Harmonic Inc (HLIT) 2009 Q2 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 second 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).

I would like to turn the call over to Robin Dickson, Chief Financial Officer.

You may begin.

Thank you.

Good afternoon, everyone.

I am Robin Dickson, Chief Financial Officer of Harmonic.

With me in our headquarters in Sunnyvale, California are Patrick Harshman, our President and Chief Executive Officer, and Michael Newman, our Investor Relations spokesperson.

Thank you all for joining us.

Before we start, let me remind you that 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 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 also 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 a 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.

I would now like to invite Patrick to give his introductory remarks.

After that, I will address the financial details of the quarter, before opening up to take your questions.

Patrick?

Well, thanks, Robin.

Good afternoon, everyone.

Today we announced second quarter results that demonstrate a significant sequential rebound in quarterly revenue and bookings and Harmonic's continuing strong position in the marketplace.

While it is premature to declare a full market recovery, particularly in some of the international markets we address, we are encouraged by healthier domestic cable spending, and strong customer interest across markets and geographies, in our expanding portfolio of products and solutions.

We are also pleased with our internal execution, as evidenced by our continued discipline in managing operating expenses, realizing cost synergies from our Scopus acquisition, improving our inventory management, as well as excellent progress in delivering very compelling new products and solutions.

In our core application areas, this was a very successful quarter for our newest products.

The move to high definition video continues to be a key market driver, and our new Electra 8000 encoder platform is gaining strong traction in the market.

We saw our first revenue from the product in the second quarter, and we are working closely with a number of our cable, satellite and telco customers, who will use this technology not only for adding new channels, but also to more efficiently compress existing digital channels.

We were also very pleased by recently published market research from In-Stat, that named Harmonic as the global market share leader in encoding.

Similarly, our newest generation NSG EdgeQAM continues to gain important market share in video-on-demand, switched digital video, modular CMTS, and new IPTV-over-cable applications.

Our cable customers are also responding very positively to our new superlink WDM technology, for segmenting cable access networks.

And we continue to be pleased by our gross margins in the Edge and access product category, a clear indication of our continuing market leadership position.

We are equally excited by the progress we are making in the newer customer and application areas we have targeted for additional growth.

The integration of the Scopus business is going well.

And the past quarter saw a solid rebound in associated bookings, and several new wins with video content originators, an important customer group we targeted with this acquisition.

We are also seeing significant progress with our new solutions enabling delivery of on-demand video content to mobile internet devices.

During the past quarter, we were awarded three separate projects with large customers pursuing this emerging mobile video area.

Going forward, we see growing interest in mobile video applications from broadcasters, cable, satellite, and particularly our telco customers, who are now extending their IPTV platforms to encompass new wireless video services.

We now expect these innovative mobile delivery solutions will contribute significantly to our revenue in 2010 and beyond.

So in summary, while global spending continues to be softer than a year ago, we remain convinced that by continuing to innovate, by continuing to strengthen our competitive position with a growing base of global customers, and by keeping our internal business execution firmly on track, we are positioned extremely well for further growth as market conditions improve.

I will now turn it back to you, Robin, to cover the financial aspects of the quarter.

Okay.

Thank you, Patrick.

Today, we announced our results for the quarter ended July 3, 2009.

For the second quarter, we reported net sales of $81.3 million compared to 89.3 million in the second quarter of 2008, and 67.8 million for the first quarter of 2009.

The lower year-over-year sales continued to reflect lower capital spending by most of our customers around the world.

And so while we have not yet returned to 2008 revenue levels, we are encouraged by our strong sequential growth, in quarterly revenue and in orders.

You may recall that our bookings had fallen both in Q4 of last year, and again in the first quarter, but on our Q1 earnings call, we said we had started to see a recovery in the early part of Q2.

This trend continued throughout the second quarter, and bookings for Q2 were approximately $81 million, up from 57 million in Q1.

While the sequential growth in Q2 bookings was stronger in the US than in international, we were pleased to see a significant improvement in our European bookings, in part due to the additional sales channels we now have as a result of the Scopus acquisition.

Turning to the revenue breakdown, domestic sales represented 57% of revenue for the second quarter of 2009, compared to 48% in the first quarter.

Here again, we saw strong sequential revenue growth in the US, with international revenue marginally lower than in Q1.

By market segment, cable customers accounted for 66% of revenue in the second quarter.

Satellite customers, 14%, and telcos and others, 20%.

As you will see from our revenue data published in the press release, on a year-to-date basis compared to last year, there was very little change in the mix of our market segments.

Our largest customer in the second quarter was Comcast, representing 19% of revenue, and once again, our only greater than 10% customer during the quarter.

Additionally, we saw sales to all of our US cable customers as an area of relative strength in Q2, echoed in large part by strong sequential growth in revenue from our Edge and access products.

And by product category, Edge and access represented 40% of revenue in the second quarter, Video processing 39%, and software services and other 21%.

In Q2, we saw a significant increase in revenues from our edge devices, following a slow start to the year in Q1.

Now in recent periods, we have seen our non-GAAP gross margins holding at around 50%, driven by the continued success of new products and solutions, a flexible sourcing strategy, and ongoing cost reduction efforts.

In the second quarter of 2009, we recognized approximately $4.6 million in revenue related to the installation and deployment of a video head end project which we had begun in 2008.

We had anticipated recognizing this revenue in the second half of this year, but received customer acceptance in June.

The project was quite significant from a competitive and technological perspective, but it generated no gross profit.

So if we were to remove this project revenue, and the associated costs from our second quarter results, our non-GAAP gross margins would have increased from the reported 45.5% to 48%, which is right in the middle of our second quarter guidance.

We have more typical gross profit levels on projects sitting in our backlog and in our pipeline, and we expect our gross margins to rebound accordingly in future quarters.

We continue to be pleased with the discipline in managing our operating expenses.

Our non-GAAP operating expenses in the second quarter were $32.7 million, up approximately $4 million on a sequential basis, all of which reflects a full quarter of Scopus operations included in our results, compared to only three weeks of Scopus in Q1.

During the second quarter, we substantially completed the integration of Scopus into Harmonic, and we are pleased to see the anticipated cost synergies well on the way to being realized.

In part, this is due to reduced head count.

We entered the second quarter with 905 employees, and at the end of Q2 had reduced head count to 842 people.

Our GAAP net loss for the second quarter of 2009 was $7.9 million, or $0.08 per diluted share, compared to net income of 25.5 million, or $0.27 per diluted share for the same period of 2008.

The second quarter of 2008 contained a large tax benefit of $15 million, related to the reversal of a valuation allowance against our deferred tax assets.

GAAP results for the second quarter of 2009 include restructuring and excess facilities charges, related to the recent acquisition and integration of Scopus.

Excluding these charges and noncash accounting charges for fair market inventory accounting at Scopus, stock-based compensation expense, the amortization of intangibles, and tax adjustments, the non-GAAP net income for the second quarter of 2009 was 3.1 million, or $0.03 per diluted share, compared to 15 million, or $0.16 per diluted share for the same period of 2008.

We continue to maintain a sound balance sheet.

We entered the quarter with cash, cash equivalents, and short-term investments of $253 million.

We are in a strong position to pursue further acquisitions or other initiatives to achieve our strategic goals.

Our receivables increased to 64.5 million at the end of the second quarter, up from 52.7 million at the end of the previous quarter, reflecting our higher revenue levels.

Our DSOs were 72 days, essentially unchanged from the previous period.

Our inventory was $34.4 million, down almost 4 million from the end of the first quarter, and we are pleased to see this reduction in inventory levels, and the improvement in inventory turns, reflecting substantial progress in integrating and streamlining the Scopus production and procurement processes.

And finally, our capital spending was $2.3 million in the second quarter, and we are still expecting CapEx for the year to be approximately 7 million to $8 million.

So turning to the outlook, the fundamental trends and the competitive dynamics that have been driving our business remain in force, even though they have been muted by the effect of macroeconomic events on our customers and their businesses.

We said in April that we believe that Q1 represented a low point for our business, and we indeed did have a strong sequential rebound in our bookings and revenue during Q2.

We entered the third quarter with total backlog and deferred revenue of about $73 million.

While the global economic situation still creates substantial uncertainty, recent seasonal patterns show that the second half of the year is normally stronger than the first half.

Based on our improved bookings and these seasonal patterns, we anticipate another sequential increase in net sales in the third quarter in a range of 82 million to 88 million.

We also expect our non-GAAP gross margins for the third quarter of 2009, to return to levels comparable with recent periods, in a range of 48 to 50%.

While we will always see some pricing pressure, our margin trends are positive, and our contract manufacturing model provides us with flexibility.

We believe our product road map and strategy are on the right track, and our long-term gross margin targets continue to exceed 50%.

With respect to operating expenses, we are pleased that the promised Scopus cost synergies are being delivered.

Non-GAAP operating expenses for the third quarter excluding possible additional acquisition-related charges, and charges for stock-based compensation, and the amortization of intangibles, are anticipated to remain relatively flat, or slightly up from the second quarter in a range of 33 million to $34 million.

So in summary, there remains significant global economic uncertainty, yet we are cautiously optimistic.

Q2 shows that our business momentum is heading in the right direction, albeit at a measured pace.

Harmonic is well placed with 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 are focused on leveraging the sales opportunities provided by the acquisition of Scopus, while delivering on cost synergies and other efficiencies.

By continuing to invest in technology leadership, and strongly supporting our diversified and growing customer base, we believe we will further strengthen our competitiveness, and extend our global market presence in 2009 and beyond.

This now concludes the formal part of our presentation.

Patrick and I will be pleased to open it up to your questions.

Operator?

(Operator Instructions).

Your first question comes from Amir Rozwadowski from Barclays.

Your line is now open.

Thank you very much.

Good afternoon, Patrick and Robin.

Good afternoon.

I was wondering, if we look at sort of the spending environment by end market, and certainly it seems as though you had some strength in the domestic cable market, I was wondering if you could talk a little bit about what you are seeing in terms of the DBS or satellite markets, and sort of, any outlook you see in terms of spending from that perspective?

Yes, as you point out, and as we said, the domestic cable markets seemed to kind of rise above all other markets, and among the other markets, including the DBS market, there are no really appreciable differences.

As Robin noted in his comments, year-to-date our satellite revenue is about 18% of total, which is almost dead-on what it was for the entirety of 2008.

As a percentage of our overall business, or as a ratio, satellite is consistent.

We are encouraged by the response that we are getting from satellite customers, both domestically and internationally, in response to the newest products, particularly the Electra 8000 that I spoke to, and when we see good opportunities around supporting the addition of new channels, as well as I mentioned, the upgrading of some previously deployed channels, both MPEG-2 and MPEG-4, high definition, as well as standard definition.

I also want to point out that as we have been saying over the past couple of quarters, while encoding I think is the main thrust of our historical business, and probably for some time going forward with satellite customers, we are increasingly excited about and we see increasing activity around diversifying business models, and delivery means coming from satellite operators, specifically some of the internet and mobile activity that I spoke to.

We are seeing satellite operators around the world really leveraging their content relationships, their customer relationships to explore, and in some cases, begin to invest in these alternative video delivery mechanisms, and we are really excited about that as a fundamental long-term incremental driver of our satellite business.

Patrick, should -- the way we think about it is sort of as the Electra 8000 gains acceptance in the marketplace, that is where we could see some further stabilization in the satellite business from a product upgrade cycle?

Yes, I don't want to suggest that we think it isn't stable.

As I said earlier, the revenues actually have hung in there quite well.

That being said, if you look over the history of Harmonic working with satellite operators, I'm talking over the last eight to ten actually years, the lion's share of the business has been around upgrading and replacing existing, previous generation encoders.

And we see, looking forward, we see great cycles, great opportunities to do that.

The first high definition MPEG-4 encoders are now in the field upwards of three years.

There are tremendous bandwidth savings now, associated with upgrading those encoders, and the same kind of opportunities exist around the standard definition channels.

We do see, with any one operator, it is a cyclical kind of investment cycle.

As a whole, you get some smoothing and we continue to see a good future with satellite operators, domestically and internationally.

And then lastly, if I may, obviously we have seen a marked pickup in your bookings and your deferred revenue on a sequential basis this quarter.

As we stand today, obviously the spending environment still remains challenged, but how would you characterize your visibility going forward, where we stand today, versus where we were probably three months ago?

It's certainly improved from three months ago.

On the other hand, it is not what it was a year ago.

So at the risk of being too much in the gray, we do see steady improvement.

We have substantially better visibility, but still not what we are accustomed to, in terms of managing our business over the past couple of years.

So we are really looking forward to seeing what is going to happen in the third quarter, and we are certainly cautiously optimistic that we will see continued improvement, not only in the fundamental spending, but also in the visibility.

Great.

Thank you very much for taking the question.

Thank you.

Your next question comes from Mark Sue from RBC Capital Markets.

Your line is now open.

Hi, this [Jana Nara] for Mark Sue.

The guidance for 82 million to 88 million, how should we look at the Scopus contribution in the third quarter?

And if you could tell us how we should look at the trends by each customer segment, telco, cable, and satellite?

We are not breaking out, and we won't be reporting on a Scopus number per se, but as I mentioned in the prepared comments, we are very pleased with the way the Scopus bookings have rebounded, and actually progressively increased through the second quarter.

Really the way the quarter finished up, and looking forward to the second half of the year, we see no appreciable difference in kind of year-over-year comps, in what was the core Harmonic business and the core Scopus business.

There is nothing particularly noteworthy about "Scopus contributions."

Let me ask you to restate the second part of the question.

I wasn't sure if that was in general, or whether you were still kind of asking about the Scopus-related contribution in those markets that you mentioned.

In general for the third quarter, I guess how we should look at trends by customer segment, telco, cable, and satellite, just big picture of that?

We do not see any appreciable difference.

I mean we have mentioned a couple of times now that we certainly saw US cable, in particular, more aggressive in the second quarter, than the rest of our customer universe as a whole.

We expect cable to continue on that track, more or less.

We are optimistic, and in fact, our guidance suggests incrementally, incremental improvement in the remaining universe of our customers or markets.

But in terms of quarter-over-quarter, other than that, no appreciable difference in different customer segments or geographies.

Patrick, it is Mark Sue.

Just to follow up on that, what about currency impact in Europe, anything that is causing some customers to watch the currency, and potentially delay purchases?

I think that is certainly an aspect in parts of Europe, particularly eastern Europe, Mark.

And I think that is part of what, if we look at it as an overall region, I think that is part of what is behind that still being a somewhat challenged region from our perspective.

Frankly, in Europe, as well as in Asia, as well as in parts of the Americas, you do have some economies that are relatively harder hit.

So those lingering issues are certainly part of our thinking, and part of our continuing caution as we try to understand how all of our international markets will emerge from this current climate.

And just lastly, just on the fourth quarter, recognizing it is early, do you kind of feel the pipeline overall for the balance might also be healthy, considering your near-term bookings, and some of the resumption in projects?

We certainly hope so, Mark, but the truth is the visibility still isn't there, isn't great.

The trends feel right.

We are certainly feeling positive about what we saw in the US, and we are cautiously optimistic that things will continue to improve throughout the second half, and therefore, that does imply, we hope, a good Q4.

But we really think it is prudent to wait to see exactly how Q3 pans out, and then of course we will have a better feel.

And just given the kind of the ups and the downs over the past three quarters, we continue to be a little bit reluctant to speak with any great confidence about the fourth quarter at this point.

Okay.

Thank you, gentlemen.

Thank you.

Your next question comes from George Notter with Jefferies.

Your line is now open.

Hi.

Thanks very much, guys.

I guess just to be clear, the Scopus revenue in large part gets recognized through the video processing revenue line, is that correct?

Yes, that is correct, almost exclusively.

Got it, okay.

So the thing that is confusing for me is that you had a very small sequential bump in that video processing business here in June, despite the fact that Scopus was in the numbers for the entirety of the quarter, only three weeks of the March quarter.

What happened to all that revenue?

It seems like it is really off relative to the almost $20 million quarterly run rates they were doing at the end of the year before the end of the acquisition.

Well, I think you have to, George, look a little differently at the revenue versus the bookings.

I mean there is no question the revenue was tilted more towards the US in the second quarter, reflecting, as Patrick and I have both said, relative strength in US cable, which tends to be, not exclusively, but tends to be more of a quick turn business.

The video processing products and solutions often carry some amount of deferred revenue.

So I think what I am really trying to say is that we saw strength in the bookings in the second quarter internationally, and I think the conclusion that I draw from that is we are going to see stronger performance internationally and in video processing, to some extent, in the third quarter.

So I think it is simply timing.

I mean as you remember, the deal didn't close until March, and I think frankly as we admitted in the first quarter call, the first quarter was a difficult time, as we were putting the deal together, and customers and distributors and so on were trying to figure out what would happen.

I think all of that is behind us, and the effects are beginning to show now, as we look at our orders in the second quarter.

So is it fair to say that the reason we had such little lift in the video processing business this quarter is because Q1, or even Q4 from a bookings perspective was super soft at Scopus, and therefore, they didn't have the deferred revenue piece of the business?

I guess I am still trying to understand what happened.

Outside looking in, it kind of feels like maybe those guys got a little bit aggressive, inflated revenues in the back part of the year last year, and you got caught kind of holding the downside after the acquisition.

No, I think the focus on Scopus is not really the right focus here.

We had -- our first quarter revenue picture was actually very strong in international, and a lot of -- and then video processing as well.

And a lot of that was coming from backlog and deferred revenue from the core Harmonic business, which had been booked in the second half of last year.

And so I think it was more the movement, the fact that the first quarter was actually relatively strong in video processing is the reason that the second quarter increase was relatively light.

It has got less to do with Scopus than it does with the ebbs and flows of our regular video processing business, our head end projects, and the like.

Okay.

Fair enough.

Thanks very much.

Your next question comes from Vivek Arya from Banc of America-Merrill Lynch.

Your line is now open.

Thank you, good afternoon.

Couple of questions.

The first is on operating expenses, do you see flattish OpEx trends from here, or do you see you going back to the historical range of OpEx being 33 to 34% or so of sales?

Well, I think, Vivek, our plan for the moment is to hold operating expenses relatively flat.

The key to getting back to that kind of ratio, I think has more to do with the top line than the revenue line.

As Patrick said, we are cautiously optimistic that things are beginning to improve.

We have made some significant reductions in operating expenses when you look at the combined Harmonic Scopus company, and so we are relatively comfortable we are at the right level now, and I think the ratios will start to get back in balance, as the revenues build back, which is what we are pointing to for Q3, and hopefully beyond that.

So in absolute dollars, then, we should see OpEx on a hold to these, the third quarter guidance that you have given, sort of that 34 million-ish type level?

Yes, the range we quoted in the press release, and earlier in the call, was 33 million to 34 million.

That compares to 32.7 in the second quarter.

And I think that is, yes, that is the way to think about it flat, maybe up a little bit as revenues increase.

There are always some variable costs that increase as well.

Got it.

Second thing, the increase in bookings is very encouraging.

Patrick, could you maybe give us some more color?

What is driving this trend?

Which segment is providing this trend?

Which segments are still remaining weak?

Any comments on Scopus versus your organic booking trends would be very helpful?

Yes, it is honestly a patch work picture, Vivek.

From a customer point of view, the clear pillar of strength was US cable, and of course, cable, we work with the range of our products in cable.

So within cable, it was a particularly strong quarter, as Robin mentioned, in our Edge and access product line, but we also did quite well with cable operators with our encoding and stream processing products as well.

So we saw, from a product point of view, broad strength in US cable.

Stepping apart from US cable though, it is a little bit more a question of domestic versus international.

And in particular, overseas, we don't see a dramatic difference between the different customer segments.

Rather it actually comes down to the countries that are struggling, or doing somewhat relatively better.

And as mentioned a couple of moments ago, there are still a number of countries, eastern Europe, some parts of Asia, for example, where we continue to see significant economic pressure, and for a variety of reasons, slower spending, or a more cautious approach to spending.

And just the last thing, this weakness in video processing, going back to the last question, is that just a result of the weak satellite sales?

And is that a secular trend, or do you see it rebounding in the second half, like it did last year?

And if yes, then why don't we see better gross margin than you are guiding to?

Thank you.

Well, again, I take issue with the point about weak satellite sales.

I mean our satellite sales were down compared to last year, but then so were all of the market segments.

As we said earlier, particularly when you look at it on a year-to-date basis, there is really no appreciable difference in the mix, at this time last year versus this time this year.

I think it has got more do with the fact, as I said earlier, that we had a relatively strong first quarter performance in video processing, with a lot of revenue being recognized from projects taken in the latter part of '08, when things were still a lot more robust than they have been over the last six months.

Just one last thing, Robin, to follow-up.

So last year, your satellite sales in the second half grew 20% compared to the first half.

Do we expect a similar strength in the second half this year?

Thank you.

I think it is possible, Vivek.

I think we are still waiting.

As I mentioned earlier, a lot has to do with exact timing.

We have no doubt that over the next several quarters, we will see, with several of our customers renewed spending, associated with some of the upgrade cycles that I have been talking about.

A number of our satellite customers around the world are taking a close look at our latest technology, and depending on where they are, in many cases are deploying a technology.

So we continue to be quite optimistic and quite confident about our position in satellite, where our satellite operator customers are headed, their aggression, and their seriousness about continuing to compete in this market.

And I think the combination of where they are at, together with the new technology, whether it be encoding, or whether some of the newer technology that I spoke to, to enable them to deliver internet and mobile services, all together, we remain quite bullish on the long-term on the satellite business.

How much of that is going to fall into, and what the uptick will be in the second half, versus how much of that maybe turns out to be early 2010 business, I think we are still not sure.

Thanks, and good luck.

Thank you.

Your next question comes from Blair King from Avondale Partners.

Your line is now open.

Hi, guys.

Thanks for taking the question.

Just a couple of quick ones.

Nice comeback on the Edge and access side.

I was wondering if you guys could talk just a little bit about what is going on in the EdgeQAM space today, if you can -- there is clearly a lot of talk about pricing pressure in the EdgeQAM space, and certainly I would imagine that is the case.

But I would be curious also to hear how that pricing pressure might be offset on increased volumes, or if that is even the case.

And just general thoughts about that marketplace today, and where it seems to be going, if you don't mind?

Yes.

Listen, it is an exciting space.

It is one we feel very strongly about, one we continue to be very excited about, and one we continue to invest in.

First, just addressing the pricing pressure, that whole area of Edge and access more generally is always a price competitive area.

But I would say that the -- relative to past years, the pricing pressure is not notably different this year than any other year.

And in fact, as we mentioned, we continue to be pretty pleased with the way our overall Edge and access gross margins are hanging in there quite nicely.

In terms of broader trends, what is nice about the area is we continue to find new applications and new opportunities.

Video-on-demand continues to be the cornerstone of our deployments, of the volumes today, and really of the opportunity going forward.

If you look back at the Cablevision-related remote storage DVR ruling that happened during the past quarter, we are really excited about what that might mean in terms of more aggressive rollout of video-on-demand over the next year or 18 months by cable operators, as they perhaps take advantage of this ruling to offer more aggressive network PVR kinds of services.

So first and foremost, from an EdgeQAM perspective, I think we shouldn't lose sight of the fact that VOD is a great market.

It is one where we have commanding market share lead, and we continue to be very excited about the future prospects.

Additionally, we continue to see opportunities growing in the other application areas.

Switched digital video, we have seen several nice wins so far this year, and looking forward to the second half of this year, and 2010, we see that as a nice incremental growth opportunity.

We continue to win new customers and new accounts in the modular CMTS area.

Somewhat related to that, I also want to highlight particularly international operators, who are utilizing an EdgeQAM based architecture to deliver IPTV services over cable network.

We had what is from my perspective a very important press release with SK Broadband in Korea this past quarter, talking about a really significant, in fact the world's largest deployment of IPTV over cable in Korea.

And that's really powered by our EdgeQAMs with some higher value software on top, to make the whole thing work.

So it is a dynamic area.

It is an exciting area, and it is one where we continue to feel good about the opportunities, as well as our competitive position.

Okay.

So just one follow-up to that.

It sounds like a lot is going on in the EdgeQAM space, implying a lot of volume and certainly I am sure there is a lot of volume.

So can you give us a sense in terms of what the price per port is, in just general terms on a worldwide basis, and where you see that going, say from today, two years from now, and then how your margins actually stack up against that?

I hate to disappoint, but I would really rather not go into any specific pricing discussion about it.

I would just like to -- suffice it to say that prices, ever since we have been in this category, prices have gone down.

We have been able to, through a combination of delivering added value capability on top, and cost reduction, we have been able to do a very good job on keeping the gross margins strong, over a period of years.

We have been in this business since 2000 I think, and I don't see any significant change in that dynamic going forward.

All right.

Thank you very much.

I appreciate the time.

All right.

Thank you.

Your next question comes from Jack Monti from UBS.

Your line is now open.

Hi.

Thanks for taking the question.

Just trying to back into the Scopus revenues from a little different angle, I was just curious if you could confirm which customer vertical the Scopus revenues are in?

And I was thinking they are mainly telco or the other segment.

And when I do the quick math here, it looks like first half 2009 telco other revenues are down about 12%.

Then we got the cable revenues down about 15%.

So I was curious if you could comment on, are these organic telco deployments, going kind of slower than Harmonic has anticipated?

It sounds like underperforming the cable space, but just trying to get a better idea of what is happening there with the organic business, and if Scopus is entirely in that customer vertical?

Thanks.

So actually Scopus is spread out across customer verticals.

In fact, we had some nice revenue out of cable that involved Scopus product this past quarter.

So I think it is important to remember, if I take a step back, we are really getting two things with the Scopus acquisition.

One is a class of products, contribution, encoding, and distribution products., And that technology, while I think it has got a particular resonance, and really opened doors with content creators and broadcasters, people like Discovery and Disney and Turner, that technology is also applicable, and purchased by all of our other verticals, satellite operators, IPTV, as well as cable operators.

Now, and that kind of business, so the sale of Scopus products across our customer base, and to some of these content originators as well, I would say represented about half of the contribution that we saw in the past quarter, in terms of new orders.

The other thing we were looking for, and the other half of the bookings contribution from Scopus, was just the fact from a sales presence point of view, particularly outside of the United States, they had channels and customers, and they were in geographies where Harmonic just wasn't present.

And so there the opportunity for us was to significantly step up our feet on the street, our sales channels, and our presence.

And again, these were across territories.

For example, in India, India in 2008, and I think 2007, was Scopus' largest market.

Their sales in that market were to cable, satellite, as well as IPTV and broadcast operators.

We have leveraged that presence, and not only to deliver historic or traditional Scopus products, but actually Harmonic products through the existing Scopus channels, direct sales presence, direct sales and support presence, as well as value-added reseller networks.

I guess just to follow up, so if I understand that correctly, it sounds like 50% of the Scopus revenue was in the telco other vertical, or is that the wrong way to think about it?

No, I will try it again.

I'm sorry I wasn't--

And then it was 25% cable and --

50% of the bookings approximately were from the products that are developed by the Scopus business, across all of our customers, cable, IPTV, broadcast, and satellite.

And the other half actually came from particularly international markets, where Harmonic had not as strong of a presence historically.

Sales in eastern Europe, in Russia, in Africa, across the African content, parts of Southeast Asia, including India.

Okay.

I guess maybe I can follow up more offline.

I think the answer was still a little confusing for me.

Well, I regret that.

We would be happy to try to go further with you.

I mean, Jack, it really gets back to the fact that we are not running Scopus as a separate unit.

We have integrated it into the existing sales and product structure within Harmonic, and we are simply not tracking everything to the Nth degree, as to the details.

It does fit mostly internationally, but not exclusively from a geographic perspective, and it is reasonably well spread across the market segments.

I mean you are right in one sense, that telco and other is the place where most of the, or many of the Scopus customers, in what we would loosely call the broadcast space do fit.

But as Patrick has pointed out, our ability to add the Scopus channels to our sales arms has helped us also significantly at some of our cable and satellite customers as well.

Okay.

That is helpful.

Thank you.

And as far as the international revenues, they were up at 52% last quarter.

We knew they were going to be off a bit this quarter.

When do we see them getting back to that 50% range, and is it still a long-term goal, or I guess vision for the Company that international revenues will be 50% of the business?

Thank you.

Well, we have not been far off it for most of the last several quarters.

We have oscillated in a range of 45, to actually, as you pointed out, about 50 last quarter.

I think with the, as we said, some of the strength in international bookings we started to see later in the second quarter, I think we are going to be back closer to parity in Q3.

It is always tough to call exactly, but I think we will be closer to parity.

Thanks very much.

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

Your line is now open.

: Hi, guys.

This is [Connor] calling in for Greg.

How are you doing?

Doing well.

Okay.

Just a quick question for you guys regarding the Electra 8000.

Just wanted to see how the orders are trending, with the satellite business being pretty lumpy, traditionally being pretty lumpy, I was wondering if you are seeing a traditional lumpy order pattern with the 8000?

Well, it is still relatively new.

The product was, customers have been testing it throughout Q2, and we made our first shipments in the second half, and as we mentioned, we were able to recognize our first revenue.

But it is still very much just ramping up.

So I think it is still very early days.

Okay.

I do want to emphasize, though, that the discussions and the interest is across our customer segments.

Certainly I think there is tremendous value and we are consequently really excited about the opportunities in satellite, but it is equally compelling for RPTB customers, many of our first wave of IPTV deployments did not involve high definition.

As you know, DSL networks are quite bandwidth constrained, and the additional compression capability of this product is very meaningful for telco operators who are looking to add high definition.

And just as significantly are the opportunities for cable operators.

Remember, this is a product that supports both MPEG-2 and MPEG-4, and one of the exciting things about this product is it will enable 4 high definition channels in one channel slot on the cable network.

This is, in other words, somewhere between 30 and 50% better efficiency than is currently being delivered in the cable network today.

So our cable customers are among the most excited about this technology, and we are consequently quite excited about the opportunities there.

So a lot of testing, a lot of evaluation going on.

First orders, some of the first shipments.

And I think it is going to be a story for us over the second half of this year, and throughout 2010, the ramp of this product.

And maybe I missed this earlier.

Do you still expect the Scopus acquisition to be accretive exiting the year?

Well, that is what we said at the beginning of the year.

I mean clearly in this environment, revenues are not quite what we expected them to be, or anyone expected them to be.

Yes.

I guess what I can say, because I am not going to try to predict the next six months, but I think what I can say is at least from an expense perspective, we have put in place the actions that need to be taken to realize all of the cost synergies that we talked about, when we announced the deal in December.

And I am very confident that we are well on the way to realizing the cost synergies piece.

The sales piece is a little more challenging again, mainly because of the current environment.

But as we said earlier, I think we are starting to get some leverage out of the Scopus sales channels, and I think there is still a possibility that that is the way it turns out to be for the year.

Thanks, guys.

Thank you.

Your next question comes from Simon Leopold from Morgan Keegan.

Your line is now open.

Hi, this is Jon Epstein calling in for Simon.

Thanks for taking the question.

You mentioned a number of wins in different product lines, and that along with the expected recovery in gross margin.

Can you help us understand how the mix affects your blended gross margin?

For example, what is the range from your best margin products to your lowest?

Well, Jon, typically if you assume the corporate margin to be around 50%, generally what we find is our video processing ranges 5 to 10 percentage points above that level with Edge and access below, to not quite the same extent, but certainly about, say 3 to 7 below the corporate average.

The software and services piece is the highest margin, but that is a relatively small component of the revenue at this point.

So think of video processing, maybe 5 percentage points above, and Edge and access maybe 3 to 4 percentage points below in general.

Thanks.

Very helpful.

It seems like the government broadband stimulus is geared mostly towards telcos, but do you see any opportunities for your customers in your business?

We do.

It is not a big part of our business, but we do have some revenue and some sales activity among the Tier 2 and Tier 3 telcos, as well as the smaller cable operators.

We are talking about the US here, and so I wouldn't say it is a huge opportunity for the Company, but in fact there is some activity, and increasing activity among that segment of the market.

And we do think it could present some additional spending, and some additional opportunity among those smaller, more rural carrier customers.

Okay, and lastly, you mentioned your largest customer.

How would you characterize the diversity below the 10% line, maybe the contribution from the top 5 or 10 customers?

Yes, our top 10 customers, and that is a number we publish in our 10-Q, so we will fine-tune the number.

From memory, I don't have it in front of me here, but from memory, I expect that for the year-to-date, our top 10 customers will represent somewhere between 50 and 55% of revenue, which is maybe a little bit lower than we have seen in the most recent periods.

Okay.

Thanks for taking the questions.

Thank you.

(Operator instructions).

Your next question comes from Paul McWilliams from Indie Research.

Your line is now open.

Hi, guys.

Thanks for taking my questions.

It looks to me, just looking at the numbers here, that most of the Scopus OpEx that is carrying forward would be R&D, is that correct?

No, not really.

I mean clearly, Paul, we are trying to protect the R&D efforts, but it is not entirely.

We have retained a significant portion of the Scopus sales and service support team, which is an important piece of the selling equation, as we have talked about earlier.

Scopus has channels and customers in many places that we have either not reached as effectively, or not reached at all, and so we have retained quite a bit of the team there.

Okay.

Well, I was just looking at the sequential changes there on a pro forma basis, and it looked as though SG&A was down a little bit non-GAAP, and R&D was up noticeably non-GAAP.

Well, I think, Paul, that maybe has more to do with the fact that, as you may remember, going back a year, maybe a year or 15 months ago, we said that, with the very strong operating margins we had at that time, that we were very anxious to invest maybe a little bit more aggressively in R&D.

So I think that is probably where that comes from, that we have been anxious to try to protect that investment and maintain that investment, even in the more difficult environment that we have been facing for the last few quarters.

So I think it has probably got more, like a lot of things that we talked about this afternoon, it probably has more to do with what is going on in the core Harmonic than the addition of the Scopus piece.

Okay.

On the 4.6 million that came over from 2008, I would like to dig into that just a little bit more.

Were there OpEx charges associated with that?

Oh, there are, yes, of course, as there always are with any major charge, any major project, but I don't mean to suggest by that anything out of the ordinary.

There were OpEx charges clearly in sales people and sales support, and so on, but nothing -- I wouldn't say anything out of the ordinary.

Okay.

So consistent with your trend, shall we say?

Yes, yes, I think that is fair, yes.

Can you tell me anything more about that particular project?

Why was it a zero GP project?

Was it a proof of concept for you?

Well, Paul, I hope you appreciate that we don't want to go into too much detail, simply because it was a one-off, and we, and you won't see it repeated, but maybe a little bit of background.

It was a complex project that involved not only our own product, but a substantial amount of third party project, as well as a substantial amount of our system integration work.

I think we ran into complications.

It turned out to be more than anybody, the customer, we, or our third party partners bargained for.

A big part of the challenge or the cost overrun was associated with other products, as well as a dramatic cost overrun in our own service and integration costs.

The key thing is that it, I don't think it is in any way indicative of a broader market trend, or a broader trend within our business, in terms of deals that we will be seeking out.

And there is no other deal like that currently active, or under consideration, or on the horizon.

What I was trying to get to is, was it a proof of concept for a big customer, that then could lead to considerably more business?

There were certainly aspects of that.

In fact there has been already follow-on business, that did much healthier margins from that customer.

I don't want to overstate it.

But what you are suggesting is certainly an aspect of, a piece of the equation, and a piece of the original thinking in going after that business.

Was it spread across, then, video processing, software, and services?

Primarily video processing.

Okay.

Real quick here, on the EdgeQAM, or the trends for CMTS, do you see modular CMTS becoming more popular, or are you seeing over an integrated CMTS, what do you see there in that trend at DOCSIS 3.0?

We were frankly, and I think we said we were surprised by the way the modular CMTS popped up faster than we had predicted in 2008.

So it was kind of a pretty steep ramp last year, and in terms of just popularity and percentage adoption.

We have not seen a substantial change since that time.

So I would not say that it is becoming more popular than since nine months ago, Paul.

It is the architecture of choice for some number of customers, and in fact, we have added new customers, who have adopted that architecture just in 2009.

That being said, I don't want to suggest that we think it is becoming the predominant high speed data DOCSIS architecture.

Okay.

Well, to cap off, then, would you say that -- and I think you have said this, I just want to make sure I ask it directly.

Would you say that you see an uptick in demand across the board for video infrastructure equipment in the second half over the first half?

We think so.

I mean, look, I want to divide it into two pieces, Paul.

I mean there is a tremendous amount of strategic activity, and thinking, and competitive planning going on around video.

I mean I don't think you could be in a more exciting place.

But overlay on top of that the fact that our customers are still dealing with uncertainty of their own, and a certain amount of caution and prudence.

So there is no question in our mind, and we see it in terms of the amount of presales activity, and customer discussions; it has frankly never been busier.

At the same time, I am not sure that translates directly into, or how that will translate directly into actual spending.

So that is one of the reasons why, and we have given a cautiously optimistic outlook for Q3, and for Q4, but we are still really waiting to see.

I think that is prudent as we go through Q3.

I agree with you.

Thank you very much for your time.

Thank you.

Your next question comes from Jeremy Hellman from Avenue [T] Funds.

Your line is now open.

(Technical difficulty) --for a minute about your perspective on what you foresee with respect to the long-term environment, maybe thinking five years out in terms of content delivery?

You mentioned in talking about Scopus there being some traffic with the content creators.

Do you see any sort of a migration or larger opportunity, with respect to your products landing at the doorstep of content creators, be it entities like NFL Network, MLB, and such, who might then kind of create a fourth channel for you, so to speak?

Yes, that is a clear strategic goal of ours.

We do think we are the premier developer of video technology, and we frankly, it is a hole that we are not delivering that technology, or have not historically to that market segment.

We want people, like the NFL Network, like Disney, like Turner, like the BBC, to be using our product.

We don't have exactly the right product today.

Acquiring Scopus was I think a first significant step in that direction.

We do additional work in that area through our Rhozet transcoding technology.

And long-term penetrating that market, and developing more products and solutions for it is a clear strategic aim of the business.

Is the challenge in doing that and the value-add for them the fact, if you -- kind of just using the NFL network, for example -- they will have all of these varying I guess delivery mediums to contend with, and management of delivery across those various mediums would seem to really beget some complexity, and need for devices, the management tools.

That is right.

We think it is a very opportunity-rich scenario.

Multiple formats, multiple times, and less ad insertion possibilities.

We think that there are significant opportunities there.

Okay, and just one last follow-up to that, and then I will sign off.

It sounded like you still might need a little bit more, like another arrow in your technology quiver for that.

And if so, is that something likely to be acquired or built?

We clearly, I think, don't have a critical mass, even with Scopus there.

But this is a case where I think we have got to walk before we run, and we are learning more and more about the market and the opportunities and the way these business models will also coincide and converge with our service provider customer business models.

So I think it is premature to say what exactly the next step will be.

We are going to try to take full advantage of the technology we have today, use it to develop closer relationships, and get better insights into the content creation market, and we will figure out then what the most prudent next step is.

Great.

Thanks, guys.

Thank you.

There are no further questions in queue, sir.

All right.

Well, I would like to close simply by thanking everybody for participating in the call, and we look forward to talking with you all again soon.

Thank you, and good day.

This concludes today's conference call.

You may now disconnect.