Executives
Erica Abrams – IR, The Blueshirt Group
Amir Bassan-Eskenazi – CEO, President and Co-founder
Maurice Castonguay – CFO
David Heard – COO
Analysts
Scott Coleman – Morgan Stanley
Vivek Arya – Merrill Lynch
James Kisner – Jefferies & Company
Greg Mesniaeff – Needham & Company
Paul Bonenfant – Morgan Keegan
Todd Cooper – Stephens Inc.
BigBand Networks, Inc. (BBND) Q3 2008 Earnings Call Transcript October 30, 2008 5:00 PM ET
Operator
Good afternoon, ladies and gentlemen. Welcome to the BigBand Networks Q3 2008 Earnings Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) As a reminder, today's conference is being recorded, Thursday, October 30th, 2008.
I would now like to turn the conference over to our host, Erica Abrams. Please go ahead.
Erica Abrams
Thank you, Nate, and welcome, everyone. If you have not seen our third quarter earnings press release, it can be found on the investor relations portion of our Web site at www.bigbandnet.com.
With me today are Amir Bassan-Eskenazi, Chairman and CEO; Moe Castonguay, Chief Financial Officer; and David Heard, Chief Operating Officer of BigBand Networks.
We will discuss financial results for the third quarter-ended September 30th, 2008 as well as outline the company's outlook for the fourth quarter of 2008.
Before I turn the call over to Amir, let me remind you that the matters we will be discussing today may include projections and other forward-looking statements and as such are subject to the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, including those risks and uncertainties discussed in our recent annual report on Form 10-K for the year-ended December 31st 2007, as well as our quarterly report on Form 10-Q for the quarter ended June 30th 2008.
We will also be presenting some non-GAAP financial information. A reconciliation of GAAP to non-GAAP items can be found in the press release issued today as well as on the investor relations portion of our Web site. BigBand Networks assumes no obligation and does not intend to update forward-looking statements made on this call.
With that, let me turn the call to Amir. Please go ahead, Amir.
Amir Bassan-Eskenazi
Thanks, Erica. Hello and thank you all for joining us today. We are pleased to report strong Q3 with solid execution and significant progress on our digital video networking strategies. Today, I will review highlights of our quarter. Moe will then present financial results. Then along with David Heard, we will take your questions.
For the third quarter, we continued to focus on business model execution on leveraging our leadership in digital video networking, and on expanding our technologies to meet emerging industry trends.
With respect to our business model execution, we are proud to report another consecutive quarter of improving financial results with revenues increasing 25% year-over-year to $48.3 million, slightly above the range we provided last quarter due to the strong demand for video products. Excluding the CMTS that we have discontinued last year, revenues specifically from our video product increased 51% from the third quarter of 2007.
Solid revenue growth, impressive gross margins and strong expense management contributed to GAAP EPS of $0.05 and non-GAAP EPS of $0.10 for the third quarter of 2008, well ahead of the outlook we provided last quarter and a strong comparison against a GAAP loss per share of $0.21 and a non-GAAP loss per share of $0.05 reported one year ago.
In addition to a strong P&L result, we effectively managed cash and investment, especially relevant given economic conditions. During the third quarter, we generated $7.9 million in cash from operations and safeguarded our now $165 million cash and investment portfolio.
Turning to the progress we made in the quarter on leveraging our leadership in digital video networking. In Q3, we both won new greenfields footprint as well as benefited from expansion business across our diversified solution portfolio.
Our broadcast solution performed very well in the quarter, with both cable and telco operators. Broadcast and cable was primarily driven by U.S. operators expanding in preparation for the transition to digital TV in February '09 as well as by the availability of an increasing number of high-definition channels and the local insertion of digital video ads on those channels, a trend we expect to persist as HD continues to proliferate.
We continue to win new footprint and beat the competition across different regions, including the recently announced high profile broadcast wins in China. In telco, we continue to grow our deployed base with Verizon FiOS TV as they expand their footprint. Verizon continues to drive significant business for BigBand, setting the stage for our success in the larger telco IPTV market space.
On the Switched Digital Video or SDV front, we netted significant footprint wins in the third quarter. Our market leading SDV solution is now deployed or in the process of being deployed to more than 17 million households, up 1 million from early September and up 3 million households from the end of the prior quarter.
In the third quarter, we announced the addition of Bright House, the sixth largest cable operator in the U.S. to our list of customers. This win includes Tampa and Orlando, two of the largest cable systems in the nation. Importantly, our customers are engaging more actively on QAM expansion, which enhances our leadership in this market.
We believe our platform approach to the QAM is attractive to our customers as it leverages new applications thus opening up new market opportunities for future growth as a leading QAM supplier.
Now, turning to the substantial progress we made in the quarter in diversifying our portfolio into new applications and regions. The third quarter marks significant milestones for BigBand Networks in portal diversification into IPTV. First, we announced our MSP2000 platform for personalized video, gaining access to a $1 billion market segment.
Today, I'm happy to announce the first MSP design win with a tier-one telco carrier. I'm also pleased to note that we continue to make significant progress with other major operators around the world. We expect the MSP to contribute to revenues beginning in the second half of 2009, and favorably impact product and geographic diversification over time.
Also in Q3 '08, we made good progress in the area of IPTV over cable. Our approach is for operators to leverage our SDV architecture to deliver IPTV to PCs, mobile and IP set top boxes. We believe this approach is more cost effective, easier to deploy and less disruptive than competing methods. As evidence of that, I'm happy to report that we have recently received a substantial IPTV over cable order from an international service provider. We expect this new solution to contribute to revenue starting middle of '09.
In summary, we've made progress across the business and are particularly pleased with the balance we struck during the quarter between our investment in strategic initiatives and cash and expense management. We will continue to invest in our business to support our long-term growth in HD, personalized television, advertising, and other video services.
We are bullish about the market opportunity in business. Thus far, we have not experienced negative impact from the overall economic environment. While we intend to cautiously monitor the impact of the economy on our business, we are comfortable with our fourth quarter outlook.
Now I will turn the call over to Moe for a more detailed financial review. Moe, please go ahead.
Maurice Castonguay
Thanks, Amir. Hello, everyone. I'll review some of the highlights of our third quarter 2008 P&L and balance sheet, and then I will provide you with our outlook for the fourth quarter of 2008. We are very pleased with our operating results for the third quarter. Our revenues were slightly above the range previously provided and gross margins significantly exceeded our forecast. Those factors coupled with tight expense management resulted in the company significantly exceeding our EPS outlook.
On the call today, I will be providing financial results on a non-GAAP basis, unless I specify otherwise. This means the third quarter non-GAAP operating results will exclude stock-based compensation of $3 million, restructuring charges of $737,000 and amortization of intangibles of $112,000.
These non-GAAP results also exclude an $18,000 benefit from selling CMTS product inventory that was previously reserved for in a prior period and $502,000 of incremental non-GAAP income tax expense on higher non-GAAP earnings.
For the third quarter of 2008, we reported total revenues of $48.3 million as compared to $38.5 million in the same quarter one year ago. Virtually, all of the revenues in the third quarter of 2008 were video revenues as compared to $30.5 million in the same quarter one year ago.
For the third quarter of 2008, four customers accounted for at least 10% of revenues. Bright House, Comcast, Time Warner Cable and Verizon each accounted for more than 10% of our revenues in the third quarter of 2008.
Particular names of the 10% customers change on a quarter-to-quarter basis. For example, Bright House was a 10% customer for the first time this quarter. On a geographic basis, 95% of our revenues were from the U.S. compared to 82% in the same quarter a year ago. Although our level of activity in international markets is high, it will take a few more quarters before there is an appreciable contribution from international customers.
Gross margins for the third quarter were 60% as compared to 51% in the same quarter one year ago. Gross margins, which exceeded our expectations, benefited from a number of factors, including higher percentage of expansion revenue, which typically has higher margins than new footprint, higher software content in a number of orders, and higher service revenues as well as improved productivity.
Operating expenses for the quarter were $23 million, relatively flat with the prior quarter. The lower than anticipated expenses resulted from selective hiring and tight expense management. We ended the third quarter with 472 employees.
Buoyed by stronger than expected margins, operating income for the quarter was $5.9 million. That's compared to an operating loss of $3.8 million in the third quarter of last year.
Interest and other income, net of this $1.1 million in the third quarter of 2008 as compared to $1.4 million reported in the same quarter one year ago. Non-GAAP net income was $6.5 million in the third quarter of 2008 as compared to a loss of $2.7 million reported in the same quarter one year ago.
Non-GAAP diluted earnings per share was $0.10 in the quarter as compared to a loss of $0.05 in the same quarter one year ago. And on a GAAP basis, our diluted earnings per share was $0.05 in the quarter as compared to a loss of $0.21 in the same quarter one year ago.
I would like to provide a little more color on the restructuring charge we recorded in our third quarter of 2008 affecting GAAP earnings and earnings per share. In Q3, we were not able to sublease some of the facilities that we closed as part of previous restructuring. Due to the current market conditions for real estate, we believe it will take us longer to sublease these facilities. Accordingly, we took an incremental restructuring charge of $0.7 million, for additional rental expense we expect to incur before we are able to sublet these facilities.
Now let's review the balance sheet. The company continued to build cash and investments. We ended the quarter with cash and investments of $165 million, up $6.2 million from the prior quarter. None of the company's investments were impaired or became illiquid as a result of the recent turmoil in the capital markets. Deferred revenues were $60.3 million as compared to $69.2 million in the prior quarter.
I would like to take a moment to provide our outlook for the fourth quarter of 2008. The following guidance applies to our fourth quarter GAAP outlook. Net revenues are expected to be in the range of $48 million to $50 million. GAAP gross margins are anticipated to range from 56% to 58%. At the beginning of the fourth quarter, we sold our FastFlow provisioning software technology, which was not strategic to the company, for $1.8 million in cash. We retained a non-exclusive license to use the intellectual property going forward.
Proceeds will be shown as an offset to operating expenses in our fourth quarter GAAP P&L. GAAP operating expenses before the offset of the FastFlow proceeds are expected to be approximately $27.5 million to $28 million. GAAP operating income is expected to range from $1.5 million to $3 million. Net interest and other income is expected to be $700,000 to $800,000 reflecting lower interest rates on cash and investments.
GAAP provision for income taxes is expected to be $700,000 to $900,000. GAAP net income is expected to range from $1.5 million to $3 million and GAAP net income per share is expected to range from $0.02 to $0.04.
Our non-GAAP guidance for Q4 of 2008 is as follows. The fourth quarter non-GAAP operating results will exclude the proceeds from the sale of the FastFlow provisioning software, stock-based compensation expense of approximately $3.2 million and amortization of intangibles of approximately $300,000.
The intangibles will be fully amortized after the end of the fourth quarter. Non-GAAP gross margins are anticipated to range from 57% to 59%, based on our current outlook of product mix.
Non-GAAP operating expenses are expected to be approximately $24 million to $24.5 million, reflecting slightly higher expenses in each functional group as compared to the third quarter. Non-GAAP operating income is expected to be between $2.5 million and $4 million. Non-GAAP provision for income taxes expected to be in the range of $400,000 to $500,000. Non-GAAP net income is expected to range between $3 million and $4.5 million.
Non-GAAP net income per share is expected to range from $0.04 per share to $0.06 per share. Shares used to compute Q4 basic EPS will approximate 64.5 million. Shares used to compute Q4 diluted EPS will approximate 68 million.
Let me conclude by saying that we are pleased with our Q3 operating results and we continue to invest in what we believe is an exciting market opportunity.
Thank you, and I will turn the call back over to Amir.
Amir Bassan-Eskenazi
So in summary, we had a great Q3, another quarter marked by solid financial execution, significant progress made across all the solutions, and diversification into new applications and regions. We remain optimistic about the next period.
Looking further into the future, despite caution with regard to macroeconomic issues, we expect network investment to continue as cable, satellite and telco competition persists. We feel well positioned to participate. We are grateful to all our employees for their performance and look forward to the coming quarters and year.
We will now open the lines. We are here to answer any questions.
Question-and-Answer Session
Operator
(Operator instructions) Our first question comes from the line of Scott Coleman with Morgan Stanley. Please go ahead.
Scott Coleman - Morgan Stanley
Hi, thanks, and good afternoon. I'm curious how much of the business this quarter was the digital transport business, and if we should expect to see this trail-off as we get closer to the analog to digital transition deadline?
Amir Bassan-Eskenazi
So by digital transport, I assume you mean broadcast?
Scott Coleman - Morgan Stanley
Yes.
Amir Bassan-Eskenazi
We don't really detail the quarter by solution as you know, but what I can tell you is that we saw digital broadcast significant in the quarter and we expect it to continue to be significant in the quarter. There is two different drivers that are causing that. One is, as you pointed out, digital transition, but the other one is the continuation of HD deployment and ad insertion. And I would say that actually more of the driver, even in the last period associated with HD and will persist over the duration, I'd say all the way to the long-term. We see HD channels being added on an ongoing basis. We think it's going to go through the hundreds through '09 to '10 and beyond and as such, that will continue to have to be provisioned. Ad insertion will have to be offered on this content, and that's what we do in our business, so we expect it to persist beyond the short term for sure.
Scott Coleman - Morgan Stanley
Okay. So it's -- from what you're saying, Amir, it sounds like you expect this business to grow in '09 versus what you'll record for it in 2008.
David Heard
Scott, hi, it's Dave. I think what we see happening, Scott, is that the HD business on broadcast, while it remains on the broadcast here, is going to be driven by the traffic. And when it is no longer put in the broadcast tier, we're going to experience that same level of growth from our switched tier. I think we feel pretty solid with our overall broadcast cable business results in this period and for the foreseeable future.
Scott Coleman - Morgan Stanley
Okay, that's very helpful. On the telco TV side, first Verizon, is there a way you can help us understand the business trends there between ongoing footprint expansion versus incremental business into existing sites?
Amir Bassan-Eskenazi
Sure. Like we said before, with Verizon, it's a lot about footprint and getting the VSO, the Video Serving Office. And when that happens, we deploy our system at the edge and grow with that creation of the footprint. Our platform approach to Verizon, much like every other product that we offer, enables us over time to add more functionality, add more capacity as needed. And we have every confidence that we will in the future experience growth from this footprint as Verizon adds more content to the subscriber and as they add more functionality. But in the previous period, it was continuous footprint growth that what -- that drove our business.
Scott Coleman - Morgan Stanley
Okay. And in terms of the new tier-one win, any additional color you can provide there in terms of is it local into local advertising, is this a competitive carrier or an incumbent telco? Anything you can help us to understand what the opportunity set is in this carrier?
Amir Bassan-Eskenazi
Okay. Well, I can't really say much about the customer by request of the customer. What I can tell you, we're very excited about this because it is a new customer for us. It validates our participation in IPTV over telco over effectively DSL last mile, which is important because that's what we see tremendous amount of telephone operators around the world using and what they're looking for us to help them in the deployment of the MSP on their network. The specific application in the first design win we got is advertising, and this is important because that's a way for the operator to monetize services, and we see broad-based demand for this application on both cable and telco. But the many other engagements we have that I referred to in the prepared statement in terms of other operators have a very broad set of applications, including offering better quality of service over the network, added value services on a per subscriber basis and incremental applications that validate our platform approach to the telco IPTV opportunity.
Scott Coleman - Morgan Stanley
Maybe one last one for Moe. Expenses below expectations this quarter but slightly higher due to increased investment, I think you said across all functional areas in Q4. What enabled you specifically to bring it down this quarter? Did you cut off travel? Was it just a closer eye on dollars going out the door? And beyond a higher revenue level, why should that go up in Q4?
Moe Castonguay
Certainly, tight expense management means that. We're obviously trying to bring more to the bottom-line, so that's part of the effort. That said, if we move into Q4, clearly we expect to do some very modest hiring, and so we would expect to have a little more there, and obviously, some of the administrative functions will require a little more support with respect to SOX and projects like that.
David Heard
Hey, Scott, just real quick, both tying together the last question on the MSP2000 and its introduction, together with the expense question. I think the good news for us is and we discussed this at our last event, analyst event is we've been developing this platform for two years. We're very excited at this validation, because obviously when you invest dollars that were built into our business model and I think that's the really, really good news when you look at the year-over-year comparisons, that this expense was already built into the business model. It allows us to scale to that small effect that Moe mentioned, the expenses as we win new customers. So given that we have the MSP2000 customer win that we talked about on our prepared remarks as well as a new IPTV over SDV customer win, we want to make sure we have the adequate resources out there touching the customer as we scale these opportunities. But again, the good news is the core R&D, the core functional expense for these products has been built in over the last two years to the business model as we've really refocused our efforts on digital video networking.
Scott Coleman - Morgan Stanley
Thanks, guys. Appreciate it.
Moe Castonguay
Thank you.
Operator
Our next question comes from the line of Tal Liani with Merrill Lynch. Please go ahead.
Vivek Arya - Merrill Lynch
Thank you. It's Vivek Arya on Tal's behalf. Couple of questions. First, Amir, I'm curious why you're guiding gross margins to decline sequentially even though your sales volumes are likely to be up. What is different about the mix in the fourth quarter that you think that could be a 100 point to 300 point basis point hit to gross margins?
Moe Castonguay
So this is Moe, let me answer that part. Part of -- in any given quarter the mix typically is what drives the gross margins. And in this particular instance, in Q3, we had a very high concentration of expansion orders and software content. As we look in Q4, although we expect, again, rich contribution from both software content and expansion orders, it's just to a slight extent probably a little bit more new footprint, and that's the reason why the margins are just slightly lower. As you know, the guidance we provided from a non-GAAP basis was 57 to 59, so not really that much below what we just accomplished.
Vivek Arya - Merrill Lynch
I see. And the next thing, on this new opportunity that you described with the MSP2000 platform. Is it a domestic customer? Is it an international customer? And how should we think about the potential size of this opportunity?
Amir Bassan-Eskenazi
Yes, so I think, like I said, we can't add more information about the specific of the design win. But, I think the important point to know is that we have a broad-based demand for the functionality the MSP offers that demonstrated who -- the engagements we have and the traction we get with operators, and that traction is both domestic and international, like I say, with multiple type of applications on IPTV and other networks. So that's the great news here. To translate those to specifics in the way that it affects the revenues, I think it's premature for us at this point. We just now got a design win right on the heel of announcing the product, but it gives us access to a large and very exciting market that we believe to be over $1 billion as operators worldwide offer more and better video services, and then the importance of our technology as MSP brings it to the customer is increasing in value for our customers and in turn for their subscribers. So that's really why we're so excited about this great news today.
Vivek Arya - Merrill Lynch
Got it. Next question is, as you look at 2009, Amir, I know you're not providing any specific guidance, but how do you think of 2009 in terms of if we, let's say, assume that the Verizon business is stable in 2009 versus 2008, how should we think of the rest of your business and what kind of growth rates are possible?
Amir Bassan-Eskenazi
Vivek, we can't really at this point guide for '09 for the main reason that our customers are still working out their own budgets, and I think it would be in this environment a bit imprudent for us to jump in front of them and forecast or guide for the '09 period. What I said before, and I can reiterate is that the drivers of our business, be them HD -- additional more HD manipulation of streams as the ad is being inserted, adding more and better services on cable and telephone networks are all things that going to continue through '09. And we didn't see any indication as we look at our Q4 plans, that any of the applications that drive our business are slowing down or people are reacting in any way. And that gives us the belief in the prospect in '09, but we can't really go beyond that at this point in time.
Vivek Arya - Merrill Lynch
Got it. And just one last question, Amir. Do you see any changes in the competitive landscape? Do you see anyone else coming to match or beat your SDV solution?
Amir Bassan-Eskenazi
I think the performance in the quarter demonstrate that our SDV remains strong. We talked before about we're winning more than all of our competitors combined in this area. I think it highlights the -- our product and service experience, as well as customer relationship advantages in this space. We're looking forward to demonstrate the same things in other applications, but we feel good about our competitive situation.
Vivek Arya - Merrill Lynch
And just one last question. This is for Moe. Moe, do you expect to be cash flow positive for the next one to two quarters?
Moe Castonguay
Well, we -- as we look out into Q4, currently, based on our forecast we would expect to be cash flow positive.
Vivek Arya - Merrill Lynch
Okay. Thank you.
Operator
Our next question comes from the line of George Notter with Jefferies & Company. Please go ahead.
James Kisner - Jefferies & Company
Hi, this is James Kisner calling for George Notter. Can you guys hear me?
Moe Castonguay
Yes, James.
James Kisner - Jefferies & Company
I just want to come to (inaudible).
Moe Castonguay
James, you're fading out.
James Kisner - Jefferies & Company
Can you hear me now?
Moe Castonguay
Yes.
James Kisner - Jefferies & Company
So I just want to come at this tier-one win for another angle. I guess I've just heard people define tier ones in different ways. Can you at least tell us, is it in the top 20 service providers by subscribers in the world, or is it a PTT or anything like that?
David Heard
Again -- so I'll give you one hint. Yes, in terms of your first question, but that's all the color we're going to provide. It's a new customer for us and again at the request of the customer we're going to keep their competitive spirit protected.
James Kisner - Jefferies & Company
Okay. That's helpful. Thank you. And on -- so I guess, obviously, there has been a lot of concerns about the spending environment. I know you said that you feel good about the areas you compete in, but I guess I just sort of look to understand, looking at sort of the three main buckets I think about your business in terms of video, SDV and IPTV and broadcast, I guess I'm curious, which do you think, going to the next year are sort of most insulated from the prevailing CapEx wins, if you will?
Amir Bassan-Eskenazi
Look, I think all three of those solutions are in the business of enabling video to flow over networks, so if you start from the very beginning, historically it has been said that TV viewing and services is an area that is relatively insulated, and people are not going to give up this very basic utility service. And if that is the case, we believe that should translate to network operators to continue and spend on their networks. But I think to go beyond that and derive -- like we said, when you talk about cautious optimism, the optimism we derive from the analysis that I just gave you in the view of what's happening in the market is what is interaction with our customers in terms of how they see our product, how does it play in their network and what happens to their businesses. As an example, if we take one example, Verizon earlier in their earning call talked about their different spending, and it appeared pretty clear that the FiOS TV is going well, and we believe as a result of that they'll continue to invest and we are positioned to participate in that. But I don't think in that case it's really different between this application and the other applications we serve. And we will continue and monitor this. We're staying very close to the customer and we'll do the right things as the situation unfolds.
James Kisner - Jefferies & Company
Okay. Understood. I guess one final question for you, just regarding your SDV solution, it seems like I understand a large portion of your business has been in SA environments. I'm just sort of curious if you could give us some kind of update on your solution for Motorola environments. Are you making progress there? Are you expanding footprint in Motorola environments?
David Heard
Yes, that's a good question. So certainly we continued to progress both in the SA environments and in the Motorola environments. As leaders in this space, we've had to deal with a lot of ecosystem issues and bringing people up the learning curve as we've discussed in prior quarters. I think we feel good about our progress there and about our experience base. We've operated in five different client environments. The Motorola environment is just the sixth. We're leaders in that space as well and continue to make ample progress. And, as Amir said, take more share than our competitors combined. Good question. Very good question.
James Kisner - Jefferies & Company
Thank you.
Operator
Thank you. Our next question comes from the line of Greg Mesniaeff with Needham & Company. Please go ahead.
Greg Mesniaeff - Needham & Company
Yes, thank you. Part of my question's been answered about the bump-up in gross margins due to high software content in the third quarter, together with expansion related shipments. I'm wondering if you can give us any guidance on what kind of margins we can expect from the MSP2000 product as that begins its ramp.
Amir Bassan-Eskenazi
I think we can't really give you specific guidance on the MSP, and nor do we give guidance on a per platform basis, on an ongoing basis. But when we launched the MSP, we talked about the fact that it's architected with the information and knowledge and know-how we learned over the last years, and it fits into the same business model in the sense that it's a platform and expansion, and we expect similar trends like you just described we have in with the MSP and generally to fit into the business model as we know it. It's going to be a balance between getting footprint initially with different applications and then expanding it. And it's premature to call the rate of expansion and the other things that will enable us to give an answer, but it should fit generally in what you've seen from us over the last period, longer periods, and fit right in the same area, I would say.
Greg Mesniaeff - Needham & Company
So I guess it's safe to assume that the initially lower unit volumes should not be a drag on the overall gross margin profile?
Moe Castonguay
Yes, again I think as we begin to see that materialize in terms of substantial revenues that are material to their earnings, we will bake that into the guidance that we provide. And I think it's just really too early to tell now. We're just delighted that, again, the investments that we've made that were already incorporated into our business model and guidance have been validated.
Greg Mesniaeff - Needham & Company
Great. Thank you.
Moe Castonguay
Thanks.
Amir Bassan-Eskenazi
Sure. Thanks, Greg.
Operator
Thank you. Our next question comes from the line from Paul Bonenfant with Morgan Keegan. Please go ahead.
Paul Bonenfant - Morgan Keegan
Yes, hi, thank you. I'm calling in for Simon Leopold. First question is one housekeeping. Last quarter, you mentioned your top five customers accounted for about 82% of revenue. Could you give us that figure for this quarter?
Moe Castonguay
Yes, the top five customers accounted for approximately 90%.
Paul Bonenfant - Morgan Keegan
90%. Thank you. Next question, you mentioned this win for IPTV over cable, and I think it was an international customer. When would you expect international tick up as a percentage of revenue in 2009, first half, second half, maybe just qualitatively?
Amir Bassan-Eskenazi
The IPTV over cable would start affecting our revenues. Like we said, it was a meaningful win for us and it will affect our revenues. We believe that's going to be the middle of next year, and that's when you're going to start seeing the diversification in terms of the split between the U.S. and the rest of the world.
Paul Bonenfant - Morgan Keegan
Okay. And I know that you're reluctant to give guidance about 2009, so maybe just to come at this a different way. You mentioned that your broadcast products, in particular, in cable were I think driven by the U.S. expansion to digital TV ahead of the February '09 cut off date. And I'm wondering, after February '09, if you see customer demand for your products changing, maybe a refocus more on SDV, once they've got the analog harvesting done, in general, or maybe specific to Comcast.
David Heard
Yes, that's a good question. Let me re-kind of clarify this digital TV transition. So certainly that was one of the drivers, and the correlation figure is not as great as the correlation figure directly related to the growth in the number of HD channels. And, again, I think Amir is right. It's too early to tell, but our preliminary looks at our customers channel line up say that HD is going to continue to grow here in the U.S., as well as the need for those broadcast products globally, which you've seen some announcements that we put out in terms of some new customers and some new territories. We think you will certainly see broadcast needs on a global basis, as well as those carriers typically follow suit after the U.S. media markets in places like Asia-Pacific and CALA and other regions throughout the world.
Moe Castonguay
So I think you're going to see that strong broadcast business continue and to the tune to which people begin to run out of bandwidth and look for a path to personalization, you'll see that same dynamic nicely transition over to our switched digital business. You will see that same broadcast business on cable evident in the telco broadcast business that we have. Our annuity service business supplies all three quite nicely, as you've seen from the operating results and its impact on gross margins on a quarterly basis. And then lastly, with the advent of the IP protocol into making services, again, more ubiquitous and more personal, the wins that we're having both on our MSP2000 platform and on our switch platform further accentuate our progress for a nice balanced, diversified portfolio.
Paul Bonenfant - Morgan Keegan
That's helpful. Thank you. One last question if I may. The MSP product, can you tell us how that gets deployed in the advertising application that you've won at the tier-one? Is this as an adjunct to, say, an existing product and is it initially onesie-twosies or tens of units or hundreds of units when this starts to hit the revenue line?
Amir Bassan-Eskenazi
So much like other platforms, the MSP is deployed at the edge of the network, where it is processing the digital video streams and give value-added services driven by the software that runs inside the MSP. In the case of advertising insertion, it works with an ad server and then close to the DSLAM in the case of carrying content over copper, and basically it scales -- with the amount of content that's being processed through this, the amount of subscribers, when you move from broadcast to personalized advertising and driven by incremental functionality that's being added to the platform as it's being deployed. What we found, and it's very encouraging for us, engaging with the customer that the platform approach is attractive to our customers. They see their IPTV network as a strategic investment that they will need to continue and differentiate, add value to, and continue and scale, in a platform approach that way, enabling them to do so with a very efficient, scalable and strategic manner. So as all those happened, that also creates incremental revenue for us, and that's how our business plan worked in SDV, works in BVS and works with Verizon. So it's very consistent that way.
Paul Bonenfant - Morgan Keegan
Alright. Thank you for taking my questions.
Amir Bassan-Eskenazi
Thank you.
Operator
Thank you. Our next question comes from the line of Todd Cooper with Stephens, Incorporated. Please go ahead.
Todd Cooper - Stephens Inc.
Yes, Amir. Is it correct to think of the MSP2000 as a media services platform for an IPTV delivery network, and the BMR 1200 being more suited for an RF delivery network?
Amir Bassan-Eskenazi
Hi, Todd. Not quite. Let me explain. MSP is really a platform that is focused on personalized television, which means it can scale and process streams all the way to a one-to-one relationship between the stream and the number of viewers. As it happens, in IPTV, that's the way that it has to be deployed day one, because of the copper network architecture, unlike cable and other networks that we deployed with. And that's why they need on day one to go to an MSP type of architecture. What the BMR is pursuing on broadcast but in other application is doing is what you can think of as multicast, somewhere between broadcast and narrowcast streams on a per subscriber basis. And we see traction with the MSP on cable networks as different processing is required in the network to give more relevant advertising as well as other application and our involvement in advertising for time shifted video or other services in this environment. So you should think of the MSP as a next generation personalized video services that it speaks to the IPTV, expand our market and opportunity, but is not limited to that market only.
Todd Cooper - Stephens Inc.
Okay, and the BMR 1200, how does that access the IPTV market?
Amir Bassan-Eskenazi
We have deployed BMRs before in IPTV market in other applications and we will continue to do so. The growth we see in the different applications, many of those drive BMRs into the market. What you will see in the future is BMRs and MSPs would work probably in conjunction in the same ecosystem to support broadcast, multicast and personalized television services in multiple type of a last mile architectures.
Todd Cooper - Stephens Inc.
And it won't be a new platform strictly for IPTV. It will be just additional IO cards in the two existing platforms.
Amir Bassan-Eskenazi
That's exactly right. We think what's important to our customers and what's important to their subscribers is the quality of service, how many services are being offered, how much HD is being offered, is the -- and the added-value services such as advertising that's offered on top of the network. The least important thing for the service or for the subscriber is whether they get their services over DSL, copper, fiber or wireless. What's important is the quality, quantity and experience of these services, and that's what the MSP able to do, and we built it for all of those networks.
Todd Cooper - Stephens Inc.
Okay. Let me switch gears if I could. This may be difficult for you to do, but I'll ask anyway. What percentage of your revenue comes from providing strictly SDV type services?
Moe Castonguay
We are not breaking down our revenues, per se, on a segment by segment basis, but I can probably give you a little context, in that if you look at our top four customers for the quarter, very nice mix of major drivers from each of those being out of our broadcast telco business, our broadcast cable business, our SDV business, and all of them obviously utilize our services business. So a nice balance in terms of the contribution from those customers and we continue to see that on a quarter by quarter basis. Each quarter, one may contribute a little bit more than another, which sometimes gets to a different mix issue in terms of end all margins.
Todd Cooper - Stephens Inc.
I'm sure you hear this all the time, and the reason I ask the question is because in the investment community, a lot of the time BigBand is seen strictly as an SDP play, and you just answered that's not the case, so that's why I asked the question, try to clear that up.
Moe Castonguay
No, it's a very, very good question and very germane, given the contribution levels of each of those businesses that have been quarter over quarter over quarter in terms of our performance.
Todd Cooper - Stephens Inc.
Okay, thanks very much.
Moe Castonguay
Thank you.
Operator
Thank you. And presenters, there is no further questions at this time. Ladies and gentlemen, this does conclude the BigBand Networks Q3 2008's Earnings Conference Call. You may now disconnect, and thank you for using ACT Conferencing.
Amir Bassan-Eskenazi
Thank you. Goodbye.
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