Harmonic Inc (HLIT) 2009 Q1 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Harmonic first quarter 2009 earnings conference call.

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

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

(Operator Instructions).

Thank you.

I will now turn the call over to Mr.

Patrick Harshman, President and CEO.

Mr.

Harshman, you may begin your conference.

Thank you, and good afternoon.

I'm 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 for joining us.

Today we announced our results for the first quarter of 2009, a quarter that was challenging, but also encouraging.

The key challenge was conservative spending by many of our customers around the globe, a continuation of the trend that started in the fourth quarter with a direct impact on our first quarter revenue and our second quarter revenue forecast.

An additional short-term challenge has been in the structuring and integration of the Scopus business, which we acquired late in the first quarter.

Despite these real and continuing challenges, however, I'm as encouraged today about our business as at any time over the past couple of years.

From an operational perspective, we've been pleased with the continuing strength of our gross margins, our decisive control of operating expenses, and our rapid progress in integrating the Scopus business.

From an external market perspective, we're also encouraged by signs of increasing customer spending, our continuing strong competitive position, and several strategically important wins, including the first orders for our new Electra 8000 encoder platform, new M-CMTS customers, new switch digital video wins, and new mobile and Internet video wins.

Looking ahead, we expect the global economic environment to continue to impact our customers' near term capital spending, although we're cautiously optimistic the environment is beginning to improve.

Additionally, recent market developments, such as the strong video results just posted by Verizon and AT&T, BSkyB's record results driven by high definition services, and Disney's entry into Hulu have us convinced that the fundamental market drivers that underpin our growth opportunities remain very much in force.

In the context of these market dynamics, our unique video technology leadership, diversified customer base, and strong balance sheet position us to further strengthen our competitiveness and drive sustained long-term growth.

I'm going to ask Robin to cover the financial aspects of the quarter.

I will then review our key business initiatives in more detail and then we'll open it up for questions.

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 base.

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 of the information will be available in the recorded version of this call on our website.

Today we announced results for the quarter ended April 3rd, 2009.

Our first quarter includes stub period results from our recent acquisition of Scopus Video Networks, which closed on March 12.

For the first quarter of 2009, we reported net sales of $67.8 million compared to $87.3 million in the first quarter of 2008.

As Patrick indicated in his introduction, the cautious approach to capital spending by many of our customers had a direct impact on our first quarter bookings and revenue, and our expectations for second quarter revenue.

As you may recall, our bookings in the fourth quarter were down significantly from the third quarter, and we saw another albeit smaller decline in bookings in Q1.

Orders started to pick up in March, but not as strongly as the historical seasonal pattern with consequent impact on our Q1 revenue.

In April, we've seen a more robust base of orders, giving us optimism that we hit the bottom during Q1.

As you might expect with our level of customer diversity, we saw some pockets of relative strength and areas of significant weakness in our Q1 bookings.

Asia performed well.

North America was middling with cable a relatively bright spot and running close to last year's booking space.

Europe exhibited real weakness, especially in central and Eastern Europe.

Turning to the revenue breakdown, international sales represented 52% of revenue for the first quarter of 2009 compared to 39% in the same period of 2008.

By market segment, cable customers accounted for 57% of revenue, satellite customers 23%, and telcos and others 20%.

Our largest customer in the first quarter was Comcast, representing 16% of our revenue and our only greater than 10% customer in the quarter.

By product category, video processing products represented 45% of revenue for the first quarter, edge and access 35%, and software services and other 20%.

Even with lower than anticipated revenue, we were able to maintain our recent levels of gross margins.

In part, because of a favorable product mix, but also from the longer term trends driven by our product strategy to develop more software intensive products.

Our non-GAAP gross margins were 50% in the first quarter.

In addition to the continued success of our new products and solutions, our flexible sourcing strategy and significant cost reduction efforts helped keep our gross margins steady despite lower revenue levels.

Our reduction in non-GAAP operating expenses in the first quarter was almost $5 million on a sequential basis.

Some of this reduction reflects a decrease in variable compensation in the first quarter compared with the fourth quarter.

Also, in light of market conditions, we took additional steps to streamline operations and reduce costs, but without impacting our R&D capabilities and long-term competitiveness.

With respect to headcount, we entered this year with just under 700 employees.

We added almost 300 people on the acquisition of Scopus, but our restructuring there and reductions elsewhere in the company brought us back down to just over 900 employees at the end of the quarter.

Since that time, we further reduced our headcount to about 860 people to date.

The restructuring and integration of Scopus is proceeding very much to plan, or even slightly ahead of it, and we are on track to realize our projected cost synergies of $8 million to $10 million on an annualized basis.

In the first quarter of 2009, we had a number of special charges which were principally related to the Scopus acquisition.

We made inventory provisions arising from rationalization of the product lines as we discontinued certain products and intend to sell some others only on a limited basis.

We also had all of the professional fees in connection with the acquisition, which are now expensed under the new M&A accounting rules, as well as substantial severance costs arising from restructuring and reorganization.

Finally, another unusual item in Q1 was a heavy tax provision, much of which arose from a recent tax law change in how California companies will be taxed on their out of state business.

This resulted in a one-time significant charge, and for non-GAAP purposes we've elected to apply a 35% tax rate to our non-GAAP income, a rate we believe is more indicative of our current normalized tax rate.

As a result of the acquisition and tax charges, we reported our first GAAP loss for some time.

The GAAP net loss for the first quarter of 2009 was $18.8 million or $0.20 a share compared to net income of $13.4 million or $0.14 per diluted share for the same period of 2008.

Excluding the acquisition-related charges, the noncash accounting charges for stock-based compensation, and the amortization of intangibles as well as a tax adjustment, the non-GAAP net income for the first quarter of 2009 was $4.1 million or $0.04 per diluted share compared to $16.6 million or $0.17 per diluted share for the same period of 2008.

As we noted in our press release, the inclusion of Scopus results for the short stub period reduced our pre-tax earnings by about $1.1 million or $0.01 a share.

We continue to maintain a very strong balance sheet.

Although we paid out cash for the Scopus purchase in March, we ended the quarter with cash, cash equivalents, and short-term investments of $262 million.

We continue to have a strong cash position from which to pursue further acquisitions or other initiatives to achieve our strategic goals.

Our receivables dropped from $63.9 million at the end of the fourth quarter to $52.7 million at the end of the first quarter, reflecting our lower revenue level.

This corresponds to days sales outstanding of 71 days compared to 60 days at the end of Q4.

However, this comparison is distorted as we took onto our balance sheet all of the preexisting Scopus receivables, but had only a short stub period of revenue contribution.

Our inventory was $38.2 million, up $11 million from the end of 2008, some of which is also due to Scopus inventory coming onto our balance sheet in March.

Finally, on the balance sheet, our capital spending was $1.5 million in the first quarter, and we expect our CapEx to be approximately $7 million to $8 million for the full year.

Turning to the outlook, the fundamental trends and competitive dynamics that have been driving our business remain in force.

However, as a result of a couple of weak quarters of bookings, we enter the second quarter with our lowest backlog for some time, approximately $65 million plus approximately $10 million inherited from Scopus for a total of about $75 million.

As we've indicated, we've seen recent signs of improvement in order rates and we look for a positive book-to-bill ratio in Q2.

However, given that we always have a significant portion of our bookings subject to some form of revenue deferral, we expect a relatively modest sequential increase in revenue for the second quarter of 2009 in the range of $72 million to $78 million.

While we don't feel comfortable giving full-year guidance in this still very uncertain environment, recent historical patterns suggest that about 55% of our revenue is recorded in the second half of the year.

Whether this pattern will repeat itself in today's very unusual circumstances remain to be seen and we expect the global economic situation to continue to create substantial uncertainty.

Non-GAAP gross margins and operating expenses for the second quarter are anticipated to be in the range of 47% to 49%.

While our long-term margin trends are encouraging, and our contract manufacturing model provides us flexibility, we have seen pricing pressure in some areas, which we expect may impact second quarter gross margins.

Still, we believe that our consistent gross margin performance in recent periods 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 GAAP operating expenses in the second quarter are expected to include further charges related to the continuing integration of Scopus.

Keep in mind that the second quarter will also include a full quarter of operating expenses related to Scopus.

While we intend to maintain our R&D capability and capacity, we have reduced spending in other areas in line with lower volumes of activity in the current environment.

Non-GAAP operating expenses for the second quarter, excluding acquisition-related charges, stock-based comp, and the amortization of intangibles, are anticipated to be in the range of $33.5 million to $34.5 million.

Let me make one last point before I conclude.

Some of you may ask why we did not make an earlier announcement of our results.

The closing of the Scopus deal late in the quarter caused our regular closing process to become much more complex and to take longer.

The new rules for purchase accounting and the significant restructuring activities made our task additionally complex.

Rather than try to rush out quickly with preliminary results and run the risk of getting them wrong, we decided to wait until we got the numbers nailed down with confidence.

When the dust settled -- although we fell short of our revenue guidance, our gross margins, and our operating expenses -- even with Scopus included, we're ahead of the guidance we provided you in January.

To summarize, we like the increased diversification of our business and revenue which the Scopus acquisition brings us.

While there's significant global economic uncertainty and some continuing caution on the part of our customers, we have a strong balance sheet and a healthy operating model, allowing us operational flexibility and the opportunity to use our strong financial position to our competitive advantage.

That's all for me.

Patrick?

Thanks, Robin.

Throughout the first quarter, we've strived to maintain a balanced focus on near term results and the execution of our long-term initiatives, investing in leading edge new product development and extending our market presence around the globe.

As a result, we've strengthened our technology leadership and market share across a broadening range of applications, customers, and geographies, putting ourselves in a strong position to continue our recent growth as the market recovers.

Looking to the future, I'd now like to review five key areas of business and investment focus that we believe provide significant mid and long-term growth opportunities for Harmonic.

The first area is video encoding.

We recently announced our new Electra 8000 encoders that are going to redefine the market for MPEG-2 and MPEG-4 encoding, and create significant new opportunities for Harmonic.

We demonstrated the product at the recent NAB show and have been trialing it with select customers and the response has been very positive.

We expect this product to be used extensively by operators, not only for adding new channels, but also to buy back bandwidth for channels already deployed.

In the cable environment, for example, upgrading with this technology can reduce the bandwidth required for an HD program by over 30% and can have a significant bandwidth savings impact for satellite [address] for broadcast operators as well.

Another key and unique attribute of this new platform is support for both MPEG-2 and MPEG-4 formats, uniquely enabling pristine reencoding from one format to another and enabling cable and terrestrial operators to position their networks for the coming major transitions from MPEG-2 to MPEG-4.

We're very pleased to have received our first order from a leading satellite operator for this new product, with the application being the upgrade of previously generation MPEG-4 HD encoders.

A secondary business focus and growing opportunity is that of enabling multiscreen video services.

Specifically, I'm talking about the workflow software, the video reformatting, and storage and streaming solutions for delivering high value video content over the Internet and to mobile devices.

We're seeing growing interest in these solutions from all types of operators, including broadcasters, cable operators, and particularly telco operators offering both IPTV and wireless services.

Our intensifying activity in this space includes our recent announcements of work with British Telecom Media and Broadcast, Chunghwa Telecom Taiwan, RaySat, who is driving AT&T's new CruiseCast service for delivering video to vehicles, and the Sinclair Group of broadcast stations, with whom we did a recent mobile to video demonstration.

A third key area of focus is converged edge processing and QAM for cable Video OnDemand, switch digital video, M-CMTS, and IPTV over cable.

We continue to enjoy a very strong technology leadership and market share position in this area and we're pleased with recent first quarter successes, breaking into new M-CMTS and switch digital video accounts.

I also want to note that we see growing interest, particularly internationally, in IPTV over cable solution, an application area which is gaining momentum over the coming year.

We continue to invest in innovative next generation edge technology in general, and we're well-positioned to take advantage of continuing market opportunities in this area.

A fourth strategic growth driver is the expansion of our customer base to include broadcasters such as the Sinclair Group and video content owners like the BBC, Disney, Fox, and Turner.

Addressing this market was a strategic driver of our Scopus acquisition, and we've recently announced two key new products based on Scopus technology that are targeted specifically at video contribution and distribution applications for these customers.

We're also making good progress at expanding our solutions that enable these video content owners to harness Internet delivery.

Our Rhozet group recently announced important new developments in which we will enable content owners to leverage YouTube's content ID and protection technology.

For cooperation with Microsoft, we're providing new ways to manage, distribute, and store video content.

I want to emphasize that our increased focus on video content owners is still relatively new, and we've got a long way to go.

However, we're making important progress and we see significant mid and long-term growth opportunities in this market segment.

The final growth initiative I want to highlight today is our ongoing push into international markets.

While many international markets are having a very challenging time in this economic downturn, and indeed our business has been correspondingly impacted, we continue to have the strategic view that long-term growth opportunities in both developed and emerging international markets are tremendous.

Through the Scopus acquisition, we're pleased to have significantly expanded our presence in mainland China, India, Latin America, and Russia.

We believe that our continuing focus on these and other international markets is key to our long-term growth.

So in summary, we've continued to see a very cautious approach to spending by customers around the globe and consequently we've had a couple of challenging bookings quarters.

Despite this global economic impact on our business, however, we remain optimistic about the mid and long-term growth opportunities in video, and confident in our ability to execute on the initiatives I've laid out.

To this end, we remain focussed on controlling costs and maintaining our operating efficiencies while making the necessary investments to grow our business over the long term.

With our technology leadership, diversified and growing customer base, and strong financial position, we believe we will further strengthen our competitiveness and extend our global market share in 2009 and beyond.

With that, we'll conclude the formal part of this presentation, and Robin and I are now pleased to open it up to your questions.

(Operator Instructions.) Your first question comes from Mark Sue with RBC Capital Markets.

The guidance of $72 million to $78 million, how should we look at the Scopus contribution in 2Q?

Furthermore, any thoughts on how we should look at the trends by customer segment in Q2 -- telco, cable, and satellite?

Well, Mike, as we made a couple of comments that I think are relevant.

One is by customer segment, we noted that cable has been relatively strong.

Now, we've seen pricing pressure and some reduced spending in cable, but in large, that market has been a relative bright point.

In contrast, the step-down in other customer segments -- satellite, broadcast, and IPTV -- has been a little bit more significant.

I would also comment that the customer spending impacts that we've seen has been somewhat more pronounced overseas, particularly in western and Eastern Europe, I think as Robin mentioned.

In general therefore, we've seen the Scopus business impact somewhat more heavily than parts of the core Harmonic business, particularly those parts that are focused on cable.

We won't be breaking out Scopus revenue and Harmonic revenue going forward, but our Q2 guidance takes all those considerations into account and as well as the actual bookings that we saw in Q4 and in Q1 -- which particularly in terms of digital video projects is really rolling forward into constituting the backlog that we have for Q2 in revenue.

With that being said, will international be up sequentially?

Are you seeing some early trends in terms of bookings for stabilization overall internationally for the second quarter?

I don't expect international to be up sequentially.

I think we saw some good strength carrying over from bookings last year.

However, as we noted, I think as a whole, international bookings were relatively more challenged than domestic bookings in the past quarter and, therefore, you'll see the manifestation of that in second quarter revenue.

Robin, just quickly, pricing pressure, I guess it's on the cable side -- is that something that will stabilize and then separately tax rate for the full next year?

Well, on pricing pressure, referring to some things we've seen, most of which relates to the cable sector.

As to when it moderates, I think to some extent that's a function of where the economy goes from here.

I would expect we'll see some continuation of it.

With respect to the tax rate, we believe -- we've used the 35% rate for our non-GAAP earnings, which is I think consistent with what we've been guiding to over the last few quarters, that our expectation for this year, 2009, would be a mid-30s type of rate.

That's the rate we're applying now.

Obviously it's early in the year, and the tax rate is very sensitive to the mix of domestic and international revenue, as you know, but at this point it just seems like the right number to apply.

And I would expect that we will continue to apply that for the rest of the year, unless the mix exchanges significantly or other factors come into play.

That's helpful.

Thank you and good luck, gentlemen

Your next question comes from Amir Rozwadowski with Barclays Capital.

Good afternoon, Patrick and Robin.

Good afternoon.

Just digging a little bit more into the order trend pickup in April, it seems as though by end market we should think about things improving on the cable side of the house.

How should we think about your visibility as it stands today?

When we were having this discussion a quarter ago, obviously some of the MSO CapEx plans and the service provider CapEx plans perhaps were not as set at the moment.

But where we stand today, can you give us a little bit of color in terms of visibility for the year?

Just our visibility still is not great.

We're encouraged by the recent trends that we spoke to, I think beginning in late March and heading into April.

I say we have a feeling and we detect a more general sentiment in the market that things are on the right upward trajectory.

However, in this market, projecting exactly what's going to happen, particularly in the second half of the year still feels more like art than science.

So I'd say maybe incrementally more confidence, but really in terms of hard data, I think it's still a relatively challenging visibility environment.

Okay.

And then if we're looking at some of the challenges that you folks have faced in Eastern Europe and Eastern and Central Europe, how should we characterize that?

I mean, is there issues around pricing?

Is there issues around delayed rule-outs?

How should we think about the drivers there and what would it take to turn around businesses within those regions?

I'll give you one view of it, Amir, and maybe Patrick can supplement this, but our currency depreciation has been a major factor.

Many Eastern European countries have seen their currencies depreciate significantly, not only against the dollar, but against the euro and other major currencies.

It seems to me that's a significant element in either the delaying of orders or in some cases the reduction of capital spending.

It's not confined, of course, to Central and Eastern Europe, but that is certainly one part of the world where some of these currencies -- some of the currency depreciation has been the most acute.

We should think about it as not necessarily a shift in strategy for some of the deployments, but more or less dealing with some macro related issues within those regions?

I think that's correct, Amir.

I think other than strategic considerations around a very dynamic competitive environment globally, I'd say we have not seen any shifts in strategy driven by the economic environment.

I think where things have slowed down, the message has been one more of delay or scale back for now, as opposed to -- as opposed to cancellation or a change in strategy.

Lastly, if I may, just a housekeeping question.

Can you give us percentage contributions from the greater than 10% customers?

Yes, the only one that we had who was over 10% for the quarter was Comcast, which was 16% of revenue.

Perfect.

Thank you very much.

Your next question comes from James [Kithner] with Jefferies & Company.

Hello, can you hear me?

Yes.

Yes, so I guess the first question is, where would Scopus fall?

Would it all fall in video processing presumably or would some of that split into other areas?

No, it's almost all in video processing.

Maybe a little bit in the software category, but almost exclusively video processing.

Okay.

Turning to edge and access for a minute, drilling down on this quarter's result, edge and access was pretty weak from our standpoint.

Is that mostly -- a condition mostly due to very soft access spending or were edge products also soft?

Yes, I think it's important to note that edge and access in general tends to be a little bit more of a book and burn business for us.

On a relative basis in terms of bookings, both our edge and access products fared relatively well in terms of what happened in bookings in the first quarter.

However, overall revenue I'd say was more than typically impacted by the deferred revenue carrying over from 2008, if you follow me.

So there's not any significant difference in terms of the way the edge QAM and our access pieces were impacted.

Both pieces actually were on a relative basis have stayed relatively healthy.

And I think you see them from a revenue perspective looking a little weak simply because overall Q1 was a weak booking quarter.

I would add to that some of the pickup was pretty late in the quarter and some of the orders we got had required deliveries and some deliverables in the second quarter.

So they didn't turn as -- they weren't able to turn in time.

So just relatedly, on the pricing pressure, is it across all product lines or is it in particular areas?

I'd say in general, James, I mean, it's -- with fewer deals on the table, everyone's just a little bit hungrier, and so we've seen some incremental notch up in the pricing pressure.

I don't want to have this overstated or misconstrued as a giant change in the business.

We're used to day in, day out -- this being a very competitive space we compete in, particularly around cable applications.

Really, we've simply seen a continuation of that fairly intense competitive environment.

All right.

Thanks, guys.

Thank you.

Your next question comes from Greg Mesniaeff with Needham & Company.

Thank you.

I was wondering if we could drill down a little deeper into the cable area.

Is it fair to say that the edge QAM business in Q1 was at least part of the pricing pressure you had alluded to?

And given the recent strength in edge QAM shipments to the MSOs to Comcast tied to DOCSIS 3.0, is it fair to say there's maybe a little more competitiveness developing in that segment?

Greg, I don't think we saw any significant change in the competitive environment, or even the pricing environment, turn on in Q1.

It has been for some time, as you know, for most of the balance of 2008, a very competitive arena.

And we certainly see that competitiveness around edge QAM continue into the first quarter.

And more generally, I would say across the spectrum of what we do in cable, encoding, stream processing, on-demand, the access solutions as well -- it has continued to be a competitive environment.

And just moving to the cable, I mean to the satellite area, that business traditionally has been somewhat lumpy for you, and with the recent rollout of the 8000 product, have you seen any of that lumpiness in terms of some of your large customers digesting the new product and perhaps transitioning to it?

Well, the product is brand-new.

We just announced the Electra 8000 a month ago or something in Q1.

We have not yet --

Really not part of the Q1 story?

I think the release of the product and the customer testing and traction we're getting is certainly for us a noteworthy development.

However we have yet to recognize any revenue from that product.

So we're really at the very beginning of the opportunity that we think that product is going to bring to us, which is really next-generation compression, which we think will -- in many instances, and indeed in the case of the early orders that we've received, be associated with the replacement cycle on previous deployed encoders.

Generally, how was the pricing environment for MPEG-4 encoders?

No substantial change around that, Greg.

That is one area where I think quality of the video signal and the extent of compression really pays dividends for operators.

So I don't want to say there's no pricing pressure in that area, but around high end encoding is probably the most benign pricing environment -- or among the most benign that we participate in, just because bandwidth is so precious, whether in a terrestrial network or over a satellite network.

So customers of all stripes are really willing to pay for quality in this area.

Thank you.

Thanks, Greg.

Your next question comes from Todd Cooper with Stephens, Incorporated.

Patrick, will Comcast All Digital Initiative open up the potential for Harmonic to sell more encoders to Comcast during the duration of that program?

I think the short answer is yes, Todd.

Going all digital is -- perhaps you saw in Comcast's presentation to investors last week.

I mean, it's really all about creating more space for both DOCSIS services and advanced video services.

We're quite excited about a larger playing field for more HD channels, more SD channels, more VOD channels.

So we think it's a good thing.

Are any of your cable customers talking about or thinking that they will be able to squeeze four HD channels into a traditional six megahertz analog channel using your new Electra8000?

Particularly with cable operators, we're really at the beginning of doing show and tell and showing them what we can do.

We believe this product will be able to be used in a four to one configuration, and that is four HD channels in one 6 megahertz slot, which I think as you probably know would be a dramatic change from today, which is typically two or three to one.

And do you see Scopus being accretive to the bottom line during 2009?

I'm still guardedly optimistic, Todd.

Obviously, the economic picture has darkened a lot since we started working on the deal, but I am encouraged at least that on the cost side, and generally the integration side overall, we're moving very quickly.

And I think I had a good plan in place and we're executing on it.

We're getting all the product rationalization decisions made and the way forward made very clear to all concerned, both inside and outside the company.

So I'm very encouraged on that front.

I think really fundamentally it gets down to what the rest of the year looks like on the top line.

And so certainly had this been business as usual as it was maybe six or eight months ago, I would have said yes without any doubt.

It really comes down to the second half, and particularly to how quickly some of the international economies recover.

What I said about Central and Eastern Europe applies to a lot of Scopus business and the countries in which they're well-positioned are many of the countries where the going is tough right now.

To be clear, you're guardedly optimistic that it will be accretive by December 2009, not necessarily over the course of 2009?

Yes, I think by the end of 2009, in the third or maybe the fourth quarter, yes.

And it could well be the third.

As I say, I think it really comes back to how quickly the top line recovers.

Okay.

Thank you very much.

Thank you.

Your next question comes from Vivek Arya with Merrill Lynch.

Thank you, good afternoon.

A couple of questions.

First, your second quarter guidance is significantly above your bookings, and I understand there's not one-to-one correlation, but generally I've seen the ratio is about one time, but your guidance is almost 1.4 times the bookings rate.

First, is that a good way of looking at this trend?

And secondly, if it is, what gives you confidence in your Q2 guidance?

Well, I think it's a couple of things.

First of all, I really would rather look at our backlog coming into the quarter, which for the standalone Harmonic business was about $65 million coming in.

But we also have coming over from Scopus a backlog number of around $10 million.

So we're coming -- we came into the quarter with about $75 million.

I think we've been encouraged, too, by the activity we've seen and the actual bookings we've seen in April, and the nature of those bookings with respect to how quickly they might turn into revenue.

So I think these are the principal factors we're looking at.

I mean, we still have a significant slug of deferred revenue.

It did not go down much in the first quarter.

The piece of that backlog that is deferred revenue -- that stayed relatively consistent.

So we still have some of these projects that will become completed or at least substantially completed during the second quarter.

And Robin, can you give us a sense for how much of that backlog is from international customers?

I'm just trying to get a sense for some of the weakness that you're seeing on the international side -- how does that impact sales going forward as you start depleting some of this backlog?

Well, I think the international picture is a little more nuanced than maybe we've suggested.

We've certainly talked about some of the weak areas such as Central and Eastern Europe, but we've seen some pockets of strength.

Asia in particular, in general, has been performing quite well.

We didn't specifically call out Latin America, but we're continuing to see some pretty decent activity there.

So I wouldn't want to suggest that international was weak across the board.

I do think that as Patrick indicated earlier that the balance of revenue in the second quarter will probably shift somewhat towards the US.

It was 48%/52% US/international in Q1.

I think the revenue might move maybe the other way.

So there are certainly some pockets of international that will still be in recovery mode.

But we don't mean to suggest that across the board it's totally bleak.

Got it.

And just one question to you, Patrick.

As you look at second quarter, and all the engagements that you have started to see, April -- can you perhaps give us some more color around these engagements with your cable and satellite and telco verticals?

Are these customers saying, okay,w e've seen the trough, now we are ready to spend again?

Is it a question of seasonality?

How do we get a better sense for some improvement in the engagement?

Well, unfortunately, the visibility is still not what we hoped it would be.

The truth is, on a presales technical discussion basis, actually there's a lot of activity out there.

Based purely on the amount of discussions around the strategic solutions and potential projects, you take a look at it and say this is quite an active time.

I think what's a little bit unique is that the link between planning and looking and evaluating potential projects and actually making a decision -- the CFO deciding yes, let's go ahead with that -- I think that's actually where we've seen more resistance or caution than in the past.

So we -- and our visibility, despite I think fairly good content at a senior level with most of our large customers, that's still an area for us that we're struggling to understand completely and get our arms around exactly how the CFOs of our customers are thinking.

So we have seen some pickup in orders.

That's encouraging.

We're seeing a lot of technical engagement.

There's a lot of discussion.

As I mentioned, some of the market dynamics, it's a very active time in the market.

What we're not really clear on is really how many of these projects go forward and with what pace.

Unfortunately, I think we just have to give it a little bit more time to see how things play out.

One last question.

Can you just remind us again how much was Scopus in total standalone in 2008?

And I know you're not giving specific Scopus guidance for 2009, but can you just help us frame either if it's going to be up, down, 10% to 20%?

Just some order of magnitude so we can model Harmonic standalone and the Scopus contribution this year?

Thank you.

Scopus did $75 million to $76 million in revenue in 2008.

So that's -- that was the 2008 revenue.

As we said earlier, we're not going to be separately tracking it.

One of the fundamental tenets of this deal was to fully integrate the organization and the product lines into the Harmonic business, and so we're not going to be separately tracking it or separately reporting it.

I would say that I think -- my own view is on a relative basis, the Scopus business is probably a little bit weaker than if you like old Harmonic or the core Harmonic -- simply because of the exposure, one, to some of the emerging markets that have been particularly beaten up in the last six months.

And perhaps secondly, to pieces of the broadcast sector, where broadcasting companies are also under some pressure because of ad revenue shortfalls and so on.

Now, again, I don't want to overblow this, but I think on a relative basis, I think it's maybe a little bit more challenged than the core business.

Thank you, and good luck.

Thank you.

Your next question comes from Blair King with Avondale Partners.

Morning.

Just a couple of questions.

The first one would be with regard to the edge QAM again, there certainly appears to be several ongoing DOCSIS 3.0 upgrade opportunities around the globe, but lots of cable operators in addition to -- some talked about SDV expansion opportunities and a seemingly continued focus on video on demand.

I'm just thinking that perhaps some of the concerns around the Harmonic relationship with Cisco is something that's talked about, particularly for the 3.0 deployments.

I was hoping you might shed some light on how Harmonic might plan to maintain or perhaps enhance its leadership position in that edge QAM space.

We do feel as though we've got a very strong position.

We feel as though we're number one in terms of deployments and continue to be number one in terms of technology.

As I mentioned earlier, although overall orders were down, a relative strategic highlight of the past quarter was adding a couple of new customers, both to a list of customers working with us on M-CMTS deployments as well as switch digital video deployments.

I think in general you see an operator trend.

I don't want to overstate it, but there is a trend towards opening up these ecosystems and using best of class products.

Now, I think in the CMTS area that's still a minority of deployments.

We have no illusions that the majority of DOCSIS related deployments will become M-CMTS anytime soon.

But for those operators for whom it is the right architecture, we think we've got a very strong solution, and we've continued to do well in that area through the first quarter.

More generally, our position in switch digital video I think from a technology perspective is quite strong, very happy to see some new wins there.

I think our position in VOD is really unquestioned in the market.

And lastly, as I mentioned in the prepared remarks, we see IPTV over cable as another very exciting and important coming application.

So at least as we think about Edge QAM, Blair, we're thinking about the portfolio of these solutions.

And we also discussed the portfolio of these applications with operators as they weigh the value in their particular context of a unified edge architecture that handles maybe not just one but multiple of these services.

One last question, if I can, on the ProView 7000 decoder, in terms of product mix, can you talk about how relative that product is to the overall video segment, or processing segment?

And then how much incremental impact you might expect from a gross margin perspective at least now that you've integrated that IRD piece of the component into the product?

Or if there is any margin impact at all?

Well, just for those listening who -- let me give a little bit of background context.

This is a new product based largely on Scopus technology.

It's a new product area for us, but it's very highly synergistic from a system solution point of view with the rest of our video processing solution.

Scopus's gross margins were in general very much aligned with Harmonic's, I think very high 40s.

And, therefore, the addition of this product into the mix and product category into the mix we don't expect to have an appreciable change one way or the other on our overall company gross margins.

This product category accounted for about 40% to 45% of Scopus's business.

If you put that together with Robin's answer on the last question, you maybe get a sense that it was one of the biggest single part of the Scopus business and on a relative basis, we're looking for a comparable contribution.

More generally, it's a big part of our strategic push into doing more work with broadcasters.

This is particularly applicable to content owners and broadcasters who are doing a so-called primary distribution of video to the cable head end or to the IPTV head end, et cetera.

So it's important product for us in those couple of regards.

One last question, maybe to Robin.

Robin, last quarter on the gross margin side, it was primarily related to lack of volume, which I guess would be the same case or similar trending into the second quarter, but the gross margin's obviously higher than what you had expected coming into the first quarter.

And I'm just wondering if you can talk a little bit more about what you had going on within that gross margin mix and how -- what are some of the steps you took to improve deployments and can we expect that to continue on through the year?

Was there something special that happened outside your view when you gave guidance for the first quarter?

Yes, we had a little bit more favorable product mix perhaps than we'd expected, the video processing and the software piece, the software and other piece up at 20%.

So that was helpful to the quarter.

We also -- as we saw things not improving in the first quarter from a general macro perspective, we also, I think, got a little bit more aggressive on the cost reduction side as well.

And so that played into it a little bit also.

So I think it was a bit of product mix, some cost reduction -- and putting pressure on our own vendors and suppliers, too, not just our own internal costs but some of our outside costs as well.

And that, I think that all served as well.

Would you still anticipate gross margins potentially moving into the mid-50s or I guess low 50s percentage range as volumes start to improve?

Yes, I think the long-term trends are very favorable.

Some of the new things we're doing that Patrick mentioned -- not only some of our more familiar products, like an Electra encoder, but particularly as we move into some of the mobile and Internet space that he was talking about are quite software intensive.

And I'm optimistic that over the next several quarters, we can continue to push gross margins in the right direction.

Short term, I think it's just mostly about maybe slightly less favorable product mix and pricing pressure and so forth -- also just absorbing the Scopus operations.

And while we're on track to get all the cost reduction done, second quarter's probably the most challenging while we continue to work our way through the plan there.

All right, thanks for taking my call.

Thank you.

Your next question comes from [Shibu Gaush] with Thomas Weisel Partners.

Hi, this is Shibu for Hasan Imam.

I was wondering if you could shed some more light around the gross margins.

I was looking at your non-GAAP -- of course you beat your guidance of [47 to 49].

Of course going into the details, the reasons why you did that were something that I'd like to go into.

Did [CS] Scopus product discontinuance of $5.9 million, now -- question, is this a one-time deal, and do you expect any of this to come into the non-GAAP portion going into Q2?

And the second is, if I just look at it from an apples-to-apples pure GAAP perspective, gross margins were down from 49.8% to 37.5%.

So what is your confidence of this improving going forward, and of course reasons why this happened in the first place?

Thanks.

Well, I think some of the answer lies in my answer to the last question, but specifically to address the product discontinuance, I think one of the things we've done well and done quickly here is address very effectively the product road map for the combined company.

And in doing so, and this is really should come as no surprise who's familiar with the two companies, there is or was some degree of product overlap between the two companies.

We've figured out how we're going to deal with that overlap, which products will remain, which ones will not, and which ones will take on different shapes and forms as we go forward.

And then in doing so, we came to the decisions quickly and we were able during the first quarter to address the inventory of those products and to write down the inventory appropriately of those products that we will not sell in the future or we will sell only on a limited basis to certain customers for certain applications.

I don't expect to see any significant inventory charges going forward.

Those decisions are made, and I think we've -- we're ready to move forward with the new product road map.

There are also in cost of sales, there are some severance charges at Scopus, and we expect to see some more of that in the second quarter.

So there will be some additional charges there as well as possibly charges relating to facilities as we made -- or are able, in fact, to close a couple of offices here and there.

Thanks.

Also if I may ask a question on OpEx, you're guiding non-GAAP OpEx to go up sequentially, about $6 million.

How should we basically look at this as a spread between SG&A and R&D?

It's probably relatively evenly split between the two.

Most of the increase of course is related to the fact that we will have a full quarter of Scopus R&D and SG&A on our books.

And aside from that, we don't expect to see any significant expense change in the baseline numbers.

But obviously with Scopus on the books, the number goes up.

I say I don't have the numbers in front of me, but I would anticipate that the split between R&D and SG&A taken together is probably relatively even.

Great, thanks.

One last question on the revenue side.

Basically, if you could firstly summarize one more time, if you don't mind, the reason for the shortfall in revenue and then going forward, plus the impact from satellite, if any, from the Charter bankruptcy?

And I notice EcoStar is no longer part of the top 10 customer list.

Is there some weakness that you're seeing in satellite in general?

Well, if you look at revenue in the quarter, our satellite business is actually pretty robust.

Yes, I agree we have no 10% customers in satellite, including EcoStar, but nevertheless 23% of our revenue, which is a relatively high percentage came from the satellite segment, which I hope maybe underlines the fact that we do have more than one satellite customer.

We have a number internationally.

I think we've seen, we've seen quite a lot of activity internationally in the more developed markets around HD, something that's maybe taken a little while to come together.

But we were starting to see the fruits of some of our wins there in the first quarter.

It is true that the first quarter was not so strong from a orders perspective on satellite, and so that probably bodes for a relatively light second quarter, and as I think both of us have indicated, we expect to see more strength in the second quarter from a revenue perspective coming from cable.

I think you had one other question there, which I must admit I've forgotten.

Was there one other?

Well, in general, your thoughts on I suppose revenue shortfall in Q1, below your guidance.

And in terms of -- we know it was of course due to lower bookings and general shortfall, but is there any more specifics you have on that?

I don't think so.

I think we've had some discussion on the call about some of the weakness in certain international markets.

That's been discussed, I think on many occasions.

That's certainly one factor.

Besides that, from a market segment perspective, the mix isn't really all that different from what we've seen recently -- cable in the high 50s, satellite around just over 20%, telco 20%.

I mean, that mix actually isn't all that much different.

I think it's perhaps more some particular geographies maybe more challenged than others.

And some people have noted, too, relatively light starts on some of the edge and access products, I think particularly in the optics area, where as you know there are hardly any new housing starts and some of the upgrade activity has been postponed and is postponable.

But those I think are the main trends that we've discussed in the last hour.

Great, thank you.

Your next question comes from Larry Harris with CL King.

Yes, I wanted to delve a bit further into the satellite area, particularly domestically.

There were some major efforts -- I know you probably don't want to discuss specific customers, but major efforts last year on the part of the two largest satellite operators in the US.

Do you think that their pace of spending in 2009 will be less than it was in 2008?

I think we don't want to get in trouble to say too much specific.

This is a relatively small customer group you're asking about, Larry.

Let me answer it a little bit more broadly by saying in general we expect spending to be down across the board.

I think across all customer groups, we've seen slower spending certainly in the first quarter, the fourth quarter.

We're encouraged by some signs of pickup.

I don't think that Q2 is going to be through the roof.

It remains to be seen what's going to happen in the second half.

Nonetheless, it's very probable that even more aggressive spending in the last half is not going to cover fully the weakness in the first half.

So I think across the board, we're expecting spending to be down somewhat.

Okay.

One other question, and that is Amazon launched HD video on demand.

YouTube has updated their website.

They now have full length videos.

Has that had a positive impact on your software business, and is there any benefit if they see greater number of visits to their sites?

We think these are extremely important trends for our business.

They have not yet manifested themselves in revenue in the first quarter, or really even in a significant way in the second quarter.

But these changes that you're alluding to -- I put Disney joining Hulu there as well -- are quite fundamental.

There is a lot of activity in the industry around formulating the appropriate strategic response.

So we find ourselves -- I mentioned earlier, I'd say actually almost an increased pace of strategic and technology discussions.

Certainly a fair amount of the discussions were around opportunities and plans for addressing or augmenting or in some way related to this almost quickening pace of change and innovation in broadband video.

But I would, to be fair, I would characterize it as a middle to longer term growth driver for the business as opposed to something that we expect to have impact in the second quarter.

All right.

Thank you.

Thank you very much.

(Operator Instructions).

Your next question comes from Paul McWilliams with Indie Research.

Hi, guys.

Hey, good afternoon, Paul.

I've got a couple of questions here.

On the Scopus, if we use 2008 as a template, the $75.7 million that they shipped in, what percentage of that will be wound down as overlapping business -- essentially discontinued, but that might be too hard of a word?

From a product perspective, maybe a little bit north of 40%.

Okay.

You may recall that I made a high level, this is a -- a little over half their business was toward this contribution/distribution space on broadcasters and video content owners, very strategically interesting to us, and very complementary.

Maybe a little less than half their business was targeted for service providers, much like our customers, but in emerging markets.

For the latter category, what we're doing is discontinuing those products.

We're using Harmonic products, but having the same sales force work in Eastern Europe and in Russia and in India and some of the other markets where they're particularly strong.

I had taken from the initial conference call when you guys went through this that there was about a 25% overlap.

Should I be thinking now that -- did you say about 50% would be discontinued?

I estimated just a little bit north of 40%, Paul.

Okay, I'm sorry

So I think -- I regret that I don't remember that discussion, but as we have dug into it, I think 40% is about the number in terms of product overlap that we see.

Okay.

Then I take it from Robin's comments that quite a bit of the Scopus technology is going to be integrated with Harmonic technology and create new product lines.

Is that really why you're not breaking out the Scopus?

I think that's certainly one piece of it.

It's an important piece.

I mean, we are developing new products -- we've announced two already that already hybrids of the two companies' technology.

Okay.

Fair enough.

It'd be nice for us to be able to do some pro forma work, but I understand the difficulties of that.

Looking at Comcast, and going back to their three priorities for the year, which were all digital, DOCSIS 3.0, and business services -- on the old digital, do you know about what percentage of their footprint is already simulcast?

Just simulcast, but not all digital?

Yes, so where they're sending out the channel.

It's a relatively high number.

I don't know the exact number.

Okay.

Well north of 50%?

I believe so, yes.

Okay.

So the real opportunity there for you is when we bring in new channels to the space that they're freeing up, not necessarily encoding the analog that they're discontinuing?

That's correct.

Okay.

That gives me a little bit of idea of flow.

At one point in time, business services was a real focus with your band product division, I believe, when you were running that division.

Is that still a focus for you?

Not so much, Paul.

Okay.

And modular versus integrated CMTS, what are the real advantages of modular beyond being able to put the SDV in the QAM with the modular with the edge QAM function?

Are there any other advantages there?

There are a couple.

And in some instances there is an efficiency to working with existing CMTSs in the field.

As I mentioned previously on these calls, actually a number of the modular CMTS projects we've done have been in the context of DOCSIS 2.0.

I think that's one driver.

The second one is the one that you highlighted, which is moving towards a unified edge.

Okay.

Are there any advantages, though, in the ability to dynamically find channels at the modular versus at the integrated CMTS?

I don't think that there's any relative advantage, Paul, other than this issue that just mentioned of working with some legacy CMTSs.

But going forward, channel binding capability exists in both the integrated as well as the modular architecture.

Okay.

Last question here, I really don't know how to ask this properly, but it's a question that I've got to ask.

It comes in two parts.

If I look at your number and try to take out what I think Scopus is, the miss from midpoint of guidance to Q1 is somewhere in the neighborhood of, oh, say $8 million to $10 million.

Is there a driver or two drivers, three drivers, that really change that, that you really had in your mind that you were going to get that just didn't happen?

If that's the case, were they delayed?

I think, Paul, probably the biggest thing is the delta in terms of the bookings we expected.

About half of our business we expect is book and burn business.

Simply we had forecasted -- our sales force forecasted greater bookings than we saw materialize.

In general, as I commented earlier, we tend to think this is delay rather than fundamental changes or strategic shifts by our customers, and we certainly don't think we have lost any market share in the process.

But we simply saw a lower level of spending overall.

I would tell you, a secondary point, and I don't want to overstate it, but Robin earlier mentioned the fact that we're still carrying a fair amount of deferred revenue into the second quarter.

And there probably are a couple of projects that we saw at the beginning of the quarter that were in our deferred revenue category that we didn't expect to become revenue in the first quarter.

And for a couple of different reasons on a couple of different projects, those projects did not get completed and therefore did not get recognized.

Now, in looking towards the future, and I understand why you didn't issue a revised guidance this time, and I appreciate you wanting to be accurate, but in looking towards the future, what would be your policy on providing revised guidance either up or down?

Paul, I don't think we have a policy.

This is the first time this has happened to us for quite some time, and we don't have a policy, to be honest.

It's something we would discuss on a case-by-case basis with our committee and our lawyers.

But there is no formal policy.

Okay.

I don't want to put words in your mouth, I understand your answer, and I'm going to ask the question again in a different way.

If you were to miss by, say, 5%, do you think under most circumstances, on the revenue line, that you might -- you would most likely revise your guidance?

Paul, again, I think it's very specific to the context and the circumstances and I don't want to provide pat answers to the question.

I think it's highly dependent on the circumstances and different companies have different approaches.

And it's not something that happens to us very often.

We'd think about it, we'd take it very seriously and think about it hard, but I don't want to predict what the answer might be.

Okay.

Your guidance has been up til this point conservative and appreciated, so this is a shocker for me, and that's why I'm trying to get better definition.

That's about it.

Thank you, guys.

Thank you.

Your next question comes from Robert Bovo with Diamondback Capital.

Thank you for taking the call.

I appreciate it.

I was hoping we could get more color on the Electra 8000 cycle -- when you expect to start seeing some booking activity on that product?

I know it was just recently launched.

And what the trajectory might look like through the year?

And if your expectations are markedly different across vertical in geography for that product?

Thanks.

I'm quite excited about the product recently announced.

It's beginning to be tested.

I don't expect meaningful revenue contribution even in the second quarter, but we do expect some more wins.

I think I mentioned that we had our first bookings beginning in the first quarter, and we're optimistic that that trend will continue in the second quarter.

And we expect good contribution to the business in the second half of the year.

The two market verticals where I think the impact will be greatest will be cable.

I talked to you earlier about the very significant impact this can have in terms of the spectrum requirements of high definition programming in particular in the cable spectrum.

And also, the impact that we expect in the satellite world where, again, bandwidth is always at a premium.

And we now see an environment where the first high definition MPEG-4 encoders are now getting up to three plus years old.

We think there's a good opportunity to upgrade those encoders and deliver significant bandwidth savings over the space currently occupied by the HD that's up there on the satellites today.

Great.

Thank you very much.

And is there any way to quantify the installed base that you think is potentially a target for an upgrade?

Obviously, you have given us detail over the years regarding your various exposures, but I have frankly no grasp on exactly what the installed base of current Electra equipment is out there in the field.

The number is in the thousands or, let's say the high thousands, certainly not hundreds of thousands.

But I also want to explain that our target market for this product is not only Harmonic encoders but also competitor encoders, so from an upgrade and replacement point of view.

Great.

Thank you very much.

Thank you.

There are no further questions at this time.

Do you have any closing remarks?

Thank you very much.

Not only just to say thank you, very much, to everyone for participating in today's call., we appreciate the discussion and we look forward to talking with you all again very soon.

Good day.

This concludes today's conference call.

You may now disconnect.