with HD content as well as mirroring up content with some of their on-demand offerings, which are perhaps a unique differentiation for -- differentiating application that they bring to the marketplace.

Everything that they are doing as well as what others are doing, are not necessarily immediately evident publicly.

I think we all look forward to conference calls from the leading cable operators over the next week or two here.

But our belief is that this is kind of unfolding as we've envisioned for quite some time.

We've expected to see a heavy push around HD, and we expect all the players, satellite, telco and cable to be fully in the game.

Okay.

Thank you.

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

Hi, guys.

Thanks for taking my call.

Patrick, I asked you a question the last conference call.

Basically it was how do you see the aggregate demand for products produced by Harmonic?

The same, better or worse than it was at the beginning of the year?

And your response was the same or a little bit better.

How do you feel now about that?

If asked the same question?

I -- I guess we're feeling modestly better than we were after the first quarter.

We've definitely seen demand pick up.

We've talked about a 1-to-1 book-to-bill ratio, and we feel relatively good about the demand for our products across the spectrum of what we're doing, Paul.

Good, good.

I was hoping that would be the answer.

Now, I need to ask some other questions that will pertain to the second half growth and then looking at '09 here, but in prefacing the questions, I don't want them to take anything away from what you've accomplished in the couple of years you've been there and doing this job.

You have pulled off miracles, but if we look at what you're saying for second year, at the midpoint, it implies that we are looking at 14.6% year-over-year growth, '08, full '08 over full '07, which is just slightly below the range in that 15 to 20%, and then as you you were talking here, you said that edge and access should be a little larger and that video processing should definitely be larger in the second half, although second half is just marginally up from first half.

Should I take it that telecom is going to soften in the second half?

Telecom and other?

That's probably a space, Paul, where we have the least amount of visibility, as we've been saying I think for the last couple quarters.

And it is frustrating, but this is still the least mature market, and we had a particularly good quarter this past quarter, and are pleased about that, adding some new customers, closing some business with some existing customers.

But as we look at it the second half of the year, I would acknowledge that business around IPTV and with telecom operators, we've got the least visibility of all the markets that we serve.

You've developed a very good reputation of promising conservatively and then overdelivering on your promise, and it sounds to me as though you're doing that again.

Not that it's a bad thing, just that's kind of what the second half sounds like to me.

Robin, operating profit margin, non-GAAP for the second half, what do you see there?

Well, Paul, as you said it certainly is very much our goal to keep it in a 15 to 17% range.

I don't see it really coming out all that much differently from the first half of the year.

Maybe -- hopefully, the gross margins tick up a little bit, that's certainly suggested by our guidance, maybe the operating expense ratio also ticks up a little bit as we've suggested, most of that probably coming in the fourth quarter, but overall, as I said, the 16% we did in the first half seems very doable in the second half and I think consistent with the various elements of the P&L that we've discussed.

Okay.

In the second quarter out of the increase in OpEx, how much was an one-time investment to set up a new tax policy for the international office?

It's a relatively small piece at this point.

We are still very much, or at least in the second quarter we're very much in the planning stages.

We talked about $500,000 related to management changes and initial costs and so it's a pretty -- it's a fairly modest number at this point, but we will bear some more cost in the second half as we go forward with implementing the program.

But that's factored into the guidance that we've already given.

Oh, yes.

But you've not taken that out in your pro forma.

No, we have not taken it out of pro forma.

We believe that that is -- that's an ongoing cost of during business, and we don't think it's justified to take it out in pro forma.

Understood.

In '09, you said that you'd be recording tax rate probably in about the mid-30s.

What do you think you'll be paying in your taxes in '09?

At what rate?

Something less than that.

But with this structure in place, it will be a higher proportion than we had originally thought.

So it's very, still very early to speak in detail to these numbers, but I think it's fair to say that probably somewhere in the 20 to 25% of that number ends up being cash.

So again, I wouldn't want to present this as anything other than the regular cost of doing business, and I think our real focus is to get the tax rate down over time, using a number of avenues that are open to us.

Very good.

Just two quick housekeeping questions here then.

What was your backlog in deferred revenue at the close of Q1, if you happen to have that handy?

It was around $82 million, and it grew slightly in the second quarter to end -- we ended the quarter with $84 million.

And then just to kind of cap off '09 and put together the comments that you've made throughout this Q&A, we're looking at, just for modeling purposes, growth -- top line growth somewhere around 15 to 20%, improvement in GP, and operating income somewhere in the 15 to 17% window.

Yes, it's early days for '09, but yes, I think that's a reasonable summary of some of the discussion that's come out of the last hour or so, yes.

Thank you.

I don't want to keep you any longer or we'll be doing review here on Q4.

Good work.

Thanks.

I think on that note maybe, operator, we are beginning to run out of time.

Is there any last questions?

There are no further questions at this time.

All right.

Let me thank you all for joining us, and we look forward to talking with you again next quarter.

Thank you very much.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.