Identiv Inc (INVE) 2002 Q2 法說會逐字稿

Thank you for standing by.

Welcome to the SCM Microsystems' second quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in the question-and-answer session. At that time, if you have a question, please press the one, followed by the four, on your telephone.

As a reminder, this conference is being recorded Thursday, July 25, 2002.

I would now like to turn the call over to Darby Dye, Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Hello everyone, and thank you for joining us today as we discuss the results of SCM's second quarter fiscal 2002.

Speaking on today's call will be Andrew Warner, Chief Financial Officer, who will provide an update of SCM's Digital media and video business, financial analysis of SCM's recent quarter and forward looking commentary; and Robert Schneider, Chief Executive Officer, who will provide an overview of SCM's security business.

As we begin today's call, let me remind you that during the course of this conference call management will make certain forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements involve risks, and that actual events or results may differ materially.

We refer you to the company's 10-K and recent SEC filings, which explain several important factors that could cause actual results to differ from those contained in any projections or forward-looking statements. Any forward-looking statements made on this call are based on information that is currently available and which is likely to change over time.

Although our projections will likely change, we do not plan to update them. SCM will provide our analysts and investors with information and forward-looking guidance in our quarterly financial news releases and conference calls. We will not provide any further guidance during the quarter unless

conference call or SEC filings in accordance with Regulation Fair Disclosure.

Now I'd like to introduce Andrew Warner.

Thank you, Darby.

As we announced earlier today, results of our second quarter were again strong coming in at above or at the high end of the range of expectations that we had set at the end of Q1 for revenue, gross margin and operational performance.

These results were driven by continued execution across both our security and our Digital media and video divisions. In particular, we continue to see significant improvements in the performance of our Digital media and video, or DMV business. Losses of over $14 million in fiscal 2001 have narrowed to just under half a million dollars in Q2 2002, positioning DMV for profitability within the current fiscal year.

Over the past few quarters, we have seen a consumer demand for our Digital media and video products remain firm, in spite of the still week economy. Sales levels have not grown as they did in past years, but they have remained stable, allowing us to drive substantial improvements in this business to careful management of expenses in the areas of headcount and manufacturing.

The rapid consumer adoption of new digital photography, video and DVD technology is

the demand for the DMV division's products, which allow users to capture, edit and share their digital content. Digital cameras continue to be extremely popular consumer purchases, creating the need for a hardware and software solution, such as ours, that allows users to edit and share their digital pictures. In addition, DVD players, which continue to be the fastest selling consumer electronics products ever, are creating a market for solutions that help people direct and burn their own DVD movies.

The DMV division addresses the full spectrum of needs in the consumer video market from hardware capture devices to easy to use software applications for everything from photo editing to DVD altering. The DMV division sells the majority of its products under the Dazzle brand, which continues to hold a leading market share position in the U.S. for Digital Media Readers and full video capture and editing products.

To leverage and extend this leading brand position, DMV has developed an exciting pipeline of new hardware and software products, which will launch in the coming months. Combined with an operation and a financial base that continues to improve, the DMV division is in a very strong position to operate profitably as an independent entity.

As we announced in February, it is our intention to separate the Digital media and video division from our core security business by either a spin-off or a

. We believe that separating our three businesses would unlock value for SCM stockholders, as each business will be able to independently create as much value as possible, and in consequence be valued by the appropriate

and expectations.

We remain committed to our separation strategy and expect it to be concluded before the end of the year. The performance of the capital markets may impact the timing of the final separation.

In the meantime, our success in internally separating the operations of our DMV and our security business is yielding positive results. And we expect to continue to operate under this scenario until the environment for external separation improves.

I have given you an update on our Digital media and video business, and Robert will provide some insight into our security business in a few moments. But first, let's take a look at the numbers for Q2.

We reported revenues of $45 million in Q2 at the high end of company guidance, which was between $40 and $45 million. Revenues were down three percent from $46.6 million recorded in the second quarter of 2001, and up four percent sequentially from revenues of $43.4 million in Q1 2002.

As I mentioned, Q2 revenues were driven by good performance from both our security and digital media and video businesses. On the revenue side, sales momentum continued to be strong for our Dazzle brand at Digital Media Readers in the retail channel, and on the security side, sales of our Smart Card Readers to U.S. government continue to be strong.

Gross margin for the quarter was 33.3 percent, at the high end of the range of 32.5 percent to 33.5 percent we had set for the quarter. Underlying operating expenses came in at $13.1 million, at the low end of the range, which was between $13 and $13.5 million, as we had previously indicated, and was down by $1.7 million from the levels at the end of 2001. This is primarily the result of expense reduction programs put in place in our Digital media and video business.

We have followed an aggressive expense management strategy over the past few quarters to bring this division to profitability. A year ago, the division posted a quarterly loss of $2.7 million. In Q2 2002, this loss narrowed to $452,000, putting it in good shape to be profitable during the current fiscal year.

On a divisional basis, our security business posted revenues of $21.9 million in the second quarter of 2002. Gross margins in the security business were 40.6 percent and operating expenses were $6.6 million, resulting in an operation profit of $2.3 million. In our Digital media and video division, revenues were at $23.1 million in Q2, gross margin was 26.5 percent, operating expenses were $6.7 million, resulting in an operating loss of $452,000.

As a result of the favorable performance from both our divisions in revenue, gross margin and expense management, SCM realized an operating profit of $1.9 million in the second quarter, exceeding guidance of breakeven to a $1.5 million operating profit.

On an as reported basis, we recorded net earnings of $286,000 for the second quarter, or two cents per share. Excluding amortization of intangibles, stock price compensation expense, separation and other one-time charges, we reported pro forma net earnings of $1.6 million, or 10 cents per diluted share. This compares with analysts' estimates ranging from a loss of four cents, to a profit of seven cents per share.

Now let's look at the results in a little more detail. Let's go to our security business.

Revenues in the second quarter from this business were $21.9 million, within company guidance of $21 to $24 million, which reflects a decrease of nine percent from the $24 million recorded in the year ago quarter, and is down slightly from the $22.4 million recorded in the previous quarter 2002. Q2 security revenues

a small contribution from Towitoko, which we acquired near the end of the quarter. Towitoko was a German-based competitor in the smart card reader market, and we expect that its integration into SCM will further increase our market share in this base.

Revenues in our security division consist of sales of digital TV conditional access modules for the European market, as well as sales of our Smart Card Reader products to the government, financial and enterprise markets worldwide. Sales of our Smart Card Reader products again increased in Q2, driven by continued roll-out of readers to the U.S. armed forces, a start of their

program for personal identification and network access.

Our deployments to the U.S. government are in conjunction with contracts we have won through partners such as

,

and

. As we have said before, orders under these contracts tend to be large, but variable in terms of timing, resulting in a fluctuation in revenue levels quarter on quarter. Sales of our conditional access modules for the digital TV decryption continue to be under pressure in Q2, primarily due to the transitional state of this market.

The financial difficulties experienced by major European operators is creating a long-term opportunity for SCM. But industry leaders are now being forced to look at more cost-effective ways to deliver their subscriber-based services. In the near term, however, this is creating confusion in the market, resulting in the slowdown of sales for SCM in this sector. Robert will provide further commentary on the dynamics of this market in a few moments.

Now moving to the Digital media and video business, revenues were $23.1 million in Q2, exceeding company guidance, which was between $19 to $21 million. This reflects a two percent increase from sales of $22.6 million in the second quarter of 2001, and an increase of 10 percent from the $21 million recorded in Q1 2002.

Revenues from this division come from sales of our Digital Media Reader

, as well as sales of our digital video capture and editing products. Both product lines

under the Dazzle brand into the retail channel, as well as to OEM customers in the PC, OEM and consumer electronics industries.

In Q2, we benefited from continued strong customer demands for these products, that leveraged digital video, DVD and digital photography technologies. Sales of our Digital Media Readers remain strong, indicating that success of our strategy to add distribution of these readers to the direct retail channel to take advantage of the strength of the Dazzle brand is

business.

We were also encouraged by initial sales of new software applications. On DVD, for creating

, which we launched in June, and

, for DVD

launched in February. These are the first two standalone software products to be offered under the Dazzle brand, and their reception in the market

reaffirmed our strategy to increase the software component of the DMV business.

Now looking at the total company, which is both divisions, on the geographic split, the U.S. represented 51 percent of revenues; Europe 40 percent; and Asia-Pacific eight percent of

revenues. At the end of Q2, our total backlog stood at $17 million, against $23.4 million at the beginning of the quarter.

For the third quarter of 2002 we expect revenues from our security business to be in the range of $17 to $22 million, reflecting near-term pressure on the sales of our conditional access modules to the digital TV market. We expect that revenues for the Digital media and video business will be in the range of $21 to $24 million, reflecting a consumer market that his holding firm. We therefore expect total company revenues will be in the range of $38 million to $46 million.

As we said at the beginning of this year for 2002, the

we expect revenues from our security business to be in the range of $95 to $105 million, including the expected accretive impact of the Towitoko transaction. Based on the continued strong demand for consumers for Digital media and video products, we are raising guidance for the Digital media and video business to between $88 and $92 million for the full year.

Gross margin in Q2 was 33.3 percent, down slightly from a gross margin of 33.6 percent in the first quarter, due primarily to a change in the mix of products sold. And at the high end of the range, as we indicated previously, which was between 32.5 and 33.5 percent. Gross margin from the security division in Q2 was 40.6 percent, slightly above our guidance for 40 percent, and down slightly from the 41 percent in the first quarter. Looking forward, we expect gross margin for the security division to remain in the 40 percent range for the third quarter, and to be in the range of 40 to 45 percent for the full year.

Gross margin for the Digital media and video division was 26.5 percent in the second quarter, slightly above guidance of 26 percent. This compares with gross margin of 26 percent in Q1 of 2002. Looking forward, we expect gross margins in the Digital media and video division to remain around 26 percent for the third quarter, and to remain in the range of 25 to 30 percent for the full year. On a blended basis, therefore, we expect gross margin for the company as a whole to remain at the range of 32.5 to 33.5 percent for third quarter.

Total operating expense in Q2, excluding the amortization of intangibles, stock-based compensation expense, separation and other one-time charges, were $13.1 million, at the low end of the range we had given, which was between $13 and $13.5 million. This reflects a $1.7 million decrease from the underlying expense rate that we had in Q4 of 2001, which is $14.8 million. As a percentage of sales, underlying

expenses were 29 percent. Research and development expenses were $3.1 million for the quarter; sales and marketing expenses $7 million; and general and administrative stood at $3 million.

Looking forward, we expect full-year operating expenses in our security business to be in the range of 25 to 30 percent of revenue. And

expenses in the Digital media and video business to also be in the range of 25 to 30 percent of revenue.

In Q3 of 2002 we expect to see continued management of expenses across the company, with combined expenses from both security and Digital media and video business to be in the range of $13.2 to $13.7 million. And that includes the full impact of the Towitoko expense

in the third quarter.

of intangibles in Q2 was $333,000. Based on the preliminary evaluation of Towitoko, which we acquired in Q2, we expect amortization expenses will increase to approximately $500,000 third quarter going forward.

Stock-based compensation expense in Q2 was $87,000 and resulted from acquisition of the remaining portion of Dazzle at the end of 2000. Going forward,

stock-based compensation expenses will remain around this level.

We recorded $1.5 million in separation costs and other one-time charges in the second quarter, slightly above our previous estimate of between $750,000 to $1.2 million. Going forward, we expect to incur charges related to the separation of the businesses of around about $1.5 million for Q3.

Q2 interest and other

at

, resulting in interest income offset by a loss on exchange. And on an

reported basis, we recorded a tax benefit of $274,000 in Q2. Going forward, we expect our normalized tax rate to remain in the range of 28 to 30 percent.

As reported, net income from the second quarter was $286,000, or two cents per share. This compared to the reported loss of $5.2 million, or 34 cents per share, in the year ago quarter. On a pro forma basis, net income for the second quarter was $1.6 million, or ten cents per share, excluding amortization of intangibles, stock-based compensation expense, separation costs and other one-time charges. This compared to pro forma net profit of $1.6 million, or ten cents per share, of the year ago quarter.

Turning to the balance sheet, cash and investments were at $60.2 million at the end of Q2, compared to $59.6 million at the end of Q1. Our Q2 cash levels reflect the

of $4.5 million for the acquisition of Towitoko, which means we actually generated around $5 million of cash during the quarter.

Accounts receivable were still at $42.1 million at the end of Q2, compared to $39.9 million at the end of Q1. And inventory levels were at $37.8 million, compared to $37.3 million in the previous quarter.

sales outstanding at the end of Q2 stood at 84 days, compared to 83 days at the end of Q1, and 84 days at the end of Q2 2001.

Overall, SCM has again executed well against that plan in a difficult economic environment. In particular, by generating cash and maintaining low DSOs.

To recap our guidance for next quarter, we expect revenues from our security business to be in the range of $17 to $22 million, with gross margin remaining in the range of 40 percent. We expect revenues from our Digital media and video business to be in the range of $21 to $24 million for the third quarter, with gross margins around 26 percent. On a combined basis, therefore, we expect revenues to be in the range of $38 to $46 million, with gross margins in the range of 32.5 to 33.5 percent.

We expect operating expenses for the third quarter to be in the range of $13.2 to $13.7 million, resulting in an operating result of $700,000 loss to $1.7 million operating profit. We expect to incur charges related to the separation of the businesses of approximately $1.5 million in the third quarter. And we expect the amortization of intangibles to increase to around $500,000 per quarter, and stock-based compensation expense to remain at $87,000.

For the full year, we expect revenues from our security business to be between $95 and $105 million, with gross margin in the range of 40 to 45 percent, operating expenses in the range of 25 to 30 percent, giving a full year operating profit range of 10 to 15 percent. And for the Digital media and video business, we expect revenues to be in the range of $88 to $92 million, gross margins between 25 and 30 percent, and operating expenses in the range of 25 to 30 percent, yielding results of breakeven to a five percent operating profit.

With that, I'd now like to turn the call over to Robert.

Thank you, Andrew.

As Andrew stated, Q2 was another quarter

driven by good execution

both our businesses in a difficult environment. Andrew has already given you an update in more detail on the Digital media and video market, so I'll focus on providing some analysis of the markets that influence our security business.

In our security business, the opportunity is currently split between two markets: digital TV in Europe, now also coming up in Asia, and secure network access to PCs in the U.S. First, focusing on the digital TV access control, in the European digital TV market there is a major transition taking place. A large operator, such as the

in le) in Germany, and

in the U.K. have filed for bankruptcy, drowning under the costs of maintaining a business model that relies on controlling the entire business value...

Thank you, operator. And while we'll try and get back to - Robert back on the line, I'll continue to read the prepared remarks on behalf of Robert.

Looking first at the

market, in the European digital TV market there is a major transition taking place. A large operator, such as the

in Germany and

in the U.K. have filed bankruptcy, drowning under the costs of maintaining a business model that relies on controlling the entire business value chain.

For many years, large European operators have managed to lock in subscribers by maintaining ownership of everything from the rights to TV content to headend equipment to the propriety set-top box receiver that sits in a subscriber's living room. This was affordable under an analog system, but with the more complex digital technology, this has proven to be an extremely business model to maintain.

In the area of receivers alone, the roll-out of digital TV means that

has significantly more costs from supplying and supporting the new digital set-top boxes. Because the boxes can only receive content from

, the consumer has no desire to pay for them. And

is forced to

each subscriber's loyalty at a cost that has become unsustainable.

If the European operators are going to be financially viable, they must rapidly transform a delivery model to one, which is far less expensive. SCM's

to face technology offers the digital industry a way to make this transformation

propriety set-top boxes with cost-effective conditional access modules that can be used with any retail set-top box with a common interface slot. Our conditional access modules are already widely used by smaller operators and provide an alternative delivery model for these larger broadcasters.

In addition, SCM's technology provides a more secure approach to protecting pay TV from broadcast piracy. Security codes on the module can be updated remotely, but often they're needed to prevent the modules from being hacked and to make the solution more secure than current embedded security propriety set-top boxes.

Last week, SCM announced we had joined an international organization called AEPOC, whose mission is to combat broadcast privacy. We will continue to work with broadcast

and shall access companies and hardware providers to make renewable security a completely secure solution for the digital TV industry.

In the near term, the turmoil in the digital TV industry in Europe will continue to constrict the selling environment for SCM's conditional access modules. In the longer term, we believe the industry's troubles will force a more rapid transition to an open system space delivery model which provides a significant opportunity for SCM.

Already,

, the German pay TV operation division of

, is preparing to roll out set-top boxes equipped with a common interface

to push to increase subscribers without having to provide expensive propriety set-top boxes. SCM is partnering with

in their new set-top box strategy.

New opportunities are also opening up for SCM in Asia, but the roll-out of digital TV is being actively managed by local country governments to ensure a competitive, financially stable environment. In China, SCM is working with local operators to develop and supply conditional access modules based on the DVD common interface standard, the Chinese digital TV cable market. The Chinese government plans to roll out digital TV to between 150 and 200 million subscribers over the next several years.

In Korea, SCM is working with the Telecommunications Technology Association to put in place a cost-effective model for delivering and protecting broadcasts in the country's emerging digital cable television industry. The Korean government is preparing to deploy digital cable television to between five and eight million households in Korea over the next five years. Cable TV broadcast will be secured through tradition encryption procedures, but will be decrypted by subscribers by removable security modules, rather than propriety set-top boxes.

of the worldwide rollout of digital TV creates a tremendous long-term opportunity. We are confident that the shift to an open platform will occur in the digital pay TV market, where they will

a few months or slightly longer. And as a pioneer in common interface technology, and the leading supplier in the current security module market, we are uniquely positioned to leverage as this shift occurs.

The other major market opportunity in the security business is enabling secure access to computer networks. We address this market with our smart card reader products for the PC platform. Over the last several years, we have worked with many leading European banks and financial institutions to implement smart card-based systems to protect their customers and their business.

Applications such as

and secure electronic banking have become widespread. And we will ensure these institutions will never go back to a

secure environment.

Currently, the economic environment has slowed IT spending. And a significant number of smart card-based security programs in Europe are on hold. Even in this very difficult environment, we are maintaining a strong market position, as we are winning market share from our closest competitors in this market.

In the U.S. the scenario is quite positive. Our smart card reader sales are currently being driven by the roll-out of smart card-based personal identification systems by the U.S. Department of Defense under their common access card program. The deployment of smart card readers for this program has been underway for several months now. And to date, SCM has provided nearly half a million readers to the U.S. Army and Air Force. The U.S. Army plans to roll out the program to four million military and civilian personnel over the next two to three years.

In addition to the U.S. government's deployment of its personal ID program, various federal agencies working with Homeland Security have now announced intentions to implement similar smart card-based systems, including the FAA and the

. These new systems are extending smart card-enabled security to the physical, as well as the digital world. The FAA plans to distribute smart cards to all airlines, airports and FAA employees by 2004. And the FTA is evaluating the use of smart cards in combination with biometrics technology for various

purposes, from driver's licenses to border control.

Interest in smart card-based security has increased significantly since September 11th, and promises to be a long-term component of the U.S. homeland security measures. Of a consequence, these biometrics technologies, in combination with smart cards, is gaining ground. Biometrics technologies provide a highly secure method of identifying and authenticating individuals, as they are based on the recognition of very specific elements that are unique to each person. Smart cards provide an ideal platform on which to store biometric images, such as fingerprints.

Using conjunction, in combination with biometrics technology, smart cards are user friendly and highly effective. In addition, the cost of biometrics

have come down considerably over the last several months, making biometrics solutions affordable for mass deployment for the first time. And during Q2, SCM announced several relationships with key biometrics technology suppliers, including

and

. Together, we are developing biometrics smart card readers that utilize fingerprints to authenticate the user, and will be available to our customers in the third quarter.

To sum up, SCM has significant opportunities across all our markets: smart card-based security, digital television and digital media and video. We hold the leading position in each of these markets and have the financial strength to leverage our position for long-term success. Our performance in Q2 demonstrates our ability to execute in our markets and in our business to create profit and generate cash.

in our DMV division, in particular, demonstrate the progress we have made in preparing to separate our Digital media and video and our security businesses in order to maximize their potential. We intend to build on these strengths and successes.

Now with that, I would like to turn the call over to the operator for Q&A.

Andrew, this is Robert Schneider. I'm back on line here.

I did

a little bit too late here. But I think you did a good job in going through this. And I'm sorry for this, but I'm back.

OK.

OK. So, operator, please open for questions and answers.

Thank you.

Ladies and gentlemen, if you wish to register a question for today's question-and-answer session, you will need to press the one, followed by the four, on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your polling request, you may do so by pressing the one, followed by the three. If you are using a speakerphone, please lift your handset before entering your request.

One moment please for the first question.

Rob Stone with SG Cowen Securities, please go ahead.

Congratulations on lots of progress.

Thank you.

Robert, I wonder if you could just comment a little bit more on the security side of the business, relative to the smart card part of it. Approximately what portion of the business is government versus enterprise?

Government versus enterprise? We've not really split it out. I would say today

quarter by quarter, but about 80 percent - let's say 75 percent roughly will be government today.

OK. And you mentioned - or at least the prepared remarks that Andrew read for you indicated that a lot of corporate programs are on hold. Do you get a sense of when deployments are likely to start again? Is this something where we may be waiting until 2003, with the onset of new budgets? Or what are customers saying with respect to what it would take to get into deployment mode again for enterprise smart card programs?

This is really - it's difficult, because those

are usually at a very high organizational level, decision level. So banks at the top level - and, of course, the underlying need for security has slowed up, because over the last few years those organizations, banks and European governments has prepared to move to electronic ways of serving customers or citizens.

So I think there is no real way to stop this. Applications are still being developed. I think because of IT cuts and all the government spending cuts, this will be - in the next 12 months, my feeling is there will be no real growth in those segments in Europe.

In the U.S., there is, of course, a huge growth capability and need and spending approval for

security. So I believe in Europe it will be - you know in the next 12 months there will be at least a slow growth.

Back to the U.S. market opportunity that we heard about, you know follow-on programs and other government agencies besides the DOD, you have a sense of the relative size? For instance, we know the common access card program for DOD is around four million or slightly over four million end users. How many people are we talking about if FAA, all of airline and airport employees, for instance, were to be rolled out?

Yeah. There is a plan, and I think there are no secret plans. But if you look at airports, seaports and the logistic centers in between, and the goal is to have all personnel equipped with security access, the smart card

biometrics identification, the total is - for example, in the FTA,

is about 17 million. So you talk about both programs, which are at least twice of the size of the DOD project.

Well 17 million would be about four times the size, if it's all rolled out.

Yeah, I'd say at least twice the size.

Great.

Yeah.

Thanks very much.

Your next question comes from Adrian Hopkinson with West LB. Please go ahead with your question.

Hello. Good afternoon, and congratulations on the good second quarter.

Could I just ask about the development of the access modules in the Far East? It is naturally very interesting that Korea is also going in the same direction as China. Could you perhaps outline to us in both markets whether you see a license model developing or whether you expect to directly deliver modules into these two markets?

Yeah, Adrian, in the Chinese scenario, if we can see it today, the deployment of security modules will be focused on the headend equipment. That allows the Chinese cable operators to exchange security and maybe even add at a stage when it's

it the Chinese own security suppliers.

In Korea, it's a more global thing. They really want to move the removable security also to the consumer level, not only to the headend equipment. Basically, adopting the U.S.

open platform. As always, there have been seminars. There is a telecom commission in Korea behind this, and, you know we do not know exactly when this will start

volume rollouts. But there is a commitment to deploy this type of technology.

If I understand rightly, then in China, if they are proposing to concentrate on the headend equipment, removal of modules would not, therefore - would not feature under those circumstances.

In the headend, yes. Actually, in Europe, all new headend equipment is now being deployed with removable security. At the headend, it's really a lower cost rate to deploy it.

I see.

But, of course, headend has not the huge volume you would have at like on the consumer set-top boxes.

Right. So how many modules could one

per user in the case of headend equipment?

Of headend equipment, you're talking in a country maybe, you know, 10 to 50,000 units.

Right.

Where there's, you know, a million units, if you go to the consumer level.

Right.

But basically it's very important to have, you know, a module at the headend first, because then

from.

Right. OK. But as far as Korea is concerned, there isn't any clear kind of

when they might start?

No, they start on the

. There is development too, since SCM is

providing the initial development environment to make boxes compliant with modules. So this has started.

Right.

The development work has started, but of course we have to be very cautious about, you know, commitments on any deployment.

Just staying with the TV modules for a moment, in Europe, is there any particular geography where the demand for modules seems to have been weaker in the second quarter? I mean Southern Europe, for example, that is where there are the biggest piracy problems and also the biggest changes in ownership. Is that what has delayed it, or is it pretty much spread right across the area?

It's spread right across the area. I think what's happening is that the consumers are really confused. You know there is so much in the media about the pay TV operators' business model not working. And, in fact, the

of some of those. So the consumer - and then you have the

, you know, transition. So they do not know, should we buy now a set-top box, should we wait? If there

set-top box or not.

If, for example, you go into, you know, a standard retail shop in Germany - like in the U.S. it would be Circuit City, in Germany it's

. And if you go to the consumer

corner, the people know what a common interface and a module is. So there is enough education in the market that the people - the retailers are aware, but the answers are not clear. So the operators have not made it a clear direction that, OK, this is where we're going to.

And since the operators are in turmoil, you know, we expect this will not clear up easily. It will take a few months and quarters.

All right. Thank you.

The next question comes from Christian Deckart with Commerzbank. Please go ahead.

Hi. First of all, congratulations on the very solid

you announced this morning.

I had one question on the possible impact of

now switching over to open set-top boxes. Could you elaborate a little bit on what might be the impact on your top line? How much revenue would you see here? That is question number one.

And then a second question, I noticed your guidance spread became larger for Q3. And now, if I got that right, you expect revenues between $38 and $46 million, while the last quarter you had a $5 million spread. Is that just coincidence or is that a sign that visibility is becoming lower in your market?

Yeah, it has to do with what I just also discussed

before. There is uncertainty at the consumer level on deployment of new services. The operators are focusing more on internal things, than communicating with the consumer.

So that's causing us to be, you know, very careful here. So the consumer is just not convinced he should buy this type of equipment. The set-top boxes in general. And the consumer industry itself is not pushing the

digital TV set yet, because this would be the other major driver for our modules.

You know the digital TV set itself, of course, there the encryption module is the most efficient and low cost way to add security anyway. So this is not

around yet. So, therefore, our guidance is getting large

of spread.

In terms of specifically on

, we cannot disclose any specifics. We are starting - we will

starting the broadband in September. It will, of course, start in smaller steps. But we cannot disclose any details in terms of volume.

OK, thank you.

Thank you.

Gentlemen, that does conclude the question-and-answer session. Please continue with any closing comments.

In summary, we are pleased with our performance in Q2. We believe our strategy to independently manage our security and digital media and video business will continue to bring benefits to the businesses and, of course, to our shareholders, partners and customers.

Thank you for joining us today. And see you here on the next call.

Bye-bye.

Ladies and gentlemen, that does conclude your conference for today. You may all disconnect, and thank you for participating.