Harmonic Inc (HLIT) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Harmonic fourth quarter 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, Mr.

Robin Dickson, Chief Financial Officer.

You may begin your conference.

Thank you, Sarah, and good afternoon, everyone.

I'm Robin Dickson, Chief Financial Officer of Harmonic.

With me in our headquarters in Sunnyvale, California are Patrick Harshman, our President an CEO and Michael Newman, our Investor Relations Spokesman.

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 the documents that Harmonic files with the SEC including our most recent 10-K and 10Q reports.

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

On this call, we will provide you with financial metrics determined on a non-GAAP or pro forma basis.

These items, together with the corresponding GAAP numbers and the reconciliation to GAAP, are contained in today's earnings press release, which we have posted on our website and filed with the SEC on a Form 8K.

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

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

I will now invite Patrick to give his overview of the quarter and year.

Then I will address the financial details of the quarter, before we open up to take your questions.

Patrick?

Thanks, Robin, and good afternoon, everyone.

Today we announced fourth quarter and full-year results that demonstrate solid operational execution in a challenging environment.

Our results also provide encouraging signs of a recovering market and very positive customer response to our newest products and solutions.

During the past year, we remained focused on our strategy of aggressive technology leadership across a range of new video applications, customers, and geographies.

As a result, we're entering 2010 with improving visibility and a stronger technology portfolio, more customer relationships and more opportunities.

Geographic expansion and diversification of our customer base has been a clear strategic priority, and we are pleased by our progress in 2009.

Our sales in Europe rebounded sharply in the second half of the year.

And our business in Latin America and Asia, particularly in China and India, was up significantly as well.

International sales represented half of our total sales for the year, and we see good opportunities to grow our international business further in 2010.

While strength in global sales presence, aided by our acquisition of Scopus, has clearly contributed to our success in these international markets.

The impact of our industry-leading technology is an equally important success factor.

The move to high definition video continues to be a key market driver around the globe, and our high definition encoding and stream processing platforms, particularly our new Electra 8000, continue to gain share across customer markets.

We are working closely with a growing number of cable, satellite and telco customers around the world who are using our technology to add and upgrade an every increasing number of standard and high definition channels.

A recently announced deployment with Inside Communications, where we are powering a state-of-the-art broadcast and on demand cable video network, and with the island of Curacao where we are powering a new broadcast and on demand IP TV service are great examples of the breadth of solution we are bringing to the global market place.

Turning now to the cable market, we saw a strong finish to the year as our newest video processing, EdgeQAM and HFC access products powered mission critical applications such as expanded high definition and video and demand offerings, start over and catchup TV services, high speed data capacity expansion and switch digital video.

We have some exciting new cable video, Edge and Access products in the pipeline, and as the market recovery progresses,we expect to see growing cable operating demand in each of these application areas.

We're also very pleased to see our cable customers, as well as our satellite and telco customers, starting to look to TV everywhere-type service delivery to PCs and mobile devices.

Our Media Prism product suite for multi screen video delivery has enabled to us provide innovative solutions to several customers who are beginning to deploy new internet and mobile video services.

Our sustained investment in technological innovation for mobile and internet video, the rapid proliferation of iPhones and other video capable mobile devices and growing service provider confidence in the viability of underlying multi screen business models cause us to be increasingly optimistic about our growth opportunities this emerging space.

We expect Mobile Solutions will represent a modest, but growing portion of our revenue in 2010.

An additional area of strategic focus in 2010 is video contribution and distribution, where we are enabling the delivery of high quality news, sports and entertainment programming from content creators and broadcasters to service providers.

We entered this market through the acquisition of Scopus, and we're seeing some very positive progress.

During the fourth quarter we announced new business with KT who is using our technology to distribute video content to over 160 cable operators throughout Korea.

And we recently announced a similar deal in India.

Looking ahead, we see further business model and technology innovation driving this video contribution and distribution market.

With the initial rollouts of new video formats and delivery models, spanning technologies such as 1080p 60 high definition, 3D and adaptive bit rate video for all manner of emerging wide screen and mobile internet devices and with Comcast's pending deal for NBC Universal, we remain convinced that creatively addressing the video delivery requirements of leading broadcasters and content creators represents a significant long-term opportunity for Harmonic.

Summing up, Harmonic is executing well and is positioned well to address an increasing array of geographies, markets and video applications.

Although we face continued economic uncertainty, we are confident in our ability to take advantage of growth opportunities that present themselves in 2010 and beyond.

And on a final note, I would like to take this opportunity to thank Robin for his many years of outstanding financial and business leadership at Harmonic.

Robin has announced his plans to retire, but will continue to serve until we complete our search and a smooth transition to a new CFO.

With, that Robin, I will hand it back over to you to cover the financial aspects of the last quarter.

Thank you, Patrick.

Today we announced our results for the quarter and year ended December 31, 2009.

For the fourth quarter of 2009, we saw sequential increases in both quarterly revenue and bookings from our customers worldwide.

We reported net sales of $86.7 million, up from $83.9 million in the previous quarter.

Bookings in the fourth quarter of 2009 were $107.6 million, up from $79.9 million in the third quarter, with very good diversification across most geographies and markets.

For the full year 2009, net sales were $319.6 million compared to $365 million in 2008.

Our lower year-over-year sales reflected the global economic recession and the lower capital spending by most of our customers around the world, particularly in the first of last year.

In the second half of 2009, we saw an improving environment in Europe and then the larger emerging economies, particularly China and India.

Throughout 2009, we continued to diversify our revenue base.

International sales represented 50% of revenue for the fourth quarter and 49% for the full year of 2009, up from 47% and 44% respectively for the same periods in 2008.

By market segment, cable customers accounted for 60% of revenue in 2009, satellite customers 19%, and telcos and others were 21%.

The sales mix by market segment is comparable to 2008, but with an increase in the other category.

This is due to higher sales to broadcasters and content providers, mainly as a result of our Scopus acquisition in March of 2009.

In the fourth quarter, we saw strong sequential growth in our cable market after a relatively light quarter for cable revenue in the third quarter.

Our largest customer was Comcast, representing 16% of total revenue in both the fourth quarter and for the year.

Perhaps most significantly in 2009, our ten largest customers contributed 47% of total revenue compared to 58% in 2008.

Both our international growth and the Scopus acquisition contributed to our significant progress in furthering our strategic goal of customer diversification.

We are encouraged to see this trend towards reduced dependence on a small number of large customers.

By product category, video processing represented 42% of our sales for the year, Edge and Access products, 37% and software services and other, 21%.

Compared to 2008, we saw a higher percentage of video processing product sales and a lower percentage of Edge and Access products.

This shift in mix reflects a number of factors.

A continued diversification of the customer base, the acquisition of Scopus, our increasing emphasis on software and services and the success of our Electra 8000 encoder in the second half of the year following its launch in the summer.

In the fourth quarter of 2009, we saw sequential improvement in our non-GAAP gross margins, which were 48.5%, up from 47% in Q3.

This improvement was driven in part by revenue growth, and in part by the more favorable product mix, although we have continued to see some pricing pressures, particularly in the Edge and Access product lines.

During 2010, we expect to roll out important new next generation products, which should contribute to improvement of our gross margins over the longer term.

We continue to be pleased with our discipline in managing operating expenses, which are essentially flat with the previous quarter at $32.7 million.

Having completed the integration of Scopus into Harmonic during 2009, we are pleased to see that the anticipated cost synergies have been fully realized.

We ended the fourth quarter with 840 employees, down by nine from the end of the third quarter.

As we recently announced, we plan to move from our current corporate headquarters in Sunnyvale, California to a 188,000 square foot facility in nearby San Jose in August of 2010.

We expect the new facility to provide an outstanding work environment for our employees as well as cost savings and business efficiencies which should begin to positively impact our results in the fourth quarter of 2010.

Our sequential improvement in revenue and gross margins had a positive impact on our operating margin and our net income.

Our non-GAAP operating margin returned to double digits at 11% in Q4.

Still short of our desired 15% target, but a significant improvement over earlier periods in 2009.

GAAP net income for the fourth quarter of 2009 was $47,000, or break even on a per share basis, compared to $2.6 million or $0.03 per diluted share in the previous quarter.

Excluding restructuring charges as well as non-cash accounting charges for stock-based compensation, the amortization of intangibles and tax adjustments, non-GAAP net income for the fourth quarter of 2009 was $6.3 million, or $0.07 per diluted share, up from $4.5 million and $0.05 in the previous quarter.

Our non-GAAP net income includes a tax charge of 35% for the fourth quarter of 2009.

We continue to strengthen our balance sheet.

We generated significant cash from operations in the fourth quarter and ended the year with cash, cash equivalents and short-term investments of $271.1 million, up from $253 million at the end of the third quarter.

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

Our receivables decreased to $64.8 million at the end of the fourth quarter, down from $70.3 million at the end of the previous quarter.

Our DSOs were 68 days, also down from 77 days in the previous period.

We're very pleased with this improvement in DSOs and the return to our desired range of 60 to 70 days.

Our inventory was $35.1 million, up almost $5 million from the end of the third quarter.

This inventory increase mainly reflects our preparations to fulfill the substantial increase in our backlog as we were moving into 2010, as well as to address concerns about possible fluctuations in parts of the supply chain.

Finally, on the balance sheet, our capital spending was $2 million in the fourth quarter and $8.1 million for the full year.

We expect CapEx to be in the range of $13 million to $15 million in 2010, which includes approximately $4 million to $6 million for leasehold improvements and equipment for our new headquarters facility.

Turning to the outlook, we move into 2010 with a much improved backlog and deferred revenue position, approximately $86 million.

While the macro economic environment has strengthened since a year ago, our customers are generally still in a cautious mood and we expect to see the usual seasonal slowdown in bookings during the first quarter.

So with good backlog entering the year, but with the expectation of slower bookings in Q1, we expect to see revenues more or less flat in the first two quarters of 2010, at a level similar to that of Q4.

So taking all of this into account, we believe that our improved backlog and visibility allows us to the return to our previous practice of providing six months of rolling guidance.

We also expect that our net sales for the first half of 2010 will be in the range of $170 million to $180 million.

For the full year 2010, we see the potential for revenue growth of 10% to 12% over 2009 with growth of up to 15%, perhaps possible in the event of a very robust recovery.

But while we have confidence in our revenue outlook for the first half, we strongly urge analysts and investors not to revise upwards the revenue expectations for the second half of the year.

There is still too much uncertainty about the course of the economic recovery.

We expect our non-GAAP gross margins for the first half of 2010 to be in a range of 48% to 49%.

While a number of factors can impact our gross margins from quarter to quarter, we believe that the success of our new products and solutions, our ongoing sourcing strategy and cost reduction efforts and the gradual increase in our video processing and software sales mix will have a favorable impact on gross margins.

We continue to see a return to 50% non-GAAP gross margins as an achievable target, perhaps as early as in the second half of 2010.

With respect to operating expenses, we are pleased with our progress in controlling costs, even while we continue to invest in the long-term strength of our business.

We expect non-GAAP operating expenses for the first half, excluding charges for stock-based comp and the amortization of intangibles, to be up slightly compared to current levels in a range of $66.5 million to $68.5 million.

In summary, 2009 was a challenging year.

We completed a significant acquisition, we continued to invest in next generation products.

We maintained solid and non-GAAP profitability and generated positive cash flow from operations.

Our business strengthened in the second half of the year and we ended the year with increased momentum.

Harmonic is well positioned with a strong balance sheet and a healthy operating model.

This allows us operational flexibility and the opportunity to use our strong financial condition to our competitive advantage.

Finally, on a personal note, after 18 years in this position, I believe it's now an appropriate time for me to hand over the reigns to a new CFO.

Harmonic has successfully navigated a very difficult 2009, and the outlook for 2010 appears to be heading in the right direction.

We have a very capable and increasingly experienced management team, a strong balance sheet and competitive position and our future prospects are bright.

And in the meantime, I want you to know that I will remain fully committed and engaged until my successor is in place and we have completed a smooth transition.

This concludes the formal part of our presentation.

Patrick and I are pleased to open it up now for your questions.

Operator?

(Operator Instructions) We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Simon Leopold with Morgan Keegan.

Thank you very much.

First of all, Robin, just want to wish you well and you'll certainly be missed.

You have been a great help in managing and explaining what's going on for Wall Street.

So extend some thanks.

And I want to dive into the first question.

Certainly very pleasant guidance here, being able to return to six month view.

And I'm trying to put this into some context relative to the commentary from Comcast about its capital spending plans, Time Warner, suggesting that their spending would be down.

So not only are you forecasting good sales trends, it's better than seasonal patterns for that March quarter.

Could you help give us a little bit of context here relative to the macro?

Well, Simon, this is Patrick.

Why don't I take a crack at that?

I think the first thing to remember about, at least the first quarter, is we are coming in with strong deferred revenue and backlog, a virtue of the fact of a very strong fourth quarter.

Second, although it is true that some of our larger cable customers are talking about reduced overall CapEx, , we have always said an either up or down CapEx environment, that what really matters most to us is the mix.

And we, at least in the first half of the year, we are cautiously optimistic that we are going to see more of that mix move towards video centric kinds of projects and investments.

And the third thing I would say is that while certainly Comcast has been our largest customer, and cable and domestic cable is a very important part of our business, I think it's worth, again, underlining the growing importance of customers outside the US cable community to our overall business.

Last year, 50% of our business came from outside of the US.

Also, as cited by Robin, our top ten customers last year contributed only 47% of our overall revenue.

These are pretty important shifts and I think real evidence of our -- the success of our growing strategy of diversifying and expanding our customer base.

So as we think about our guidance, we are thinking of global customers across customer market segments and across

And just to -- sorry.

Just to follow up on the Comcast opportunities, on their call yesterday, they suggested that they are going to take a fresh look at switch digital video.

You had been awarded a contract some time ago.

What's your thought on that particular opportunity?

I would rather, Simon, not comment specifically on any one opportunity with any one customer.

But I would say that we have got a great leadership position in the market with our EdgeQAM product, as you know.

It's number one in video on demand applications, and we think it's increasingly the product of choice, particularly for our existing EdgeQAM customers for switch digital video rollouts.

So we believe switch digital video, there's probably greater attention on that across the industry in 2010, , as the race for more high definition channels continues pretty much unabated, and we like our chances to compete for that business across operators with our market leading EdgeQAM

Great.

One last housekeeping question.

What was the backlog?

Simon, the sum of backlog in deferred revenue, which is the best way to look at it, was $86 million at the end of the year.

86?

86, yes.

Great.

Thank you very much.

Thank you.

Your next question comes from the line of Mark Sue with RBC Capital Markets.

This Johanna in for Mark Sue.

The fact that you are reverting back to six months guidance, does that mean overall better visibility?

And how should we factor in seasonality for the first quarter and the second quarter, and do your near term projects indicate continued strength in the second half?

Well Johanna, I think the way to think about it is that we had a very strong bookings quarter.

We did over $100 million in bookings, and a substantial amount of that, of course, is carried over into 2010 with our revenues at around $86 million, $87 million.

So we certainly got a good head of steam coming into the first half of the year.

Nevertheless, as you know, historically Q1 is often the lightest quarter of the year for our customers' spending, and we don't see this year as being any different.

So we have a good head of steam from the backlog, but with the prospect of relatively lighter bookings in Q1, we see kind of a flat six months, honestly, when you put it all together, and that's really what we are suggesting here.

The midpoint of our guidance is 175, which is roughly two times the number for Q4.

Okay.

And for the fourth quarter, it seems like your Edge and Access business was down sequentially almost 12%.

If could you comment a little bit on that, that would be great.

We don't see any underlying big trend.

I think it's just the vagaries of what projects are happening, and we do expect to see relatively stronger and relatively weaker quarters in any one given product category.

I would say additionally, though, that we have found the new video processing products acquired from Scopus earlier in the year increasingly coming into their own over the course of the year and from that point of view, we have been expecting and witnessing a mix in revenue more towards video processing, just by the injection of those new products.

Your next question comes from the line of Brian Coyne with Wedge Partners.

Good afternoon, guys and first to Robin, congratulations.

No surprise, no wonder that you skipped the ribbon cutting ceremony.

(laughter) Just wanted to say thanks again for all your help all over the years, and I'm sure I'm not the only one to say that you'll be missed.

I do want to your guidance, glad to see the six month outlook.

You mentioned in that, looking obviously for seasonality in the first quarter.

Do you think that that ought to be in the normal historic range around, maybe high single-digits as a percent and on a sequential change?

And then, if that's the case, should your margins and sort of the OpEx follow roughly the same usual pattern that we would expect off of that?

Or do you have anything built in there that might, in terms of perhaps an R&D increase or something like that that might change that?

No, I think our view on operating expenses is that it's pretty much steady as she goes at the moment.

We've had a couple -- we've been sitting for the last few quarters in a range of $32 million to $33 million, and we don't have any immediate plans to change that significantly.

We'll do, I'm sure, a little bit of selective hiring here and there, but I think it's still a cautious outlook, at least around our spending plans.

Got it.

And then the only other question I really had was you talked a bit about new products in 2010 that should be coming out and help support and possibly expand the gross margins.

As these roll out in I'm assuming small volumes, at least at first, would these have the small margin contributions that you would expect?

A and then if you could also then tie that back a bit into your view about being able to keep OpEx growth in check.

Well, Brian, I will take the product part of that question.

I think you referred to, perhaps in our EdgeQAM area, it is true that there's a little bit of a razor blade idea there.

Usually when we come out with a new platform when it's fully occupied, it's achieving higher gross margins, but initially getting a new platform out , there is often at slightly lower gross margins.

And that certainly is the case around the EdgeQAM product, and indeed, that is one product area where we expect to -- where we are doing some pretty interesting innovations, and you can expect to see some pretty exciting new product announcements from us and deliveries to the field later in 2010.

On the other hand, on our video processing side of the house, there we expect to see gross margin advantage right out of the gate, and that touches a whole range of products, traditional encoding, transcoding, stream processing, contribution, distribution, et cetera.

In just about every product category we are participating in, you will see some kind of new announcement and development over the course of the year.

And in most of those cases, in video processing, as I said, you will see and we'll see higher gross margins at the

Got it.

And then last one, can you comment a little bit more on, just at least in -- if not dollar value, maybe just in terms of the nominal size or the increases that you are seeing on the Electra 8000 and a little bit of color on that front?

Well, it's just been moving.

It's exceeded our expectations, frankly.

And as you may recall, this is a pretty multi-faceted product.

It's working at MPEG-2 or MPEG-4, handling both -- either standard definition or high definition or combinations thereof.

So we have actually seen it go into a wide range of applications across different customer segments and certainly across geographies.

So, beyond that, I think that basically captures the picture.

We are very pleased with the way it's going.

It's been accepted extremely well, both from a functionality point of view as well as from a video quality point of view.

From both perspectives, it's positioned extremely well competitively and right now, we couldn't ask any more from that platform.

All right, sounds good.

Thanks, guys.

All right, thank you.

Your next question comes from the line of George Notter with Jefferies & Company Incorporated.

Hi, thanks very much, guys.

I wanted to ask about budget flush.

We saw some evidence of budget flush from a number of players in the cable equipment sector and I was wondering if that was a factor in the quarter.

And speaking more about the cable operator piece, any comment there?

Yes, George.

I think undoubtedly we saw some of that as well, and some of it flowed into Q4 revenue, but a significant amount of it has carried forward into 2010.

Again, our bookings exceeded our revenue in the quarter by roughly $20 million.

So we do get the benefit of taking some of that with us.

So while there was a flush, I don't think it was particularly significant in our case.

Got it.

And if I could just add one thing to that.

I think it's also very important, as Robin mentioned in his prepared comments, the contribution to the bookings was extraordinary from a number of customers.

This was not driven largely by one or two customers.

We had -- we saw a -- we saw basically the sea rising across the globe, across countries, across customer segments, and that's -- while it's undoubtedly true that there may have been some budget flush activity happening in all corners of the markets we address, the fact that the bookings' input was so broad based, leaves us feeling pretty good about it.

Got it.

So when I think about the upside in Q4 and then the strength and the bookings heading into Q1, is the story here just the strength on the Electra 8000?

Is that the biggest source of upside in your mind or was it budget flush or something else that drove that?

Regrettably, there isn't one single headline.

As I've said a couple of times here, we are quite pleased with the Electra 8000, and that was certainly important.

But George, we did see from a bookings perspective strengths, really right across our product offering.

I highlighted in my prepared comments a couple of important contribution/distribution wins that we had overseas.

We also, I think in the fourth quarter had a very nice HFC announcement around some of the new technology we are delivering to cable there.

So we saw booking strength, really right across the product offering.

And as we said, absolutely some piece of that was probably extra pent-up budget that was on hand.

I think it's one of the reasons why we are a little bit reticent to get too far ahead of ourselves as we go deeper into 2010.

But the breadth of the customers and the breadth of the customer interest across our product line, both we think are quite positive signs.

Got it.

Thanks very much.

Your next question comes from the line of Amir Rozwadowski with Barclays Capital.

Thank you very much, and good afternoon, Patrick and Robin.

Good afternoon.

Just, Robin, to echo previous comments, best of luck in your next steps and certainly, thank you for all of your help over the years and working with Wall Street.

We certainly appreciate your help.

Oh, thank you, Amir and thank you to everyone else who has echoed those same sentiments.

Thanks.

If we think about the traction with the Electra 8000, it seems like you folks have been gaining material attraction.

How should we think about adoption across the different end markets?

Previously, when the product was announced, the goal was to not only to spread it within the typical end markets for the product platform, but to drive further adoption across other end markets.

Can you give us a little bit of color in terms of how that is going?

Well, I think we have to admit that the main progress has been in the core end customer markets and applications.

So that is cable, satellite and IP TV telco.

That's been the bulk of the business, although we have actually started to see some success out of the broadcast space.

So we've highlighted a couple of times that broadcasters and content creators are an additional area -- custom area that we are focused on for growth.

As you know, last year was kind of tough for that segment with the massive hit the ad revenue took.

But I think as many other companies have commented, there seems to have been some recovery in ad spending in the fourth quarter, and we certainly shaw some more amount of business, including Electra 8000 sales, to customers in that category as well in the fourth quarter.

Thank you, Patrick.

That's helpful.

And then Robin, you had mentioned that sales for the full year could be in the 10% to 12% range.

Am I mistaken in that comment?

No, that's correct.

That's what I said.

That's our best expectation at this point, and then again, suggesting a first half that's pretty flat with the fourth quarter of 2009.

I'm talking revenue here.

Sure.

And then a second half that's up a bit and then probably, roughly in line with the consensus that's out there on Wall Street, at least as of this morning.

Well, if we think about the higher end of that range, what drives you to the higher end of the range?

Is it new product announcements?

Is it improved spending trends?

Is it further adoption of some platforms like the Electra 8000?

What should we monitor to gauge progress towards the higher end of that range?

Well, look, from my perspective, it's really all about the customer spending and underlying that, the health of the economy.

We think our customers are very well aware of and very excited about our newest products and technology, including the 8000.

The question is, is will large scale projects be going forward?

Last year was characterized by a lot of activity.

A lot of our customers took a lot of time looking very closely at our technology.

We just didn't see that much -- as much spending as we saw in 2008 and as we hoped to.

And it really comes down to that.

If there's spending there, we feel as though there will be upside in the business.

Great.

Thank you very much for the incremental color, Patrick.

Thank you.

(Operator Instructions) And your next question comes from the line of Blair King with Avondale Partners.

Good afternoon, guys.

Robin, congratulations and I wish you well.

The -- I will just go into the question.

With -- I guess Patrick, with respect to the software segment in your business, obviously there's all kinds of visible trends everywhere about rollouts of online video and mobile video services, I'm hoping that you might be able to give us some sort of sense as to where the software segment is heading as a percent of Harmonic's overall total revenue and ultimately, how you scale that business, and would it ultimately impact the P&L at any point this year from a scaling perspective?

Yes.

So I think as you have noticed and over the past couple of quarters, so actually the so-called software piece of our business has actually been growing absolutely and certainly relatively, fairly -- in a fairly healthy way, and we're quite excited to see that.

We think we've got an exciting portfolio product.

We're certainly doing a lot from the R&D perspective in that area and we have got high expectations over the next several years.

I think the biggest thing that is going to drive that sector is it's less on on us and more about how some of these new services accelerate, how quickly we see more widespread and mainstream video offerings to mobile devices, how quickly TV anywhere and similar kind of initiatives really take hold and how aggressively service operators get out there with those kind of offerings.

And as you know, it's probably less the technology and more some of the underlying business issues, which are somewhat of an impediment there.

Nonetheless, we are involved in several deployments and many more trials the second half of last year and heading into this year, we see a lot of activity.

All of that means that we do think that we will be able to talk about continued growth throughout the year in 2010.

At the end of the day, at the end of 2010, I think it will still be a relatively modest contribution to revenue, certainly in the single digits.

Very high margin products.

So perhaps a little bit more contribution to our bottom line.

And so, some contribution in 2010, but I just say in 2010, we are probably looking at it more from the longer term strategic growth perspective than we are from an immediate impact on our financial statements.

All right.

That's helpful.

One last question, if it's okay.

Clearly, the satellite pay TV guys seem to be retooling their efforts to drive additional HD channels, more so now it seems than last year.

I wonder if you could just broadly outline what the pipeline for Electra 8000 is with satellite domain.

And then ultimately, do you see a product refresh for an encoder refresh on the horizon with some of the larger satellite guys?

Right.

So there's -- perhaps there's -- there's probably two main applications, I think you've just hit on them.

One is adding more channels, both standard definition and high definition.

And the other is going back to encoders that were deployed two, three, more years ago and actually, replacing those encoders to achieve significantly higher bandwidth efficiency.

And we see that playing out both in the US and internationally.

I would say that in the US, while there certainly are more channels going up, the bigger opportunity for us over the next year or two is probably ultimately about the refresh cycle.

On the other hand, outside of the US, it's important to remember that there's over 100 direct-to-home satellite operators around in the world, and those markets in general were still in the very early days of high definition rollout, although high definition really is starting to take hold in all corners of the globe, and there, the bigger opportunity for us is really the initial population and rollout of those high definition channels.

So you would expect the satellite segments to continue its trend here through 2010?

Yes.

We continue to be very strong supporters and quite bullish on the satellite segment, both domestically and internationally.

Thank you very much.

I appreciate your time.

Thank you.

Your next question comes from the line of Larry Harris with CL King.

Thank you.

And if I could add my thoughts regarding Robin.

Excellent job working with Wall Street over the years, thank you.

Thanks, Larry.

With respect to 3D TV going to the consumer electronics show, you couldn't go anywhere without seeing a 3D TV monitor.

And I guess like all things, there's the initial excitement and then reality, and then the service gets rolled out.

From a technological or capacity point of view, is the Electra 8000 3D capable?

What are the requirements, say, of a 3D signal?

Would it involve additional encoding beyond, say, what one might see with a typical HD type of channel?

So Larry, as you might understand, there's a lot of technology involved here.

I will try to keep it at the headlines, and you tell me where you need to dive deeper.

At the top level, the good news is that the Electra 8000 is very much 3D capable and in fact, in several trials today, it's actually delivering and powering 3D delivery.

In fact, at the CES show, the Electra 8000 was used to drive a couple of the 3D demonstrations that you perhaps saw.

There is going to be a couple iterations of the technology, and early technology will use a simple one encoder.

I think more sophisticated technology will use two encoders.

And that's one of the great things about the Electra 8000 platform.

It houses many multiple encoder in the same box, and future generations of the encoder, from a hardware perspective, we are situated ideally to also deliver the next generation of 3D technology that's envisioned, that together with televisions and/or set top boxes will allow, for example, 3D delivery that will not require the funny glasses.

I think it's also very important to point out that I think as we think about 3D, we think -- we just think about this as continuing to push the envelope of the video quality experience, and as you -- along the roadmap in 3D, 1080p at 60 frames a second become very important.

And that's another important differentiating capability that we have in the Electra 8000.

And so we are looking for 3D to drive demand, not just from -- exclusively from 3D, but actually to raise the bar right across the realm of video quality, including things like greater penetration of 1080p services.

Okay.

And do you think it could create opportunities with satellite operators as well as cable operators, or maybe more so with one type versus the other?

Look, from our perspective, it's opportunities across the board.

I think as I look out a little bit further, I think having at least a couple of channels, a competitive 3D offering is going to become a requirement, just like delivering some HD content was three years ago.

So we see a cycle very much like that.

I don't want to suggest a revolution in 2010, but it's the same kind of cycle that we see.

And we see that requirement basically applying equally to all different flavors of video service provider.

It does seem that not unlike in the case of HD, we are seeing direct-to-home satellite operators kind of take the early lead from an aggressiveness point of view.

Understood.

Well, I'm going to have to sign up with DIRECTV.

Okay, thank you very much.

Good explanation.

All right.

Thanks, Larry.

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

Yes, thank you, and -- can you hear me?

Yes.

Okay.

Great.

First of all, let me also add my feelings of gratitude to you, Robin, for all of years that we worked together and wish you all the best going forward.

Thank you.

I have a question on the -- the brief comment you made in your prepared remarks about pricing pressure and the Access area.

Can you give us a little more color on that?

Are you referring to the EdgeQAM products specifically?

No, not specifically, Greg, and there's nothing really new.

The entire Edge and Access area, EdgeQAMs, as well as HFC, they are both very competitive spaces.

And pricing pressure and cycles of product innovation and cost reduction is just part of the game.

And I think -- because we commented several times over the course of 2009, we saw that pressure continue, that industry dynamic continue.

And in some ways, in the context of slightly reduced spending, it's true that it seemed that that pricing pressure dynamic was probably exacerbated a little bit.

Okay.

That's very helpful.

And also, you've clearly been gaining market share in the -- with the Electra 8000 product, and yet when you look at your distribution of sales by type of customer, satellite was down as a percentage, MSO, cable keeps going up.

So is it fair to say that the mix of customers may have surprised you, the percentage that were cable customers?

No, I don't think so.

We've -- I think we have always expected that the Electra 8000 would be a hit with all of our major customer segments, and we are certainly seeing it go into cable customers.

There's a number of cable customers, I think some of which we have publicly announced and some of which we haven't.

But it has a broad reach.

As Patrick pointed out earlier, it's capable of MPEG-2, MPEG-4, high definition, standard definition.

So it fits all -- virtually all needs of our customers.

So it -- so a portion of our cable revenue is certainly coming from video processing products more -- broadly, not just Electra 8000, but broadly as well as, of course, perhaps what you're more familiar with, which is the Edge and the Access area.

Yes.

And just to wrap up, with DSOs down in the quarter, is it fair to assume that linearity was better in the fourth quarter than previously?

Perhaps to some degree.

I think we commented three months ago, some of our customers, and I think particularly in the cable space, closed down their receiving areas early -- relatively early ,before the end of the quarter, and so in some cases, we did have to accelerate shipments in order to get in under the wire, but I wouldn't -- so I would say that's part of it.

But it was such a strong quarter for orders that we were busy, pretty much through the entire quarter.

I think frankly, some of the DSO reductions probably has more to do with the fact that we have now really got our arms around Scopus.

When we took over the company and obviously, having a more diversified and very international customer base, it maybe took us a little while to really get our arms around the customer base and the collections and all of that.

And that's, I think, one reason we've cited before that Q2 and Q3 DSOs were maybe a little higher than we would have liked.

And I think now we have comfortably got our arms around all of that.

Thank you.

And once again, Robin, best of luck to you.

Thanks, Greg.

You are in next question is a follow-up question from the line of Brian Coyne with Wedge Partners.

Hey, thanks.

I was wondering if you could just briefly talk about your involvement in any targeted advertising trials and your outlook for this.

Do you think it is going to be impactful to your P&L this year?

Thanks.

Brian, we are involved in a number of activities touching on advertising across different customer segments.

But no, I don't expect any meaningful impact on our revenue in 2010.

Anything in particular?

Is this all EBIT related?

(inaudible) on something going on in the set top box side that you need to integrate with down the road?

How -- I was wondering if you could give us a sense to how far along that process right be?

Well, there's a couple of different scenarios in which we are involved.

Touching both, ad insertion into the live programming as well as on demand programming.

In general, everything that we are touching and the subset of a solution that we are providing is on the head end and/or in the network and not touching the set top box.

Got it, great.

Thanks.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster.

And at this time, there are no further questions.

Okay.

Well, thank you very much, Sarah, and thank you, everyone, who participated today.

We appreciate the questions and discussion, and we look forward to talking with you all again soon.

Good day.

This concludes today's conference call.

You may now disconnect.