Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Harmonic Inc. (NASDAQ:HLIT)

Q3 2008 Earnings Call

October 27, 2008 5:00 pm ET

Executives

Patrick J. Harshman – President and Chief Executive Officer

Robin N. Dickson - Chief Financial Officer

Analysts

Mark Sue – RBC Capital Markets

Greg Mesniaeff - Needham & Company, Inc.

Vivek Arya - Merrill Lynch

Blair King – Avondale Partners LLC.

George Notter – Jefferies & Company, Inc.

Nikos Theodosopoulos – UBS Securities LLC.

Larry Harris – C.L. King & Associates

Paul McWilliams - Indie Research, LLC

Todd Cooper - Stephens, Inc

Operator

Good afternoon, my name is Kara and I will be your conference operator today. At this time, I would like to welcome everyone to the Harmonic third quarter 2008 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions). Thank you.

I would now like to turn the call over to the President and Chief Executive Officer, Patrick Harshman. Mr. Harshman, you will begin your conference.

Patrick Harshman

Thank you and good afternoon everyone. I am Patrick Harshman, the President and Chief Executive Offices of Harmonic, with me in our headquarters here in California are Robin Dickson, our Chief Financial Officer and Michael Newman, our Investor Relations Spokesman. Thank you all for joining us.

Today we announced the results for the third quarter of 2008, the quarter which we delivered both the highest revenue and bookings in Harmonic’s history. These operating results demonstrate our products and solutions continue to be selected by an increasing number of both incumbent and emerging video service providers around the world. This continuing market momentum confirms the strength of our products in core technology, the ongoing success of our global strategy and the focus and excellence of our worldwide team.

Looking ahead to 2009, the global economic environment clearly creates some uncertainty. However, we are convinced the fundamental market and technology drivers that underpin our opportunities that transports, more video being delivered in more formats, to more devices over more networks by competitive operators remain in force. We, therefore, continue to be confident about our strong market position and long term growth opportunities and we continue to move forward with our innovative product development programs that powerfully address these fundamental market trends.

I will now ask Robin to cover the financial aspects of the quarter and I will then review some of our recent business developments and strategic initiatives in more detail. Robin.

Robin Dickson

Thank you Patrick and good afternoon everyone. During this call, we may make projections or other forward-looking statements regarding future events of the future financial performance of the Company. We must caution you that such statements are only predictions and that actual event or results may differ materially.

We refer you to the documents that Harmonic files with the SEC including our most recent 10-K and 10-Q reports. These documents identify important risks factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Please note that on this call, we will provide you with financial metrics determined on a non-GAAP or pro forma basis. These items together with the corresponding GAAP numbers and the reconciliation to GAAP are contained in today’s earnings press release, which we have posted on our website and filed with the SEC on Form 8-K. We will also discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in the press release and the remainder will be available in a recorded version of this call on our website.

Today, we announce results for the third quarter ended September 26, 2008. We reported net sales for the quarter of $91.5 million, up 11% from $82.3 million in the third quarter of 2007. For the first nine months of 2008, our net sales worth $268.1 million up 20% from $223.8 million in the same period of 2007. In the third quarter, our international sales represent 39% of total sales and 43% on a year-to-date basis.

By market, our Cable customers in the third quarter accounted for 63% of total revenue, satellite customers 22% and telecoms and other customers 15%. The same numbers in a year-to-date basis are 62% for Cable, 20% satellite and 18% telcos and others. Our largest customers in the third quarter were Comcast and Equistar, representing 24% and 10% respectively of our total revenue.

We have given both quarterly and year-to-date numbers for the revenue mix. As important to take a longer view of our revenue growth and now to focus unduly on the quarter-to-quarter fluctuations and mix that an evitable feature of our business.

Our year-to-date revenue growth of 20% is distributed broadly across our customer base both by geography and market. Both domestic and international revenue are grown steadily, with domestic up 22% year-over-year and international up 16% both on a year-to-date basis.

Similarly, market segment growth is also broad based. At year-to-date, Cable is up 19%, satellite 22% and telco and other 18%. But we aim to do more to further diversify our customer base were pleased with our progress so far.

In addition to our strong revenue, one of the most notable features of the third quarter was a very strong order input particularly in August and September. We had a book to bill ratio for the quarter of around 1.2 and the bookings were quite broadly distributed across all geographies, product lines and markets.

By product category, video processing products represented 35% of revenue in the third quarter, edge and the access products 47% and software services and other, 18%. The third quarter had the highest revenue of any quarter of this year from our edge device products, reflecting the increasing of option of our universal edge plan by customers all over the world.

We maintain our non-GAAP gross margins at 50% in the third quarter, in spite of higher freight costs and the strengthening dollar. While the universal edge client was important to our revenue growth, it is also part of the year-over-year improvement in gross margins. It is a great example of our many new products and solutions that provide exceptional value to customers and more sustainable gross margin benefits to Harmonic.

Our non-GAAP operating expenses in the third quarter were up on a sequential basis by about $300,000 to $30.8 million. As we had indicated on our July conference call, we started to accelerate hiring for several key projects and we added 21 people during the third quarter bringing our total headcount to 695 at the end of September.

Our operating margin on a non-GAAP basis was over 16% for both the third quarter and on a year-to-date basis, marking the fourth consecutive quarter in excess of 15%. Below the operating line, our results for the third quarter included the charge of approximately $800,000 for the impairment of a $1 million investment in Lehman Brothers’ debt. Aside from this one instance, we believe that our cash and marketable securities are conservatively invested and in particular well diversified to withstand current conditions in the markets.

GAAP net income for the third quarter of 2008 was $12 million or $0.12 per diluted share, compared to $9.4 million or $0.12 per diluted share for the same period of 2007. We exclude charges for the investment impairment, stock based compensation expense, the amortization of intangibles and the excess facilities and also a credit for the reversal of evaluation allowance against the deferred tax assets. Non-GAAP net income for the third quarter was $15.9 million or $0.17 per diluted share, up from $11.9 million or $0.15 per diluted share of the same period of 2007.

Our operating performance continues to strengthen our balance sheet. At the end of September, we had cash, cash equivalents and short term investments of $293.4 million, up from $288.2 million at the end of June.

Our receivables were $75.9 million with DSOs of 76 days. This is higher in Q2 but it primarily reflects the timing of shipments in the third quarter following the strength in orders of the quarter progressed. We expect DSOs to come down slightly in future quarters, although in the current environment, we expect to see some pressure from customers for easier credit.

As we normally do, we will review these requests very strictly on a case-by- case basis and in addition, we are monitoring all of our receivables very carefully in this credit challenged time.

Net inventory was $32.5 million about flat with the previous quarter, and finally capital expenditures were about $2 million in the third quarter, and we continues to expect CapEx of approximately $8 million for the full year.

With respect to the outlook, we came into the fourth quarter with strong order backlog and deferred revenue of close to $100 billion. And so far in Q4, we have seen a reasonably good level of new bookings. So with this start, our current visibility into Q4 is quite good and we are holding to our statements in September that we expect to be at the high-end of our second half revenue range, which we announced at the end of July.

Beyond that quarter, the picture is less clear. As you might expect and most of our customers tell us that they are reassessing their capital expenditure plans for 2009 in the light of current conditions.

So while we have been in the practice of providing grow in six-month guidance, making projections that include any part of 2009 would be quite difficult. So taking these factors into consideration with decided to provide guidance for the fourth quarter only.

We currently anticipate that our net sales for the fourth quarter will be in the range of $92 million to $95 million. Our gross margins are expected to be 47% million to $49% on a GAAP basis. Non-GAAP gross margins for the same period, excluding stock based compensation and amortization intangibles are anticipated to be in a range of 49% to 51%.

While external operating performance has allowed us to step up reinvestment in our business. We believe that for now, we are stacked appropriately for current business levels and for major projects. In the fourth quarter anticipate an increase on non-GAAP operating expenses of up to $500,000 over the $30.8 million reported in Q3 mainly as the result of our recent hiring. Our expectation for non-GAAP operating margin in Q4 is within a range of 15% to 17%.

Finally, on the fourth quarter we expect to continue to have a nominal tax rate for the fourth quarter of about 6% to7%. At this point, we are unable to add anymore positions to our previous forecast of a mid-30s tax rate for all of 2009.

In summary, we are very pleased with our performance in the third quarter, while the significant global economic uncertainty, we have a strong balance sheet and had made study improvements in our competitive position and our operational flexibility. In a longer term, we are very optimistic about our industry and our opportunities for continuing profitable growth. Patrick?

Patrick Harshman

Thanks, Robin. Our strong results reflect robust video delivery market place and it continued with strengthening of our competitive position, allowing us to take advantage of compelling opportunities across a broadening range of applications, customers, and geographies, and particular operators around the globe. We continue to see healthy fundamentals and intensifying competition from direct to home satellite, Telco IPTV and new internet-based video service providers.

Cables competitive response continues to feature more high-definition programming, more on demand capability, and higher speed internet access that can flexibly support increasingly popular IP-based video services. Our powerful solutions in compelling development roadmaps for each of these applications continue to set us apart in the market, enabling us to deepen our relationships with existing Cable customers and penetrate new accounts worldwide, for example, we were pleased to recently announce that Germany’s largest Cable operator, KDG, selected a broad suite of encoding, re-encoding, multiplexing and scrambling products, and that Russia’s largest Cable operator, NCN, recently selected our encoding in video processing, edgeQAM and on-demand software solutions.

Our latest edgeQAM base solutions for VOD and high-speed data continues to be a key driver of our growing business with Cable operators worldwide, and a recent first significant order for a new IPTV over Cable solution is an important milestone in emergence of this additional Cable growth initiative.

We also continue to extend our competitive and technology footprint with incumbent a new satellite operator around the globe. We recently announced the Direct TV, the world’s largest direct home satellite operator has expanded its deployment of our video processing solutions to support its new national high-definition services. And we recently announced that Portugal Telecom implemented our latest compression and stream processing solutions for its nationwide satellite direct to home television service. These announced wins are indicative of our ongoing success in building new and expanding relationships with leading satellite operators in Americas, Europe and Asia.

With a growing array of high-definition, standard definition and lower resolution video program is being delivered over satellites around the globe. In the satellite transponder bandwidth continuing to be a precious commodity, we see strong long term demand for our continuing video compression, innovations and new product releases.

We also continue to be pleased with our expanding customer and technology footprint in the emerging global IPTV market where we involve new IPTV customers and follow-on business from existing Telco accounts. We have recently won new IPTV customers in Asia, the Americas and Europe with both our compression and on-demand technologies providing important competitive differentiation.

We also announced recently that one of our existing customers, Bell Aliant has selected us for its MPEG-4 upgrade to enhance its IPTV video service for customers throughout the Atlantic Provinces of Canada. Underlying our growing competitive success and strong gross margins, these are continuing execution in delivering powerful and high value new products and technologies to have application across video delivery markets. A Rhozet Transcoding Technology, for example, continues to help us expand our customer base in new directions, including recently announced wins with Adobe, Independent Television News, a leading news and content Company in the UK, MTV Germany and 3 Italia, a leading mobile operator in Europe.

We also recently unveiled a new ion high-definition encoder, a new StreamLiner of 2000 Flash memory video servers and a new ProStream 4000 multi-screen transcoder for Sync-and-Go video delivery to mobile phones, personal computers, and personal media players. In addition, we have recently successfully completed performance testing with Microsoft of our ProStream 2000 splicer for digital advertisement insertion within the Microsoft to Mediaroom, IPTV environment.

In summary, our powerful and growing portfolio of new video delivery products and solutions and our strategy of addressing a broadening range of global customers continue to drive our growth, strong gross margins, and profitability. By continuing to introduce innovative products that enable our customers to address the key trends towards more high definition, on-demand and any time, any where video a new creative and cost effective ways.

We feel increasingly well positioned in this market place. What a global economic environment clearly creates of uncertainties. Our technology leadership, diverse customer base, strong operating performance, and strong balance sheet have placed such an excellent position to further strengthen our competitive position and we remain confident about our long term growth opportunities.

Well this concludes the formal part of our presentation, and now Rob and I will be pleased to entertain any questions that you might have.

Question-and-Answer Session

Operator

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

Mark Sue – RBC Capital Markets

Patrick, the improvements in bookings, was it any particular region or specific customers or was it broad based and likewise if you could comment on the big jump in deferred revenue growth?

Patrick Harshman

The bookings were quite broad based, Mark. We saw good strength domestically but also internationally. Additionally, the strength was really across the products and a different customer market segments that we saw. We saw again good strength in Cable but also good strength in satellite, direct to home, as well as IPTV.

Mark Sue – RBC Capital Markets

And maybe, Robin, if you could talk about the long term improvements in gross margins particularly with the growth in the edge segment and likewise you seems like you are not adding any headcount. Should not that mean improving operating margins in extent of the guidance that you have laid out for operating margins?

Robin Dickson

Well, let me deal with maybe the second question first, Mark. We added 21 people during the quarter and they did not all start at the beginning particularly for a number of them have started towards the end of the quarter and even few additional into October, and so the run rate for Q3 will be higher in Q4 simply because some of those people were not on board for the full quarter. That is really the principal reason to allow for some increase in operating expenses in the fourth quarter and I think, it is also important to point out, although we think we are appropriately sized for the business, nevertheless, I mean we will not cease from hiring very good qualified people for very selective roles from time to time. So I do not want to suggest we are cutting it off completely.

Mark Sue – RBC Capital Markets

I got it.

Robin Dickson

I think the first question was around longer term gross margins, I do not think our review was change there might, we expect to see more software and software based solutions permeate our product lines, whether these are pure software or very smart boxes powered by very intelligent software and firmware. And we believe that in a longer term that will continues to take our margins hopefully beyond the 50% that we have now consistently reported for the last few quarters.

Mark Sue – RBC Capital Markets

Okay. That is all and thank you, gentlemen.

Operator

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

Greg Mesniaeff – Needham & Company, Inc.

Yes. Thank you. Couple of questions, first on Robin, on the satellite business, I mean clearly you have enjoyed several quarters of strong order flow for the high definition encoder products and I was wondering if you, at this point have, what kind of visibility you have from Dish networks regarding the momentum that we have seen recently, I mean could you just give us some color as to what you hearing from them as far as their long term plans would be.

Patrick Harshman

Well, Greg, it is Patrick. I will jump in and take that one. We cannot comment specifically in what we are hearing from Dish or any other specific customer. But I would tell you more generally, we continue to be quite positive about what is happening in the satellite worldwide, domestically as well as internationally. I think high-definition does get a lot of press, but in advance of this call we look at some of our numbers and you had might be interested to know that year-to-date we have actually shipped substantially more standard definition than high definition encoders into the satellite market around the world, so in addition to growing numbers of HD channels that are undoubtedly being put up in the US and increasingly overseas.

We also see just a strong movement afoot of moving from MPEG-2 to MPEG-4 and of customers availing themselves of the latest compression technology whether it is our newest high definition or standard definition encoders to really milk more bandwidth out of the existing satellite transponder space.

And frankly, those are trends that we do not expect to see subside any time in the near future. We have seen more and more for programming both standard and high definition go up. And frankly, our technology continues to get better and better such that overtime there becomes appealing upgrade cycles that really make good financial sense, our customers availing themselves of the latest compression technology to free up essentially available our satellite transponder bandwidth.

Greg Mesniaeff – Needham & Company, Inc.

Thank you. That is very helpful. Now, my other question is shifting to the Cable business, you clearly had another great quarter with Comcast. I am wondering whether, if you can give us some color as to where the pockets of strengths were? Was it in the VOD-related edgeQAM sales or was this really more of a DOCSIS 3.0 driven momentum?

Patrick Harshman

Well, first, let me step back and say we have been fairly bullish about Cable all year just because we saw a broad opportunities across the spectrum of what we do product wise. So I am going to give you a little bit more color on edgeQAM in a moment but before I do that, I do want to emphasize that high definition encoding, stream processing, HFC, bandwidth augmentation, on-demand software, all key parts of the momentum and strength we see in Cable, and of course, actually the edgeQAM and several applications underneath the umbrella of what the edgeQAM can do represented the single largest year-over-year increase for us to date. And there the strength has been roughly balanced between strong expansion of the VOD footprint, more and more streams, more and more operators, investing more and expanding their VOD footprint. On one hand and on the other hand, the DOCSIS expansions where we have continue to be quite successful in DOCSIS 2.0 as well as early DOCSIS 3.0 deployments.

Greg Mesniaeff – Needham & Company, Inc.

And as far the encoder sales to the MSOs, any color there?

Patrick Harshman

Much like the satellite story, it is continue to be a mix of both high definition as well as standard definition. Domestically that work continues to rely on the innovative things are still doing around MPEG-2 technology. And as I think, we have reported to you previously we are seeing an increasing amount of interest on the part of international Cable operators and MPEG-4 technology that they can avail themselves of that technology because they, in general have smaller deploy basis of set top boxes. And I do want to emphasize that our strength with international operators is certainly an important contributor to the strength we have seen in Cable this year.

Greg Mesniaeff – Needham & Company, Inc.

Thank you.

Operator

Your next question comes from Vivek Arya – Merrill Lynch.

Vivek Arya - Merrill Lynch

Hi Patrick and hello Robin. Couple of questions, first, Patrick, I just wanted to dig deeper into your 2009 prospects. I appreciate you are not giving some guidance, but if you have such a strong backlog and you are seeing good bookings even in October, if you assumed that these trends do not change significantly, what kind of sales growth is structurally possible in 2009?

Patrick Harshman

Well, barring I think the reason to market turmoil, every other fundamental from our point of view that is still very much in place. We think that the technology trends that are moving this market forward are very much there. We think the competitive trends are still very much there.

So, I would characterize this as cautiously optimistic that all of these drivers will continue to move things forward in 2009. And into that context, we would normally be looking to another year of double digit growth. That being said, I think, what is happening in the markets and you would hope, at least as well as we do, is really unprecedented, and we have really have yet to hear from our customers of how exactly they will react in 2009 regarding the capital expenditure budget. So, I think that is why we think it is really premature to get ahead of ourselves and get ahead of them in terms of prognosticating exactly how recent events may shake out and may affect what actually does transpire in 2009.

Vivek Arya - Merrill Lynch

Have this topics of discussions been postponed or have they have been less positive compared to last year. I am just trying to differentiate between what has just sort of, just being prudent about next year based on what they are seeing in newswires actual discussions with your customers.

Patrick Harshman

Well, let me be clear, it is not that we have received a negative or concerning news. This is the time of the year where many or most of our customers are actually engaged in setting our capital budgets for 2009. And frankly, in any other year at this point in time, we would have an educated guess to work things that going to end up. But, the truth is we do not know exactly, because they are still behind closed doors, working thing through. And as where we are today with that, it is a given that some of the broader economic situation. I think we have reason to be, perhaps a little bit more slow in terms of coming out with our estimates of what is going to happen in 2009. I think, we prefer to hear directly from our customers and many of them are reporting over the next couple of weeks. We prefer to wait to hear what they have to say directly about where they are looking at 09.

Vivek Arya - Merrill Lynch

Next thing is on the operating margins. You have very good margin expansion. Q4 last year are up 17.5% margins, and since then, they sort of stabilized in this 16 to 17% range. What is the next step from here? Do you think 18 to 19% margins are possible? Or do you think this stabilize at this count levels?

Patrick Harshman

Vivek, I think that those higher margins are possible, certainly and we aspire to be there in due course. I would not how ever say that we expect them within the next several or couple of periods. We continue to see a lot of great opportunities with a great market momentum right now. And so, we have been, I would say, very much balancing our investments, taking part of the incremental improved performance to the bottom line. We have also been continuing to reinvest incrementally more aggressively in our R&D development programs, with really with an eye towards further raising the gross margins of our products which I think eventually becomes the engine of greater bottom line contribution.

Vivek Arya - Merrill Lynch

Should we be worried at all about any credit issues or access to capital issues for your international customers?

Patrick Harshman

Yes, we believe that the majority of our large customer’s both domestically and internationally are in fairly good shape, or reasonably good shaped. Now, one of the features of our business one of our strategies has been to grow an increasingly wider net, and we are working with more customers and more parts of the globe than we ever had before.

So, I think it is undoubtedly true that we are going to have some customers whose ability to invest in adversely effective. So far, we do not have this view for any of our largest customers and we do not yet have a view that this will be a significant impact on us. I still think that it is relatively early days understanding exactly what the consequences will be, and I think that will be a story that was unfolding over the next several months.

Vivek Arya - Merrill Lynch

Just one last question. Comcast was a very big part of sales on this quarter. How do you see that on customer turning over the next few quarters? Thank you.

Patrick Harshman

Well, perhaps I will answer it this way and say that we saw greater diversity, customer diversity in the bookings that we had in the third quarter. So, looking forward to Q4 and even out until, initially further than that, we expect that the general trend of the diversifying customer base and revenue streams are to continue.

Operator

Your next question comes from Nikos Theodosopoulos – UBS Securities LLC.

Nikos Theodosopoulos – UBS Securities LLC.

I have a couple of questions. The first one was on DSOs Robin mentioned that they went up and it should be linked to the booking rate being kind of later in the quarter. I guess I am a little confused on that, because, it looks like most of the bookings went into backlog rather than shifts, because your backlog you mentioned was a hundred million or so. So, I am just trying to understand why the DSOs went up. Also, there was a higher United States mix which would have suggested that they would go down. That is my first question.

Patrick Harshman

Well, because there are variations in the composition about backlog and deferred revenues and that does vary quite a bit by quarter, much of the deferred revenues, the timing of payment does not necessary follow the recognition of revenue. In fact, it is probably more often than it does not. I think that domestic-international mix is really less relevant here and it is really got more to do with the composition of the backlog. Many of projects that we are currently engaged in, while we may have recognized some revenue in Q4, much of that are in Q3, much of that is carrying over into Q4 and I must admit, this is off the top of my head, but I believed that a greater portion of our shipments and recognized revenue in Q3 did come from more traditional set of “book and burn” type business. In particularly, given the strength of cable that we saw in the third quarter, that which is more prone to “book and burn” that there was actually more of that, and we did have, particularly with the pickups and orders that we sell in August and even into September, we did have a slightly more back end loaded quarter than you might normally expect.

Nikos Theodosopoulos – UBS Securities LLC.

So, maybe that it is the differed revenue that went up. More so, then, you still had a high level of book-and-ship that was kind of more –

Patrick Harshman

That is right the deffered revenue was up in the quarter, I believe about $67 million.

Nikos Theodosopoulos – UBS Securities LLC.

And my other question was, it is kind of slight derivation of the prior question is on the international bookings that you have, and the visibility that you have. This has been significant currency movements recently. What do you think that if any thing to what you have in bookings and backlog if there have been some big changes throughout the quarter. Does it change your booking composition? Do you think there is any risk to it based on currency or was it pretty set based on what you have on your books right now?

Patrick Harshman

I think it is as far as what is on the books right now, I think we are in good shape, and we certainly have not seen many evidence of any deterioration or any changes as a result of currency fluctuations. And I think, it is a fair point that, going forward, the stronger dollar, particularly the stronger dollar we have seen in just in the recent week or so, is a bit of [39:07] no question about that. But, as far as the current backlog and the orders on the books since, I am not seeing any evidence of problems with that.

Nikos Theodosopoulos – UBS Securities LLC.

So, you have not heard from your customers or anything that they may want to change the size of recent bookings based on currency trends?

Patrick Harshman

No.

Operator

Your next question comes from George Notter – Jefferies & Company, Inc.

George Notter – Jefferies & Company, Inc.

I was just trying to reconcile the 1.2 book-to-bill with your guidance for $92 and $95 million in Q4. I guess, for example, if I looked backwards with the June quarter, you exited June with 1 for 1 book-to-bill. You pointed a revenue number that looked pretty consistent with June to September as you would expect, yet, it seems like your forecasting and divergence between what the book-to-bill would suggest and anticipated revenues for Q4 would suggest. So, what is the thought there.

Patrick Harshman

Well, I think that some of it, as we said, the bookings in Q3 were quite broad based than that. Well, that does include some book and burn as we discussed. There is also a number of project that we won in the third quarter, that with the revenue, we will be recognized over a period of time and into the first quarter and in beyond that in 2009. Obviously, not all of those large projects are going to be recognized immediately. In fact, I think financial strength. You saw the differed revenue increase. So I think, that gives us what we were not prepared to talk a great detail about Q1 of 2009. At least there is going to be some deferred revenue that we see now that will carry forward into next year.

George Notter – Jefferies & Company, Inc.

Yes, I guess, I just sort of assumed that you did not give any guidance for Q1 2009, that most of the bookings would have been more near term in nature. In other words, I guess, I were to see more visibility for Q1 rather than last, and you would be more have to give guidance than not.

This is a separate question. On MCMTS, you reference did any contacts of DOCSIS and DOCSIS 3.0. What is the trend there? Are you seeing an increasing mix of activity in momentum in MCMTS or what is the thought, thanks?

Patrick Harshman

I would say, the mix has not changed appreciatively George, over the past couple of quarters. We have seen a substantial growth in both the edgeQAM activity associated with the MCMTS business. As well as, what we call traditional VOD expansions.

As we have seen, both of them grow in pretty good proportionality to each other. Both of them strong, and in fact that they are not unrelated in terms of the architecture vision how that we put forth to our customers.

George Notter – Jefferies & Company, Inc.

How may MCMTS customers do you have now?

Patrick Harshman

I do no have a number at the top of head George. It is, I would call, in double digits. But, I do not have a solid number for you.

Operator

Your next question comes from Blair King – Avondale Partners LLC.

Blair King – Avondale Partners LLC.

Couple of quick questions and not to beat a dead horse, I know the focus has been a lot on 2009 and I guess, I would kind of trying not to come out at this well a little bit. In terms of the clear investment you guys have made in your infrastructure of investment you made in Europe last quarter. And obviously, there is some confidence in your business going forward and so, maybe, and Patrick, you might have done this already to some degree. But maybe, if you could just highlight what really gives you guys a confidence going into 2009, to have made that infrastructure investment?

Patrick Harshman

We continue to see strength world wide, in terms of, emerging video delivery models and competition around that. Frankly, we have not seen, even in up until this week, we have not seen competition subside at all. Just today, Verizon made a good announcement about the progress it was making with FiOS TV and Cox announced a major new wireless initiative. Last week we saw Comcast announce what it is doing, raising the bar of high speed internet access. This is all United States examples. But, to varying degrees, we would see this kind of competitive situation playing out internationally as well.

We have also thought for a long time, that particularly outside the United States, our market share has not been that great, and there is significant opportunity for us to extend on market share of leveraging our products and technology.

So, I should suggest that we continue to invest, not only in product development capability, but also in our presence in some of these international markets.

We think of these fundamental market drivers do not change on the long term. Or we could certainly see some slowdown or periodic break for a period or two that certainly remains to be seen. But, fundamentally we think that such situation continues to roll forward.

We like also the way we are positioned in the market. We see ourselves continuing to do very well competitively. Our goal really is to take advantage of this position and in this momentum that we have. And that is what we have been and will continually to do.

Blair King – Avondale Partners LLC.

In terms of, I guess just in terms of order flow through the quarter was it fairly consistent?

Robin Dickson

Well that is mentioned in the prepared remark. It was particularly strong in August and September; I mean, July was not bad, it suddenly just take up in August than September. So, in that sense, it was perhaps, a little bit more towards the back end of the quarter. We also believed it was pretty broad based, both in terms of the geography and the market segments.

So, there was no particular, or I do not think any particular focus, and it was perhaps a little bit more broad based than the revenue mix might suggest.

Blair King – Avondale Partners LLC.

Has the order flow state fairly consistent this quarter?

Robin Dickson

Yes, we got off to, at what I would characterize as reasonably good and pretty decent start. Third quarter was very strong, and it would be unrealistic perhaps to expect to continue at those levels. But, it is certainly started quite reasonably so far.

Blair King – Avondale Partners LLC.

Okay. So, were you guys, you are really just like the rest of us, where you just have not got enough facts on capital spending outlook that really put a stick in the ground, right?

But, overall business really does not appear to be any different to you although potentially good swell, is that a fair way of assessing it?

Patrick Harshman

I think that is right. We have not seen any specific directs indication of any extraordinary change. Competitively we think, if for customers it is business as usual, I think our order intake has been business as usual, and we are certainly carrying on with our business is business as usual. And that is why I think we have felt fairly good about the guidance we have given for the remainder of this year.

We do, like you said, like everybody, we got questions about what happens as we get into 2009.

Blair King – Avondale Partners LLC.

So, would a good way to, just to kind of model out 2009 be the takeoff seasonal trend on the first quarter and typically. There is down take in the first quarter somewhere, say seven, five, three, four percent range. Is there, would that be a fair way of assessing the first quarter in your view as you, to the extent that you have that view right now?

Robin Dickson

Yes, we do not see any reason to expect anything different in terms of seasonality. You are right Blair. You point our first quarter is usually the lightest quarter of the year. I certainly would not expect that to be any different going into 2009 than most of the recent years.

So, at this point I would say yes. I would expect to see Q1 lower than, what we have indicated for Q4.

Blair King – Avondale Partners LLC.

One last question Robin, and maybe you have mentioned this and I just did not hear it. But, we are talking about the tax rate for 2009. Last quarter, I know you mentioned that would be in the mid 30s and potentially go down to the low 30s toward the end of the year. Is that still kind of the case that where you see things standing still?

Robin Dickson

I think that is the best we can see at this point. I mean, clearly we need to be able to model our expected P&L for the whole year, including the revenue expectations and the profit we think we drive from that and until we can get a better handle around 2009, I do not think we can make a whole lot of forward progress on the tax rate, but I think what we said last quarter is still the case that our best guess is that it is in the mid-30s. We are putting some structural changes into place to make that effective, and that work is moving ahead. But ultimately it is going to depend on revenue levels and revenue mix and all the details that we are just not in a position to talk about yet.

Blair King - Avondale Partners

All right, congratulations on the quarter. Thanks guys.

Operator

Your next question comes from Larry Harris – C.L. King & Associates

Larry Harris – C.L. King & Associates

Yes. Thank you. A couple of follow up questions on the income taxes, if I could looks like on both the asset and liabilities side of the balance sheet. There was an increase in the income taxes, deferred income taxes and then income taxes payable. What should we be thinking about in terms of 2009 not in terms of the income statement, but in terms of the actual tax payments? Would it be a significant difference between the income statement and say what is actually paid in terms of taxes next year?

Robin Dickson

Well, Larry, as you are aware, we have had a pretty nominal tax rate over the last several years and pretty nominal tax payments, what we expect we see next year as we indicated is a tax rate that is in the mid 30s and we have during the course of this year released the valuation allowance that we held against our deferred tax assets and that release is what accounts of the fairly significant changes on the balance sheet where simply now acknowledging those assets that have real value and under on the balance sheet as the result.

With respect to 2009, the tax charge in the P&L mid 30s, we expect that a significant but not the entire month will be payable in cash. Again, we are not really in position to get greater position on that at the moment but I would expect that at least time is probably as much 2/3 of it would effectively be a cash payments simply because we have used that or will have use that by the end of the year the vast majority of the NOLs that are available to us.

Larry Harris – C.L. King & Associates

Understood and in terms of your cash and marketable securities position continues to grow $293 million, close to $300 million at this point, what are your current thoughts regarding acquisition, share repurchase, other activities with the cash?

Patrick Harshman

Well I think a stronger balance sheet competitively as well as to enable strategic and I think complementary M&A is the first priority in the first thought process around the strong balance sheet and I would say the current economic environment is it really not altered our strategic view. We continue to be fundamental believers in the way this market is going to go forward, the way new technology is going to play a key role and that we continue to keep our eyes out for complementary technology companies that can both technology as well as financially booster our competitive position.

Operator

(Operator's instruction) Your next question comes from Paul McWilliams - Indie Research.

Paul McWilliams - Indie Research, LLC

Have there been any material changes in your competitive environment, not the competitive environment for your customers but yours?

Patrick Harshman

No, we have not Paul seen any significant changes amongst our traditional competitors.

Paul McWilliams - Indie Research, LLC

If the dollar continues to gain over the euro, do you expect that competitive pressure will lead to increase particularly when looking at some of your European competitors?

Patrick Harshman

I think it is certainly possible to the extent competitors have a larger parts of their play base, any areas well currencies are under pressure. The dollar I think that can actually come into play. From a product cost point of view, I kind of think that mostly everybody is getting their product done in an inefficient way and a way that is probably closely tied to the dollar so I would not anticipate any substantial changes in terms of product cost.

Robin Dickson

Although I would say at the edges just to answer that Paul, I think it is helpful in that respect with all the prices coming down in some of the high freight cost and surcharges we have seen earlier this year, we will probably abate somewhat and the same maybe true of some commodity prices and that hold on still on the go ends of our product. I am saying that is with the edges, I do not think that is huge but it back at least probably works in our favor to some extent.

Paul McWilliams - Indie Research, LLC

Well, excellent. A little bit of an offset there. Are there any new strategic product directions that you are considering taking on either in house or via acquisition?

Patrick Harshman

We are always talking with our customers, looking to what is happening in the market and thinking about new and complementary directions. What I am comfortable mentioning publicly here is the pretty interesting work we are doing around IPTV in the context of cable networks. I have mentioned in the prepared remarks that we have now seen our first significant order for work in this area. It is a pretty exciting direction. It leverages a lot of our core strengths, what we have been doing in IPTV for Telcos together with obviously what we can do around our edge capability as well.

So, I think that is a good example of how we are staying close to where the market is going and leveraging technologies to get into some super exciting new areas. That certainly through organically and as I just a moment ago or to the extent that we see something compelling inorganically, it is good to know that we have the fire power to execute if we find the right opportunity.

Paul McWilliams - Indie Research, LLC

And you believe that you have got a fairly substantial competitive advantage right now in the IPTV over cable?

Patrick Harshman

We believe that we are in early move around, Paul and we do believe that some of the things that we do technology in both the product as well as the system solution point of view are actually unique and quite strong. There is relatively few companies we believe that have mastered the diverse technologies that are needed to wrap this kind of solution and we think we are in a great position to really lead you.

Paul McWilliams - Indie Research, LLC

The FCC just took a fairly strong position on SDV up in the northeast with the cable box, cable card situation. Do you think that that is going to delay the SDV deployments I think we were envisioning for early '09 or at least the trials going forward?

Patrick Harshman

I do not know, Paul. As I think we have said, we have not seen that much SDV activity in '08, certainly less than what is forecasted about a year ago and I would say our outlook cash remain fairly conservative about growing SDV opportunities on '09 and I think I do not have really a much more intelligent to say particularly in light of some of these recent developments. We are really waiting and watching to see our customers are thinking about it.

Paul McWilliams - Indie Research, LLC

I got one more here and I will let you go on. And this is me connecting dots, well that is part of my jobs. Some times I found out later the dots do not exist so forgive me if I am doing that but when I look at your domestic sales number, your mix of product, edge versus others and your cable number, it would appear to me that you are getting a very, very substantial market share in universal edgeQAMs domestically, can you take events a rational conclusion?

Patrick Harshman

Yes, the majority of edgeQAMs that are out there deployed and they have been deployed for many years now are the context to VOD and we believe that we have a clear market share advantage in leadership position in terms of deployed edgeQAMs and certainly in addition towards continuing to push the envelope but technologically getting in, adapting our edgeQAM technology to support in addition to VOD switch to digital video and high speed data, I think we have also really taken advantage of our incumbency and so combination of our strong incumbent position as well as to really mover advantage and some of these new application areas, I think we still enjoy a very strong position to the market.

Paul McWilliams - Indie Research, LLC

So, this strong position that you have you believe is following on in the universal edgeQAM as well domestically?

Patrick Harshman

Absolutely. I mean for us it is an extension. It is not a completely new product. It is an extension of the existing product our customers, our field technicians who had been working with our edgeQAMs through the rest of the year are accustomed to and comfortable with the technology. The penetration of the universal edgeQAM is definitely will piggyback on top of what we have done over the last several years, the first releases of the edgeQAM.

Operator

Your last question comes from the line of Todd Cooper - Stephens, Inc.

Todd Cooper - Stephens, Inc

As I hear what you are saying about the lack of visibility with CapEx spending with your key customers that one or both of you had expressed to me that you, in the past, that you worried about continued spending in emerging markets which represents I believe 15% to 20% of revenue. Any visibility going forward in that market?

Patrick Harshman

I think Todd it is hard to generalize when we talk about emerging markets. We would acknowledge that there are some countries where we see their currencies or financial systems on the particular stress. There are other parts of the emerging world there. So, we take things look relatively positive. So, as we thought about this, we tend to think about some of these markets overseas less as an aggregate and more on a case-by-case basis. Certainly there are some packages that we perceive of being potentially weak. On the other hand as I said we are relatively optimistic about the prospects near term for some other markets and I would say more generally we remain very committed to our business in emerging markets. So if I take a slightly longer term view on the first half of '09 I think about the next couple of years, there really is no doubt in our mind that video delivery over a variety of means across the emerging market landscape is going to be a key contributor to our business.

Todd Cooper - Stephens, Inc

And regarding your transcoding technology, do you see demand from the marketplace to turn your software technology into more of a high speed, real time transcoder with more of a hardware component to it?

Patrick Harshman

No, I think the majority of our customers I think actually care a little less about whether it is hardware or software. The real concerns are about speed as you mentioned, about flexibility, about cost. So, most of our discussions with customers are less about underlying a hardware or software technology, etc essentially about those functionality actually that I have just mentioned.

Todd Cooper - Stephens, Inc

Well, I was just looking, I was trying to see if that work could possibly be a new product category for you but you are happy with your Rhozet software?

Patrick Harshman

We are very happy with what we do with Rhozet. As you know we have a full line up of hardware based in coding and stream processing products as well and the way we look at it is we try to be best of class across technologies and across applications and of course one of the key things that they were always looking forward is new and interesting synergies between different platforms and I certainly do not rollout a traditional Harmonic product for cable appropriating what is best from Rhozet and vice versa. I think that is really one of the advantages of bringing these companies and these technologies together.

Todd Cooper - Stephens, Inc

And one last if I may kind of getting a little more specific as to the question that Paul asked earlier, Tandberg recently announced that with their encoders that with their encoders they got to win at DirecTV. I know DirecTV likes to use multiple sources but do you feel that they close the GAAP with your MPEG-4 encoders with their line of products?

Patrick Harshman

In all humility, we think that we have got the best high-definition encoding platform out there right now and I think this has been going out in numerous tests and I think really by this tremendous success that we have had. With that being said, we certainly do not run every piece of business and the press release that I saw involving Tandberg was regarding the support of local channels for DirecTV and that is not business that we currently have and we look at as an opportunity. So far, DirecTV is using our technology to power their very high profile national channels and we are very pleased to be continuing for that piece of investment.

Operator

And now, no further questions, you may proceed with your presentation for any closing remarks.

Patrick Harshman

Alright, well thank you very much. We very much appreciate everybody's time in your participation in the call and we look forward to speaking with you all again soon. Have a good day.

Operator

That concludes this evening's teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Harmonic Inc. Q3 2008 Earnings Call Transcript
This Transcript
All Transcripts