Harmonic Inc (HLIT) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome.

At this time, I would like to welcome everyone to the Harmonic's fourth quarter and year end 2008 earnings conference call.

(Operator Instructions).

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

Thank you.

It is now my pleasure to turn the call over to Mr.

Patrick Harshman, President and CEO.

Sir, you may begin your conference.

Thank you very much, and good afternoon.

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 full year 2008.

It was an outstanding year for Harmonic with record revenues, gross margins, earnings and cash flow.

Underlying this operational success is the strongest product portfolio and competitive position the Company has ever had.

And a consistently growing number of video service providers around the globe who are relying on Harmonic to power their mission critical video services.

Looking ahead to 2009, Harmonic will continue to leverage this strong position across a growing range of video delivery technologies, customer segments and geographies.

In addition to aggressive organic execution, our business will be further strengthened by the upcoming acquisition of Scopus Video Networks with its powerful technology portfolio and extensive international customer base.

While we expect the global economic environment to undoubtedly impact some of our customers' near term capital spending.

We remain convinced that the fundamental market and technology drivers that underpin our opportunities, the trends towards more video being delivered in more formats, to more devices, over more networks, by competitive operators, will remain in force over the long term.

We believe that our technology leadership, diversified customer base and strong financial position give us a great deal of operational and strategic flexibility and position us to further strengthen our competitive position and increase our global market share.

I will now ask Robin to cover the financial aspects of the quarter, and I'll then review some of our 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 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 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 statistical information regarding our business and operations.

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

Today we announced the results for the quarter and year ended December 31, 2008.

For the fourth quarter of 2008, we reported net sales of 96.9 million, up 11% from 87.4 million in the fourth quarter of 2007.

For the full year net sales were $365 million, up 17% from 311.2 million in 2007.

Year-over-year both our domestic and international sales grew strongly with international representing 44% of our annual revenue in 2008.

For the full year, Cable customers accounted for 62% of revenue, Satellite customers 20% and Telcos and others 18%.

Our largest customers for the year were Comcast and EchoStar, representing 20% and 12%, respectively, of our revenue.

By product category; Video Processing products represented 38% of revenue for the year, and Edge and Access products 45%, Software services and other products 17%.

We were very pleased with the year-over-year growth in revenue in all of our principal market segments, geographic regions and product families.

Looking ahead, one of the primary benefits of the Scopus acquisition is the further diversification of our revenue streams by geography, market segment and product category.

Specifically, it will increase our international business and our revenues from markets other than Cable.

Moreover, Scopus has very little customer concentration with no recent 10% customers and revenue spread across a very wide range of customers.

We also improved our gross margins in 2008 reflecting the continued success of our new products and solutions, as well as our sourcing strategy and product design innovations.

Our non-GAAP gross margins were 51% in the fourth quarter and 50% for the year.

The improvements in Q4 was due in substantial part to a higher mix of Software and Services revenue in the quarter.

Our non-GAAP operating expenses in the fourth quarter were up significantly on a sequential basis to 33.3 million.

Some of this increase reflects a full quarter's impact of our active hiring during last summer when we added 19 people during the third quarter.

Some of the additional expense is due to our strong Q4 performance with a consequent increase in variable compensation accruals in the quarter.

Additionally, we took a very close look at our customer receivables in the light of credit and currency markets and current general economic conditions.

We concluded that a few of our international customers have fallen into some degree of financial difficulty and may not be in a position to pay us in full.

Accordingly, in the fourth quarter, we took a $1.4 million charge to increase our bad debt reserves.

Historically, we've had very good receivables experience and minimal bad debts, but we decided it would be prudent in these circumstances to increase our reserves.

In spite of this charge and this substantial increase in OpEx, we increased our non-GAAP operating margin sequentially to 17% for the quarter, which is 16.5% for the full year.

Our other income declined again sequentially, even although our cash balances have increased.

Of course this is mainly because of the very low interest rates which now prevail, particularly on treasury securities.

We recorded a tax benefit in Q4, principally due to an additional reversal of valuation allowance for deferred tax assets, which we have excluded from our non-GAAP results.

However, the Q4 benefit was also due in part to the recent passage of the R&D tax credit for 2008, resulting in an overall lower tax rate for 2008, which is accounted for in our Q4 non-GAAP results.

Our GAAP net income for the fourth quarter was 13.2 million or $0.14 per diluted share, up from 6.6 million, or $0.07 per diluted share for the fourth quarter of 2007.

For the full year GAAP net income was 64 million, or $0.67 per share, up from 23.4 million or $0.28 per share in 2007.

Excluding a litigation charge and noncash accounting charges for stock-based compensation, the amortization of intangibles and the reversal of the valuation allowance, our non-GAAP net income for the fourth quarter of 2008 was $19 million, or $0.20 per diluted share, up from 16.9 million, or $0.19 per diluted share for the same period of 2007.

For the full year 2008, non-GAAP net income was 66.4 million, or $0.70 per diluted share, up from 43.1 million, or $0.52 per share for 2007.

This strong operating performance further improved our balance sheet.

As of the end of December 2008, we had cash, cash equivalents and short-term investments of 327.2 million, up by approximately 34 million from September.

As we recently announced, we plan to acquire Scopus for approximately $51 million in cash, net of Scopus cash and short-term investments and before transaction expenses.

The acquisition is expected to close in March and will still leave our balance sheet very strong with pro forma cash of at least 270 million, allowing us to continue to pursue further acquisitions or other initiatives to achieve our strategic goals.

One reason for the increase in cash in Q4 was our performance in receivables which dropped from 75.9 million at the end of Q3, to 63.9 million at the end of Q4.

This corresponds to DSO's of 60 days down considerably from 76 days at the end of Q3.

We believe this shows that the vast majority of our customers are paying us according to their usual terms.

And where we have a few customers in financial difficulties, we've made appropriate reserves as I discussed earlier.

Our net inventory was 26.9 million, down over $5 million from the previous quarter and over $7 million from the end of 2007.

We're very pleased with our success in improving our inventory turns during 2008.

And finally, our capital spending was around $2 million in the fourth quarter and approximately $8 million for the full year as anticipated.

So turning to the outlook, we're moving into 2009 with the fundamental trends and competitive dynamics that have been driving our business remaining very relevant.

Our customers are at different stages of their annual planning processes and we understand that many have still not yet finalized their capital spending budgets for the year.

However, based on discussions with our customers and public announcements by some major telcos, we expect overall capital spending to be flat to down during the year in response to global economic conditions.

Moreover, because of a slowdown in orders towards the end of the fourth quarter, we are moving into the first quarter with an order back log and deferred revenue of around $74 million, lower than a year ago.

Now please keep in mind that historically the first quarter offers the least visibility with respect to our customers capital spending plans.

And it is seasonally the slowest period of the year with sales generally building up as the year progresses.

This pattern has been quite pronounced in the last few years.

We are expecting this historical pattern to continue with sales growing sequentially during the course of 2009.

Yet the current challenging economic situation creates substantial uncertainty.

So while we have been in the practice of providing rolling six-month guidance, making projections beyond the first quarter of 2009 is quite difficult.

So taking these factors into consideration and excluding any impact of the anticipated Scopus acquisition in March, we expect that our net sales for the first quarter will be in a range of 72 million to 78 million.

Non-GAAP gross margins for the same period, excluding stock-based compensation and the amortization of intangibles are anticipated to be in a range of 47% to 49% and non-GAAP operating expenses in a range of 30 million to 31 million.

The corresponding GAAP numbers are 45% to 47% and 32 million to 33 million.

While our contract manufacturing model provides us with flexibility, we do have some internal fixed costs which takes longer to adjust to lower revenue levels and which we expect will impact our Q1 gross margins.

However, we believe that our strong and consistent gross margin performance throughout 2008 demonstrates that our product strategy is on the right track and our long-term gross margin targets continue to exceed 50%.

With respect to operating expenses, our strong performance in 2008 allowed us to add resources in the second half of last year.

But we are now planning to hold head count flat or even lower it slightly in the short term.

We ended the year with 698 employees and we have currently stopped hiring except for a handful of critical positions.

While we intend to maintain our R&D capability and capacity for competitive reasons, we are reducing spending in other areas where there's a lower volume of activity in the current environment.

Additionally, we will have much reduced variable compensation expense in Q1 and expect no recurrence of the bad debt charge which we took in Q4.

As a result of these measures, we believe we can reduce non-GAAP operating expenses to a range of 30 million to 31 million allowing us to remain very comfortably profitable even with lower revenue than we've seen in recent quarters.

With respect to our tax rate for 2009, we're not yet in a position to update you with any precision mainly because of the uncertainty around the revenue and particularly the geographic mix expectations for the rest of 2009.

However, as we've noted on previous calls, we have reversed our valuation allowance against our deferred tax assets during 2008 and we will become a regular taxpayer in 2009.

Once again, I underline that these expectations exclude any impact of the Scopus acquisition.

As we discussed in December, Scopus reported revenues of 55.4 million for the first nine months of 2008, up 35% from the same period in 2007.

Its gross margins are around 49%.

Upon full integration, we expect to realize substantial synergies of between $8 million to $10 million on an annualized basis, including the integration of product lines and road maps, sales and marketing efforts and public company costs.

With these synergies, we still expect the transaction to be accretive to our non-GAAP earnings in 2009.

After completion of the purchase accounting at closing, we plan to provide more financial guidance for the combined Company.

In summary, we're very pleased with our execution and performance in the fourth quarter and throughout 2008.

While there are significant global economic uncertainty in the near term, we have a strong balance sheet and a healthy operating model allowing us operational flexibility and the opportunity to use our strong financial condition to our competitive advantage.

We like the diversification that the Scopus acquisition brings and the attractive business and cost synergies that come with this consolidation.

Over the longer term, we're very optimistic about our industry and our opportunities for profitable growth.

Patrick.

Well thanks, Robin.

2008 was clearly a very successful year for us.

In addition to our excellent financial results, we're equally pleased with the underlying technology innovations and competitive positioning we've achieved.

Throughout the past year, we continue to invest in both leading edge new product development and extending our market presence around the globe.

As a result we've extended our technology leadership and market share across a broadening range of applications, customers and geographies with both incumbent and emerging video service providers selecting our award-winning systems and solutions to power their growing array of new video services.

Looking ahead, we continue to see significant growth opportunities across the worldwide broadcast, cable, satellite and telco IPTV market segments that Harmonic has historically addressed, as well as with the video content owners, programmers and newer internet video players we are just beginning to address.

So far this week we've heard from both Verizon and AT&T that their video services continue to gain market share.

At Big Sky B, the large satellite player in the UK, just announced solid subscriber gains, churn reduction and acceleration of HD penetration.

Netflix communicated strong subscriber gains driven by its new streaming service.

It's therefore clear that competition between video delivery service providers and platforms remains intense despite the macro economic environment.

And that the new video delivery technology that we provide will continue to be a strategic enabler of this competitive marketplace.

High definition video is at the center of a lot of this competitive activity.

And as was emphasized in a recently released market research report from Instat, the global transition to high definition viewing is still in the early innings.

Our newest high definition products, an exciting product road map, continue to position us the forefront of this market opportunity with all types of service providers.

We also see intensifying market focus on multi-format video delivery to a growing array of wired and mobile end-user devices.

Our newest Software based solutions and technology road map for these applications will continue to be a powerful incremental growth driver for us with both new and traditional customers.

We also expect to continue to see very strong growth of video streaming over the internet, putting increasing stress on the Edge and Access portion of the network.

Our market leading Edge QAM solutions for modular CMTS and IPTV over cable applications, indirect citing new WDM transition solutions for bandwidth expansion will be key technologies for cable operators around the world seeking to scale their broadband infrastructure to accommodate this explosion of internet video.

And for all of our customers, we also continue to see growing strategic importance of video delivery solutions that can support both real time and on-demand consumption.

Correspondingly, we expect requirements for our new video capture, storage transcoding, streaming, and catch-up TV software applications, and our [VOD] Edge processing solutions to - - continue to be a growing part of our business.

While organic technology and solutions development is the center piece of our strategy, we're also using our strong financial position to extend our market leadership and worldwide customer base through a strategic acquisition.

Our recent agreement to acquire Scopus represents an additional significant step forward in the growth and diversification of our business.

Nearly half of Scopus' revenue is derived from contribution and distribution markets where Harmonic does not actively participate today.

The contribution market calls for high quality delivery of news, sports and other live events to broadcasters or other video programmers.

The distribution market involves the subsequent transmission of high quality video programming from these programmers to Harmonic's traditional cable, satellite and telco IPTV customers. With global transitions from standard to high definition, from MPEG-2 to MPEG-4, from DBBS from DBBS-2 modulation, and from single channel back haul of live events to multi channel, all just getting under way.

And with new applications such as multi-format and file-based delivery beginning to emerge, we see significant growth opportunities for Harmonic in this space.

Furthermore, it remains a critical part of our strategic vision that international expansion will be a key growth driver for our business.

We've been very successful in organically expanding our business in western Europe and select Asian markets.

While Scopus has been very successful in emerging markets, such as India, Russia, the former CIS countries and several African nations.

The addition of Scopus' broad array of end customer and sales channel partner relationships will enable us to further accelerate the globalization and diversity of our business.

Finally, Scopus will also be adding powerful and complimentary technology and associated video R&D talent.

The addition of Scopus' R&D team will enable Harmonic to remain the pace setter for developing innovative new video delivery technology.

In coming periods, you can expect Harmonic to announce a number of high impact new product introductions.

Moving into 2009, we intend to continue to extend our technology leadership in what remains a dynamic video delivery industry, despite the expected impact of seasonal slowing in the first quarter of and of more general global economic conditions on our customer's near-term capital spending.

We remain focused on controlling costs and delivering outstanding operating results while making the necessary investments to grow our business over the long term.

With our technology leadership, diversified customer base, strong financial position and operational and strategic flexibility, we feel excited and confident about our ability to further strengthen our competitiveness and extend our global market share in 2009 and beyond.

In closing, I want to take this opportunity to thank our outstanding employees, suppliers and business partners for their dedication and contributions to our success during the past year.

With that I'll conclude the formal part of our presentation and now Robin and I will be pleased to entertain any questions that you might have.

(Operator Instructions).

Our first question comes from the line of George Notter with Jefferies & Company.

Sir, you have the floor.

Hi, thanks very much.

My question has to do with bookings.

I calculate your bookings in the December quarter at about 71 million.

- - if I go back and look at the year ago quarter, you did about $96 million in bookings in December.

I guess I was trying to figure out how you guys are thinking about seasonality right now?

Obviously, the bookings number was down a ton here in December.

Is that - - even on a sequential basis and certainly on year on year, how are you thinking about seasonality?

Is it that the orders are coming in softer now in Q4 than they were in the past?

Do you expect it to come back in Q1?

What's the thought process?

Thanks.

Well first, a couple of things.

Going back to Q4, I think it's important also to remember that the bookings were hugely up in Q3.

So there is a - - there is an inherent ebb and flow to projects and orders.

In this particular year, we saw a real burst of activity.

In fact, we had a record bookings quarter in the third quarter.

And that was actually driven by a huge amount of activity late in the quarter that we had actually frankly expected to take place in Q4.

So when we look at the back end of the year, it was really in line with what we expected.

Although I would agree that it was a little bit more in Q3 and a little less in Q4 than we had expected.

And that was some of what drove I think an upside in the results relative to our initial expectations in the back half of the year.

- - all of that being said, heading into this year, it remains true that the visibility is not too great.

We don't read too much into what happened in Q4, but we do know that from most customers who have made some decisions, as Robin stated, we do expect CapEx among many of our customers to be flat to down.

In many other cases, however, those CapEx discussions are still very much underway and not yet resolved.

We're finding ourselves in a position where we're in a historically slow quarter for capital expenditures, the first quarter of the year, and I'd say the visibility is incrementally worse than what it normally is.

Hence, we're confident in the guidance we've given for the first quarter.

But I think we still want to wait and see a little bit more what our customers have to say about the rest of the year before we get a better feel for what the remaining quarters will look like.

Got it.

Okay.

And then separately, I also wanted to ask about M&A.

Your acquiring Scopus here, deal closes in March.

I guess I was - - based on your prepared remarks, you mentioned that you have a significant cash balance pro forma for the Scopus deal and that you were still interested in pursuing M&A and other strategic initiatives.

Could you give us more color there?

Is it likely that Harmonic would go out and look to acquire after the integration of Scopus, could you do something even sooner?

What's the thought there?

Thanks.

We remain very interested in - - in acquisition opportunities that make good sense technologically, from a customer basis as well as financially.

And we have been and we will continue to keep our eyes open.

And we think that the current environment as well as our position puts us in a good position to execute deals.

- - I think - - in the six weeks or so between now and the close of the Scopus deal, I would say it's probably unlikely to see anything else.

But on the other hand - - you shouldn't be surprised to see us do something else later in the year.

If - - if and as the opportunities present themselves to us.

Thanks very much.

Thank you.

Okay.

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

You have the floor.

Thank you.

Hello Patrick.

Hello, Robin.

My question is really if you take a step back and people think that generally consumption of video services, it goes up cyclically.

So I am surprised why you are seeing the budgets on video turning down?

Is it that customers are done with some of the upgrades they had in mind, or what's really going on?

I thought video budgets would be more resilient to these CapEx downturns.

I'm sorry, perhaps I wasn't clear or I misspoke.

Our discussions to date with customers who are still working through their plans or have settled on plans.

Those CapEx - - the information we have is very top down.

So the numbers that I quoted are what our customers are telling us for their overall total CapEx.

So I should make that clear, that where we do have information, we have had communication and people have told us that their CapEx is flat to down.

That's been their - - the total pot.

What - - quite honestly and somewhat regrettably, we have less visibility on is the allocation of that CapEx.

And of course, I think as your question points out, for us it's really all in the mix.

Our understanding is as many of the CapEx discussions are, however, being driven from the top down.

And while our visibility of total CapEx is limited, I regret to say that our visibility on the underlying allocation of those CapEx is even more limited.

We - - so we have limited, we have visibility into what's going to be happening in the first quarter, but we're still waiting to hear and understand how exactly the CapEx will be allocated over the remainder of the year.

I would say we remain cautiously optimistic as your question suggests, that we will see a growing proportion of whatever CapEx there are going into new and competitive video services.

Patrick, if you look at this ongoing digital TV transition, did Harmonic benefit from that in the second half '08.

And should that be seen as a one-time benefit, that now the transition is close to being over, that benefit goes away?

I think there was perhaps a marginal benefit, Vivek, encoding business with the so-called ATSC channels in the US who were perhaps scrambling to put up digital channels.

So not a significant impact.

And, yes, I would agree that I think that small incremental impact was probably a one-time with this transition.

I do want to step back from that and say that - - the ATSC and broadcast channels and video broadcasters in general is an important market segment that we feel strategically we have underserved and under addressed.

And certainly part of our strategic rationale with the Scopus acquisition, who has both a product line as well as a relationships and a history of sales focus and activity in this market.

We expect to raise the level of activity with broadcasters.

And we see a whole host of activities and ongoing spending initiatives there that go beyond the - - the simple 2009 digital transition.

So that's at Harmonic we're learning more about it.

And I think you'll see us over the coming year and years, reporting more and more revenue from that segment and - - but not specifically associated with the transition to digital.

Patrick, what - - as you look at 2009, I understand that - - visibility is limited and you're not really giving guidance.

But do you see the Company actually growing organically this year.

And if yes, where would that growth come from?

Would it be from your cable customers, from satellite, from telco, or do you think it's all going to come from Scopus?

Well, I - - we are uncertain and I don't - - we made a decision not to give guidance beyond the first quarter.

And really, as you might imagine, we see a range of scenarios and we're really uncertain.

I tell you we look at the opportunities and the prospects for investment from our customers.

We do not see substantial change of the dynamics and the distribution of those opportunities from what we saw in 2008.

We see a lot of activity that we think needs to happen within the cable space, more aggressive moves to HD, much more aggressive roll out of DOCSIS 3.0 and associated bandwidth expansion as well as continuing to leverage the early head start in on-demand.

We continue to see good opportunities in satellite as well, not only new channels, but MPEG-4 channels.

The first ones have now been up there for several years.

So we - - with some of our newest technology that's been delivered or is in the pipeline, we see some pretty exciting opportunities to go back and do an even better job of compressing some existing HD content.

So in short, Vivek, we see good rationale and good opportunities across our customer segments and across geographies.

How exactly that's going to shake out, and whether that affords the opportunity for substantial top line growth, we still have to wait to see.

And I think we'll start to get a better idea later this quarter when more of our customers come out with their earnings and talk more concretely and publicly about their plans for 2009.

Just one last one for Robin.

Robin, I know you are suggesting that we should model - - tax at some statutory level.

I'm wondering, does Scopus offer any benefits on the tax rate.

Can the combined tax rate be below - - for example, if we are modeling 35%, can the combination with Scopus make that - - be below that rate?

Vivek, yes, I believe so.

I mean clearly we have not completed all of the work we want to do.

We've certainly done some top down modeling, but there's a lot more to be done.

But I think in general, the profile of their revenue distribution across geographies and their tax loss attributes and so on certainly give us the opportunity I believe.

Over time, perhaps not so much this year, but certainly over time to enhance what we believe we can do in addition to - - Scopus will enhance what we can do organically.

And as we've indicated in the past, we've certainly done some restructuring that is helping us to - - that should help us this year to lower the rate below the statutory rate.

It's simply that there's still a lot of variables, particularly on the top line as Patrick's just discussed.

So we don't really feel in a position to update what the kind of position that you would all like.

Thanks and good luck.

Thank you.

Thank you.

Okay.

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

Sir, you have the floor.

Yes, thank you.

If I may, I'd like to dig a little deeper into this - - the question of visibility in terms of the three customer segments that you guys addressed, namely cable, satellite and telco.

Clearly with - - notwithstanding the overall - - economic back drop - - Comcast continues to - - push ahead with DOCSIS 3.0 where quite a bit of your Edge QAM deployments seem to be tied to.

So I can't help but wonder maybe, Rob, and you can give us a little bit of color as to whether you're seeing - - less certainty in the satellite business in the near term.

And maybe that's what's behind the - - the increased caution that you're putting out.

Or is it more of an international - -Telco related situation?

Well, I'm - - I'll let Patrick add more color in a minute, perhaps, if he chooses to.

But no, we don't see it as being particularly focused on any geography or market segment.

Now that said, there's no question that some of our international customers are perhaps doubly challenged by - - not only by the - - by conditions in credit markets, but also to some extent by recent substantial depreciations of their currencies.

So if I were to try to pick out any particular group of customers, I would acknowledge that there are some and it's very case by case, country by country.

But there are certainly some that are maybe in some - - with some greater challenges than others.

But I think particularly coming back to the - - North American, western European markets, I think the general lack of visibility we've talked about is really across the board.

And the customers that we have spoken to and the customers we've cited here in our discussions are of all shapes and sizes.

So we don't see it as being particularly focused on one group.

Has Dish given you any particular color as to their targets for high definition at this point or is it still kind of a fairly unknown picture?

Well - - Greg, I'm sure you can appreciate that we are not in a position to discuss any specific discussions with any customers.

I would just observe at the top level that all of our large customers, we think, are quite healthy and are looking at the market quite aggressively.

And as I said, a couple of moments ago, we're cautiously optimistic about the way things will unfold later in the year.

- - you mentioned cable in particular earlier.

And I think it bears remembering that we had a very slow start from a bookings perspective in Q1 of 2008 with cable and of course we turned out to have a good rest of the year.

So I think we've given appropriate guidance therefore for Q1 of this year.

And thereafter, we're simply saying we want to wait and see what they say publicly about what they plan to do.

All right.

And just as a final follow-up.

In addition to the 8 million to 10 million in terms of synergies from Scopus that you expect.

Could you comment on any potential for any supply chain management savings or component savings associated with - - realigning manufacturing and things of that nature?

We're certainly optimistic that over a medium to long term we can do even better, realizing even more operational benefits as well as - - top line synergies which we've not really modeled at this point.

I think, however, it's prudent to wait till we - - till we - - we've really got the integration of the companies well under way to be more specific and to really start to factor such benefits in.

Thank you.

All right.

Thank you.

Okay.

Our next question comes from the line of Todd Cooper with Stephens, Inc.

Sir, you have the floor.

Patrick or Robin, see if this question makes sense.

If you look at the process you took to arrive at your guidance for the first quarter, how much of the guidance is based on true visibility given back log, bookings, that kind of thing.

And what percentage is based solely on your perception that spending by your customers will be down for the year and maybe a little slow out of the gate.

Okay.

Todd, let me take a shot at that.

We came into the year, as we said, with back log and deferred revenue of around 74 million.

Typically, and I don't think this quarter is any different, we certainly almost every quarter see the majority of that converted to revenue in the current quarter.

So although our back log is certainly down from where it was three months ago or even the same period last year, we still have pretty decent visibility over revenue for Q1 simply because of the volume we have.

So there is - - I think the comfort that, as I say, at least half and some more of that will convert as well as business that we have seen materialize in the first - - in the first weeks of this quarter.

Is there anything that your major customers could say about their CapEx spending plans when they announce them publicly that would - - that could make the revenue in the first quarter be better than you're expecting right now?

Well I think ultimately it's what they do rather than what they say - - this is - - this is not unusual to see a slow start to the year.

If I look back a year ago without the economic back drop, I think Patrick mentioned this earlier, the order intake in the first quarter was relatively light, our customers took a while to get going and to put their plans in place.

And I think we're just seeing that again this year with the added back drop of the economy adding a further note of caution.

So at the end of the day, I think it's what they do.

And as Patrick pointed out, it really is mostly to do with the mix of what they are working on and the mix of projects they have rather than the absolute levels of CapEx.

What I would expect to get from their conference calls is a sense of their confidence or lack of perhaps, but their confidence in their businesses and how they see their businesses performing going forward.

Okay.

You've reminded us that you had at the beginning of the last quarter a very good book to bill, it was 1.2.

And Patrick, you said that in a number of those wins the revenues would be recognized in and beyond first quarter.

Are you seeing any change in those projects maybe earlier than expected revenue recognition thus the upside this quarter or any push out in delays of any - - of some of those projects?

No, I'd say there's no substantial deviation from the visibility we've had on projects.

I think we've been executing quite well on our projects and programs.

And I think we feel quite confident that the rate going forward - - that they will go according to plan.

So to the extent, Todd, that there's an upside, I would say there's probably an upside in terms of new business that materializes in a given quarter.

Okay.

And then one last if I may.

Kind of some intriguing language in the press release about we should expect important new product introductions.

Should we look for new product categories from Harmonic that's developed internally.

Or are you thinking more in terms of like a recent announcement more extending and/or improving the current product offerings?

Certainly in the near term it's more the latter.

We - - I mean we - - we have an R&D team that's executing, I think, better than ever before, as I told you - - as I mentioned earlier, we feel extremely good about our competitive and technology position.

And we have recently announced, or expect to announce over the coming several months, major extensions or new additions to our product line in just about every category.

So we - - we're quite excited about our pipeline of activity and the impact that continually introducing these new products into the marketplace will have for us into 2009.

Okay.

Thank you.

Good luck.

Thank you.

Okay.

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

You have the floor.

One quick question, if I may.

International sales, guys, were up pretty substantially in the fourth quarter relative to the third quarter as were gross margin.

Is it safe as we look into 2009 to assume that there's not significant pricing pressure given the decline.

Or, I guess, a significant decline in demand despite the strength in the US dollar for international opportunities?

Yes, 2008 was a great year overall for us outside of the United States.

And by and large we expect - - we expect those markets to continue to be good contributors for us.

I mean, in fact, as we've mentioned a couple of times, a good portion of the logic behind the Scopus deal was their strength and depth of customer relationships overseas, particularly in some countries or markets where we have not historically participated.

So - - pricing pressure, I think, is a reality, it's always there.

But we've dramatically increased, I think, our presence, our execution, our credibility, our brand recognition overseas.

And we expect to continue to push the advantages, I think, that we created last year.

And I think the addition of Scopus will be an additional benefit and driver of us continuing to increase our success overseas, in general.

Okay.

Thanks.

Okay.

The next question comes from the line of Jack Monti with UBF.

You have the floor.

Okay.

Thanks for taking the question.

I want to follow-up on something that was previously asked.

When you look at the back log, is there any particular customer segment that maybe has more strength or weakness than you expected at this point?

And, also, as far as orders through January, kind of the same question.

If there's any particular customer segment that is stronger or weaker than you had anticipated coming into this quarter.

Thanks.

Jack, no, I don't think so.

As I tried to say earlier, we don't - - with the exception perhaps of a few international customers in countries which have particular challenges and those customers can be in all - - could be in any of our market segments.

We don't see any particular - - particularly different pattern to the - - either in the back log or in the incoming orders that we've seen so far this year.

And as far as gross margins, they were pretty healthy in the fourth quarter.

I was just hoping you could help us understand the change that you see - - the changes that you see in terms of the guidance for the first quarter.

What's changing there that leads to the lower gross margin guidance?

Well I think the principal change is that we are looking - - the guidance we've given in revenue is quite a bit lower than we've seen in recent quarters.

And although we've got a contract manufacturing model which really helps us largely to have a largely variable cost model.

I mean there are still some internal costs and overhead costs that just can't be adjusted so quickly in the short-term.

Nor, in fact, do we necessarily want to adjust them and if we do believe that the rest of the year is going to start to see some sequential growth.

But it's mainly the law of having a certain amount of fixed costs to manage our supply chain.

Okay.

So just to be clear, there's no significant change in mix, it's mainly just volume related?

It's mainly volume related.

The only thing I can - - the only thing we did take into account is we do have one fairly significant project that we expect we will close out in Q1 where the margins are quite a bit lower than our typical margins.

And we took that into account because we expect that revenue is going to convert in the first quarter, but aside from - - aside from that, I would say it's mainly - - it's mainly to do with the effects of the lower volume.

Great, thank you very much.

Okay.

Our next question comes from the line of Larry Harris with C.

L.

King & Associates.

You have the floor.

Yes, thank you.

First off, congratulations on the cash flow generation in the fourth quarter.

Two questions.

One, these new products that we expect to see, I guess, in the next few months.

Could they have a significant impact or material impact, say, on revenues in the second half of the year?

And the second question that I have is, it was announced at least by one of the trade press publications that you're going to be supplying universal Edge QAM's or maybe already to charter along with Cisco.

And I was wondering the decisions in terms of the purchase at Universal Edge QAM's, say in conjunction with CMTS deliveries.

Is that a decision that tends to be made by Cisco or is that a decision that tends to be made by the cable operator?

Thank you.

Well I'll take the second question first.

I can't place - - or, sorry, not sure about this news that you spoke to, but I can address the more general question and our Edge QAM activity, we have worked with a number of partners, including Cisco.

But our relationship is ultimately with the end customer and the vast majority of our sales it to the end customers.

I think it's important to remember that part of the strength of our positioning in the high speed data, or DOCSIS 3.0 opportunity, is the fact that our Edge QAM's already have such a large install base for video on-demand applications.

So in many cases or most cases, we already have deep, existing relationships in general and around Edge QAM deployments in particular, with leading cable operators around the world.

And the support of the DOCSIS 3.0 traffic is really an incremental service capability offered on a preexisting Edge QAM relationship.

And you know what, Larry, I'm sorry, I've forgotten the first part of the question.

Sure.

The new products, I guess, that you're going to be introducing in the next few months.

Oh, yes, yes.

Will they have a significant impact?

I believe they will.

In many cases, they will - - they will replace some existing products, but we think that the performance, the value for our customers, the competitiveness will be material.

As well as we do expect them to come into play - - quite quickly.

And, therefore, be responsible for big pieces of the revenue that we might associate with these different product categories.

So it could be as soon as the second quarter we could see some impact?

I'm speaking to a number of programs.

We've scaled up our R&D quite significantly as you know over the last six to nine months.

We're really excited about some of the things we're doing and the capabilities.

So I don't want to point or have anyone thinking about one particular product development program.

But really across everything we do in video processing, our software for on-demand, our recently announced new H&C product as well as in the Edge QAM space.

We're quite excited about what we're doing across all of these areas, and I think over the next several months you will see - - you will see exciting things from us in each of these areas.

Great.

Thank you.

All right.

Thank you.

Okay.

Our next question comes from the line of Amir [Roswadowski] with Barclays Capital.

You have the floor.

Thank you very much, Patrick and Robin, for taking the question.

Patrick, just following up on sort of your last comment, certainly you folks have - - seem to have scaled up R&D ahead of the launch of some of your new products.

How should we think about sort of support for these new products in terms of operating expenses.

And perhaps are you folks looking now that these new products are coming to market to ratchet down R&D in 2009?

In terms of support, I think the rest of the infrastructure of the Company is very appropriate and we feel quite well placed.

As a matter of fact as Robin mentioned earlier, some - - we do have some levers at our disposal to scale capacity up and down.

I think one area that we feel very strongly about continuing with the current level is R&D.

- - I think one of the themes of the success of the business in addition to the revenue growth, I think the growing market share, has also been the growing gross market expansion.

And we believe that's very much been driven by innovative designs and really high value product innovations that we've brought to market.

And as we continue in our long-term quest to continuously raise the gross margin profile of our products and solutions and we believe the way to do that is by continuing what's been successful for us over the last two years which is this continuing innovation from an R&D point of view.

So that is one piece of the equation that we continue to press forward with and we see very good financial results, returns on this investments to date.

And when we look at the combination of the opportunities in terms of both revenue as well as gross margin expansion, we think it makes a lot of sense.

And then perhaps - - just touching on that gross margin expense, I mean certainly you folks have been very successful with expanding your gross margins.

How should we think about some of the puts and takes there for 2009?

I mean certainly the demand environment, at least visibility indicates - - sort of a softening demand environment.

Are there specific product areas that perhaps - - or could impact sort of your gross margin progression over the course of the year.

Or how should we think about sort of the puts and takes from that perspective?

I don't think we expect any substantial - - certain product lines will be relatively - - under relative pressure or relatively unpressured.

So I think that we expect and we're planning to - - over time to continue basically the steady, quarter-to-quarter variations will absolutely happen associated with product mix in a given quarter, et cetera.

But I think over a slightly larger arc of time, I think you will continue to see us do what we've done.

And I think the mix of our products and the mix of our sales are slowly, but relatively steadily moving towards higher margin products.

And we don't see that general trend being substantially impacted or altered in the context of near term - - capital spending pressure.

Do you folks anticipate any pricing pressure to perhaps impact - - given some of the service providers may ratchet back - -

Certainly.

I mean this is - - this is undoubtedly, has always been a very competitive space.

We have some very strong competitors and pricing is certainly one of the - - is one of the elements in that game.

And we don't expect that to go away.

And, in fact, I think it could be argued that the pricing pressure may be somewhat exacerbated in this environment.

All that being said, we think a lot about pricing pressure and we think a lot about underlying cost in our product development programs.

And so with our newer generations of products, we endeavor not only to raise the value proposition, but quite frankly also to reduce the cost.

And - - I think we continue to be well positioned from that point of view.

So I - - as we think about gross margins, we think - - we think a little bit about pricing.

We probably think a little bit more about some of the volume related and overhead constraints or issues that Robin spoke to a minute ago, though.

Great.

Thank you very much for taking the questions again.

Okay.

Gabe, perhaps we have time for one more quick - - one more question.

One more?

Okay.

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

You have the floor.

Hi, guys.

Thanks for taking my question.

I've got a couple of questions here.

On the Scopus product line, how would that break out on what you estimate their sales to be this year between two or three product categories?

Paul, the vast majority of it will fit in what we currently define as video processing.

Okay.

Would that be 75%, 80%?

Oh, yes, yes, yes.

In fact, it's - - I mean it's probably over 90%, yes.

And the balance in what we - - what we define as Software and Services.

Okay.

Would it be fair to model them for about 65 million for the year do you think?

For which year?

Okay.

I'm sorry, calendar 2008.

Well, I - - I think Scopus is due to report their numbers in a week or two and so I think I - - I don't think I would want to comment on their 2008 numbers until they're - - until they report on them.

Okay.

Very good.

Now you mentioned that you're going to have a conference call after the close of the Scopus deal.

Is that an implication that we'll have a call in March or are you intending to wait until April?

Well, I don't think we specifically spoke to a conference call, Paul.

I think what we would like to do is once the deal closes and once we get our arms around a level of details that we need to get ourselves as comfortable as we want to be, we'll give some updated guidance to the street.

Exactly how and when we do that, I guess I would prefer to - - not to be specific about here.

But obviously once we're in control, we would want to update you as much as we much as we can and as soon as we can.

Okay.

I appreciate that.

Any word as to whether Yoren Simler is going to come over with the deal?

There's a whole lot number of planning and integration, organizational issues, Paul, that we're working through.

And not to be cryptic, but we're still very much working through those.

And I think we prefer to let all the dust settle before we start communicating how things are going to work out.

Okay.

I understand.

I just was curious if there had been anything settled on that one subject.

For Q4, who were the 10% customers?

I think you gave full year, Robin, didn't you?

Yes.

It's actually for the Q4, it was the same line up, it was Comcast and Equistar.

And both the percentages were actually very close to what they were for the year as a whole.

And if you just bear with me a second, I can probably quote these to you right now.

Yes, Comcast was 19 for the quarter, 20 for the year.

Equistar was 12 for both the fourth quarter and the year as a whole.

Very good.

We're all trying to crawl inside your head on this guidance issue here and I'm not going to try to push you too much on this.

What I'm curious about, though, is how much of your Q1 guidance this year is based on turns versus what you had based on turns last year?

Yes, my head is starting to hurt from all the crawling that's going on, but - - I don't think - - really the mix is not - - we don't see it being that much different from last year.

I mean our back log contains, as it always does, and I think as I said earlier, a significant amount of deferred revenue on various types of projects of all shapes and sizes in different places.

And I -- I don't see the mix as being particularly different with respect to - - what's already in deferred and what's coming from turns.

Component companies quite often will establish what their turns assumptions are per quarter.

I just thought I'd ask to see if that's something that - -

As I said earlier, the majority and it's actually more than just a thin majority, is coming out of the existing deferred revenue and back log that we had at the beginning of the year.

And the balance does come from turns business.

I mean much of our Access business, particularly, and even our Edge business to a large extent tends to be more of a turns basis, whereas the video processing is - - very often in deferred revenue for some time.

You guys did particularly well this year in Edge and Access.

Would you attribute that to the universal Edge QAM primarily?

We did see strengths all the way around, but, yes, it was a really particularly strong year, I would say, in the -- for us in the Edge QAM space, driven by both VOD activity.

Where we continue to see solid expansion of VOD offerings and VOD transactions with cable operators around the world and.

And of course, as we've said before, we're very pleased by the growing penetration of our Edge QAM into high-speed data applications as well.

One last question then.

What products are driving your success in Software and Services?

Yes, I'm hesitating a little bit because it's - - in a lot of ways, we've got a spectrum of smaller products that really work well together as a broader solution.

So not pointing at any one particular area, but the software coming out of - - and we've adapted out of our inTone acquisition continues I think to do very well for us.

It was a very good year for us in terms of a Rhozet point of view.

I think you recall seeing a number of press releases.

We're really pleased with the way the market is accepting Rhozet technology.

And the way Rhozet is bringing us into some new customers.

And, of course - - on-demand technology, trance coding technology and some of the other things we're doing around processing and video in the software domain.

They all tend to work together for broader system solutions sitting behind.

Particularly, file based video delivery platforms that we see increasingly being built out by both our existing customers as well as customers who are brand new to us.

Thank you, and again, Patrick, congratulations on the marvelous success you've given us all with Harmonic over the last three years that you've been there.

Well, thanks very much.

We very much appreciate that recognition and, of course, we are pleased with the results.

You know, Gabe, I think we do perhaps have just a little bit more time if there is one additional question Paul's.

So we'd like to take that and then wrap it up.

Okay.

Fantastic.

Our last question comes from Mark Sue with RBC Capital Markets.

You have the floor.

Thank you.

Patrick and Robin, if you look across your customer basis of Satellite, Cable and Telco.

Any sense of what percentage of your revenues are project driven, and what percentage may be maintenance driven?

And then as you consider that question, maybe if you can give us a sense of with the moving dynamics, is 72 million, does that kind of like settle, is that kind of like the bottom for you in terms of what you're seeing in activity.

Or is it still somewhat uncertain beyond the first quarter at the 72 million mark?

Maybe, Mark, I could ask you for a little clarification as to what you mean by maintenance?

I mean the way we think about our business in one - - from one angle is that we have projects which are almost always associated with the deferral of revenue and the recognition of revenue over some period of time.

And then what - - is commonly known as a couple of questions were asked about turns business.

In addition to both of those, we have a modest level of maintenance and support contracts which we sell to all of our customers or many of our customers across all geographies and market segments.

So if you mean by that strict definition of maintenance, that's bundled into our services software number and is typically less than 10% of our overall revenue.

Well, perhaps just a thought of new projects versus expansion of existing projects.

That's tough because - - maybe - - I don't know, maybe Patrick has got some better ideas.

But - - we - - what we see with our cable customers is that - - a project may be - - many projects are designed to be implemented in all or the majority of the systems around the country.

So, if you're thinking at the overall level and that - - Edge QAM's for example.

You can think of that as a project that our customers are going to undertake over - - over some extended period of time, but any particular installation in a particular system might be a one quarter project.

So again I'm not trying to confuse you, I'm just saying it's not that easy to think about it that way.

Lastly, Robin, the tax rate, any bracket, any thought on - - I understand it's still kind of fluid, but will it be less than 30%, less than 20% for 2009?

No, I - - we have talked in the past about - - for '09 being maybe somewhere in the mid-30's and in 2010 and beyond becoming lower probably closer to 30%.

And we're certainly driving our tax strategy and our business in a direction that's - - I think is consistent with that.

We're just a little uneasy not - - again, not being able to talk with great precision to revenue for the year.

It gets a little hard to talk about tax because it is very dependent on the mix, particularly the geographic mix.

So maybe I can leave you with these thoughts, that those numbers are still broadly where we're shooting for.

But we'd like to come back once we get a little better visibility into the year and become more precise about the rate, particularly for 2009.

Thank you, Patrick.

Thank you, Robin.

All right.

Well, thank you very much, Mark.

Well, I think with that we will wrap it up.

So I would like to thank everybody for participating in today's call.

And we look forward to speaking with you again soon.

Good day.

This concludes today's Harmonics fourth quarter and year end 2008 earnings conference call.

We appreciate everyone's participation.

You may now disconnect your line.