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ARRIS Group, Inc. (NASDAQ:ARRS)

Q1 2009 Earnings Call

April 29, 2009 5:00 pm ET

Executives

James Bauer - VP, IR

Bob Stanzione - Chairman, President and CEO

Dave Potts - EVP, CFO and CIO

Bruce McClellend - President, Broadband Communications Systems

Bryant Isaacs - President, Media and Communications Systems

Analysts

Nikos Theodosopoulos - UBS

Greg Mesniaeff - Needham & Company

John Vinh - Collins Stewart

David Cohen – JPMorgan

Simon Leopold - Morgan Keegan & Co.

George Notter - Jefferies & Co

Blair King - Avondale Partners, LLC

Mark Sue - RBC Capital Markets

Larry Harris - C.L. King & Associates

Craig Brar - Goldman Sachs

Johnny Brown - Stephens, Incorporated

Shubho Ghosh - Thomas Weisel Partners.

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2009 ARRIS Group Incorporated Earnings Conference Call. My name is Stacy and I will be your conference moderator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. (Operator instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. James Bauer.

James Bauer

Thank you very much Stacy. And welcome to all to this ARRIS conference call with management. This afternoon we are going to be discussing our first quarter 2009 financial results, which we released after the close of markets today.

As usual we will be using a series of slides during our webcast which were posted on the ARRIS website under our ARRIS investor relations section. With us here at the ARRIS headquarters are Bob Stanzione, Chairman and CEO; Dave Potts, ARRIS Executive Vice President and Chief Financial Officer; and several other senior ARRIS management. Including Bruce McClellend, Larry Margolis, Jim Lakin, and Bryant Isaacs.

There will be a replay of this entire call available approximately two hours after the conclusion of the call. And in addition a replay of the call and the slides will be available on our corporate website for the next 12 months.

If we could move now to chart number 2, please. Before we began on chart number I would like to point out that during the call, we will be making or we will be called upon to make forward-looking statements. Including statements regarding our outlook and expectations for our industry in general, estimated revenue and earnings for the second quarter of 2009, our outlook for 2009 overall, certain financial operating metrics, the timing and introduction of certain new products and technologies. Anticipated spending patterns, perhaps by some of our customers and expected sales levels for certain product categories. It's important for you all to note that actual results may differ materially from those suggested by any forward-looking. For further information in this regard, with the specific examples of any risks that could cause these results to differ materially from those forward-looking statements. Please see our recent filings with the SEC, and with that said, let's please now go to chart number 3.

Bob and Dave are going to provide their comments in a moment on our results, and after that, as Stacy said we will open up for your questions and our answers. With that, now over to you, Bob.

Bob Stanzione

Thanks, Jim, and good afternoon, everyone. Let's go on to chart 4. Considering the economic environment that we are all dealing with, I have to say that I'm very pleased with our Q1 results.

First of all, the results even though down somewhat from the fourth quarter of 2008, are well within the guidance that we gave in spite of the uncertainties that we experienced at the beginning of 2009.

More importantly, when I look back at the year-over-year comparisons, although our revenues are down by $20 million, we are far more profitable than we were a year ago.

Delivering non-GAAP earnings of $0.18 per share versus $0.12 a share a year ago.

During the first quarter, we delivered our best gross margins ever. Up 650 basis points from a year ago. We generated almost $14 million of cash from operations. We bought back some of our outstanding debt. We increased both our book-to-bill ratio and our backlog, and we believe we gained market share in key product areas.

The successful introduction of our new generation of DOCSIS 3 CMTS in the second half of last year has truly been a bright spot for us. As reflected by ARRIS effectively being tied for number 1 market share according to research.

As you can see from our second quarter guidance, we are predicting even better results for the June quarter. At the midpoint of our guidance for the June quarter, we would exceed last year's second quarter and first half earnings results by a healthy margin.

We are expecting growth across all of our product lines, BCS, ATS, and MCS in Q2. Now let's turn to chart 5, and I will give you a few product segment highlights.

First in the BCS broadband segment, downstream port shipments were 24,516. This is down from the prior quarter for the reasons we gave on the last call. But we definitely expect shipments to increase in Q2.

We had key CMTS wins during the quarter in Korea and Japan as well as in North America. On the CPE front, we shipped 1.3 million units. We continued to hold our very strong market share, and shipments of higher value, multi line and warless gateways increased. DOCSIS 3 CPE shipments also increased.

But we still expect it is going to take a while before a significant shift to this product occurs.

Now let's move on to chart 6, please. The ATS segment has and continues to be hit hard by the weak economy. And product mix and lower volumes have impacted margins. However, we think that Q1 may represent a bottoming out of this business, and we are seeing improved order input for Q2 deliveries.

The MCS segment had a good quarter. We are expanding our current work deployment in Brazil, and we had a significant win with a new customer in that region.

Mix in the quarter, shifted toward the on demand and ad insurance products, which affected good morning somewhat. But overall we feel good about the prospects of this business and, again, expect better Q2 results.

Before I turn the call over to Dave, I would like to go back to two charts that I presented at the February 11th, earnings conference call.

First chart 7. The bottom line on this chart is that the quarter played out about as we expected. Commenting on the first two points we said that we expected a slow start, and we certainly had one.

Activity in January was unusually slow due to delays in capital deployment within our MSO customers. Business picked up considerably at about the midpoint of the quarter. However, we are still seeing cautious spending patterns, and I still believe that overall industry CapEx will be down by around 5 to 10% this year.

On the third point as we expected our sales to Comcast were down in Q1 as they deployed the large Q4 CMTS shipments that we made. However, as our guidance reflects we are expecting sales to our largest customer and to others to rise in Q2 and beyond.

And on the final point, slow and contracting economies around the world have definitely had an impact on Voice-over-IP and high speed data unit growth and our EMTA shipments for the quarter bear out this trend.

However, growth in network traffic clearly provides an offset to this weakness.

Now, please, turn to chart 12 I'm sorry. That's chart 8. Let's look at the, this is the last chart from the February presentation. I said that I'm cautiously optimistic about the outlook for the rest of the year. The reasons for my cautious optimism remain the same let me say a few words as to why.

Our bookings and order activity are up, and our Q2 guidance reflects this improving traffic across all of our product lines.

New video rich applications such as Amazon's HD On-Demand and Netflix continue to drive traffic growth. And hopefully macroeconomic factors will improve as the year plays on.

You heard public statements from Comcast and others that support the goal of widespread DOCSIS 3 deployments. As another data point, at the NCTA show earlier this month DOCSIS 3.0 and IPTV traffic were very hot topics.

We continue to be optimistic about our C4c platform customer feedback at the NCTA show was very positive for this product and we look forward to its availability later this year.

And new OSS projects are definitely on the horizon. Cost control and service improvement continues to be an area of focus for cable operators around the world. As I said before, our work assure management in Brazil is going very well, and we expect to replicate this model elsewhere in the region over the next year.

Latin America, Canada, Asia, and Europe all seem to be regaining momentum. Overall our international sales were down in Q1 for several reasons. Strong shipments at the end of last year, along with budget uncertainties at the beginning of this quarter were compounded in some regions by severe currency fluctuations.

We believe that things have settled down now and expect an upturn in Q2. As we commented before, DOCSIS 3 CPE deployments are beginning slowly, but they are happening. Especially in Asia and Europe we still see a major upgrade cycle coming but probably later this year.

Competition among service providers has never been more heated, and the trends in traffic growth continue to amaze me.

In summary, I am now cautiously more optimistic about 2009. And the ability of the ARRIS team to meet our customer's demand with the very best product products and services as they respond doing test competition and increasingly demand in strikers.

With that said, let me turn it over to Dave Potts, who will get the chart numbers correct, and after his remarks we will take your questions.

Dave Potts

Thanks, Bob, and thanks everybody for joining us this afternoon. Before we get in to the details if you just take a step back and think of the backdrop of the environment which we are in, our results are very good I am very pleased with our first quarter results.

In particular our year-over-year profitability improvement which is I just believe stellar, and I'm also very encouraged by the outlook which we have for the second quarter at this stage.

All right. Let's get to some of the details on chart 10 if we may please. Sales were $253.5 million in the first quarter, which as expected are down from $273.5 million in the first quarter last year, and from $292.4 million in the fourth quarter of 2008.

And I will provide a breakdown by segment in just a moment. Gross margin was 37.7% in the first quarter, up from 31.2% in the first quarter last year, and 37.2% in the fourth quarter of 2008.

Obviously we are really pleased with this result. SG&A and R&D totaled $63.7 million in the quarter, and was down approximately $1.4 million year-over-year, and down approximately $2.5 million from the fourth quarter.

Our adjusted non-GAAP EPS was $0.18 in the first quarter, which compares to $0.12 a year ago, and $0.25 in the fourth quarter 2008. Both sales and earnings were in line with the guidance we provided in February.

Our Q1 2009 GAAP EPS was $0.10 per share and compares to $0.03 per share in the first quarter of 2008. Some significant items to note. Is a net before tax gain of approximately $4.2 million in the quarter associated with the repurchase of approximately 15 million face of our convertible debt.

Next is the amortization of intangibles related to the C-COR acquisition which was before tax expense of approximately $9.4 million in the quarter as compared to $13.7 million in the first quarter last year.

Included in our GAAP earnings for the first time is non-cash interest related to our convertible debt. This was $2.8 million in the quarters and compares to $2.6 million in the same period last year.

As required by the new accounting pronouncement FSP 14-1 we have revised our historical financial statements to include the impact of the new guidance. And as always a reconciliation of our GAAP to non-GAAP is attached to the press release and can also be found on our website.

Cash and short-term investments ended the first quarter of $424 million, down approximately $3 million from the end of last quarter. But please note we did use about $10.6 million to retire $15 million of convertible debt.

We generated approximately $14 million from operating activities in the quarter. Now, frankly, this is a bit better result than what I estimated 90 days ago, and I will touch a little bit more on the balance sheet and cash in just a few minutes.

Our order backlog was $155 million at the end of the quarter, and our book-to-bill ratio was 1.16 well backlog in the book-to-bill are up from the first and fourth quarters of 2008.

Let's turn to chart 11 and look at some of the sales details. First, let's focus on the sales by segment bar chart comparing our reported sales by segment. BCS sales were $194.1 million in the first quarter, up from the first quarter of 2008 $189.6 million, but down from the $225 million in the fourth quarter.

As we highlighted cast quarter, we expected to see a sequential decline. On the last call we talked about Comcast taking a bit of a breather in Q1 as they absorbed their Q4 shipments.

We also mentioned that certain customers wanted to use their remaining capital budgets fourth quarter last year which we expected to have some impact on Q1. Both of these factors, indeed did play out as we expected. Its important to note that the sales mix is quite.

Particularly the year-over-year where the larger percentage of CMTS sales. You'll see this in our margins in a moment. If you remember, Comcast bought very little from CMTS in the first quarter of 2008.

ATS sales were $43 million in compared to $72.9 million in the first quarter of 2008 and $50.5 million last quarter. Both supplies sales were down. We continued to see cautious infrastructure spend by the customers.

However, we now expect to see a modest increase in ATS sales in the second quarter. NCS sales were $16.4 million in the first quarter as compared to $11 million in the same period last year, and $16.9 million in the fourth quarter 2008.

Sales in the first quarter last year were of course impacted by purchase accounting effects, which we estimate to be about $7 million. Let's turn to our geographic split. Our international sales were $67.5 million in the quarter, down from prior periods. Our international sales were also impacted by certain customers using up that 2008 budgets late last year. We have also seen a bit of cautious start to 2009, in part as a result of currency fluctuations, but at this point we do anticipate that our international mix should return to more historic levels in the second quarter.

One final comment on sales. We have two 10% customers in. Time-Warner and Comcast. .

Okay. Let's turn to chart 12 where we provide some details on gross margins. Our overall gross margin percent improved to 37.7% in the first quarter. Our highest level ever. Up from both the first and fourth quarters of 2008. With respect to the first quarter of last year, as we highlighted in last year's Q1 call, our margins were depressed by purchase accounting impacts.

Adjusting for those impacts, we estimate gross margin would have been approximately 33%, versus the 31.2%. So like for like, we are still significantly up year-over-year. The increase year-over-year is primarily related to product mix, most notably the highly successful integration of DOCSIS 3 CMTS last year. We have more sales high-margin CMTS in the mix this really shows itself on the margins of our BCS segment.

Gross margin for BCS was 40.7% in the first quarter of 2009 as compared to 30.6% in the first quarter last year.

The gross margin percent of our ATS segment was 21.6% down sequentially and from last year. The decline reflects less access and transport sales in the quarter, in particular the higher-margin optics gear. As I mentioned a moment ago we do expect to see some in the second quarter. The decline also reflects just the overall lower volume.

The gross margin percent for MCS was about 45% in the quarter. The decline from prior periods, again, reflects mix. As we mentioned before performance in this segment can be a bit lumpy as revenue recognition is significant tight to customer acceptance is associated with multiple month and quarter projects.

Anticipating your question, and again, it all depends upon the ultimate mix. I anticipate margins to be in a similar zone to what we have achieved in the last few quarters. Let's turn to operating expenses on chart 13.

Total R&D and SG&A was $63.7 million in the first quarter, down $2.5 million from the fourth quarter of 2008 and down $1.4 million from the same period last year. As I mentioned on our fourth quarter call, we expected a slight decrease in OpEx in the fourth quarter, which indeed occurred.

With respect to SG&A year-over-year we were down $1.7 million. Decline reflects synergies we achieved during 2008 related to the C-COR, acquisition, somewhat offset by associated legal costs associated with patent and other litigations.

Legal costs were up $1 million year-over-year. R&D was essentially flat year-over-year. I will point out, though, that the results included the benefit of about $1 million in grant money we availed ourselves of. We do not expect this to repeat in the second quarter.

Included in overall operating expenses is amortization of intangibles, which declined $4 million year-over-year. The vast majority of the amortization related to the C-COR, acquisition, the decline reflects the completion of amortization of certain intangibles in 2008.

Specifically the order backlog. Looking forward to Q2, we anticipate that we may have a modest increase in OpEx. The R&D grant I mentioned earlier. Next we project higher variable compensation costs, associated with the anticipated higher level of sales and earnings.

We expect to have on increase in non-cash equity compensation expense about $1 million associated with recently issued equity grants. And lastly we expect to have higher protocol expenses related to certain products.

Let's move to slide 14 and review some of the balance sheet highlights. We ended the quarter with $424 million of cash and short-term investments, as compared to $427 million at year end.

Something to note, first we generated approximately $14 million from operating activities in Q1. Let me touch on some of the pieces. The elements of earnings at our cash base were approximately $34 million, which were the foundation of our cash generation.

As we expected, we consumed cash for working capital in the quarter. In fact we used $20 million of working capital needs. Our accounts payable and accrued liabilities went down $37 million from year end, our annual bonuses were paid out in March and our accounts payable for inventory declined.

Our accounts receivable were lower viable $4 million some of the quarter-over-quarter decline in sales resulted in lower AR. This was somewhat offset by higher DSOs. As I mentioned on our last call, our fourth quarter collections were really good.

Our inventory declined by about $9 million, this is partially timing and partially just an effort to reduce the levels. CapEx was approximately $5 million in the quarter, which was in line with our projections.

Convertible debt. We used approximately $10.6 million of cash to retire $15 million of face of our 2013 convertible debt. This is about a 29% discount, and represented about a 10% yield to maturity. Also the TARP permits referral of debts on gain. The principal of the instrument must be repaid in cash.

We and our Board concluded it was a prudent balance sheet move to opportunistically buy some in at the levels that we were able to. So I am very pleased with our balance sheet position.

The cash continues to be king in this environment, and we continue to be very focused on cash generation and prudent balance sheet management.

Before moving on to guidance, let me point out one other thing. As I said we implemented FSP 14-1 which changes the balance sheet presentation of our convert.

You will see long-term debt of $203 million at the end of Q1. Remainder face value of the convert is now in equity essentially representing the value of convert option.

It may not be intuitive to everyone what happens, so I thought I just would point it out.

Okay. Let's turn to guidance on chart 15. At this point for the second quarter 2009, we estimate that sales will be in the range of 270 to $290 million and that non-GAAP EPS will be in the range of $0.20 to $0.24 per diluted share a GAAP EPS will be in the range of $0.12 to $0.16 per diluted share.

A reconciliation of GAAP to non-GAAP EPS can be found in chart 16, and is also attached to the press release. Reconciling items include amortization of intangibles equity compensation expense and non-cash interest on the convertible debt.

And finally in chart 17, we have included a reconciliation of our GAAP to non-GAAP earning per share for the first quarters of 2009 and 2008. So with that, thank you, and let me turn it back over to Jim Bauer for questions and answers.

James Bauer

Thank you, David, and I'm going to turn it back over to Stacy just to go over how to ask questions. Again, I would like to try to ask you to limit your questions to just one, with a follow-ups.

Question-and-Answers Session

Operator

Thank you. (Operator instructions) Your first question comes from the line of Nikos Theodosopoulos with UBS. Please proceed.

Nikos Theodosopoulos - UBS

Thank you. I wanted to ask on the gross margin, can you go back a little bit and talk about the puts and takes in the BCS area? Why the margin improved so much sequentially, and if you look at your composition of backlog in that area, do you think it continues to improve going forward, stay stable, just some additional detail would be helpful. Thank you.

Bruce McClellend

Hi, Nikos this is Bruce McClellend. A combination of a number of factors. Certainly product mix we talked about before just has, a dramatic shift on gross margin in that segment as we sell more of the, you know, CMTS product and less of the CPE we just have a big shift. The number of CPE shipments. The 1.3 million which is down something like 10% or so from the previous quarter, so that has a big shift on the gross margin.

On top of that, clearly the new technology we have introduced with our DOCSIS CMTS, depending on the configurations that get deployed, on whether its an upgrade or a new chance just has a fairly big shift on the gross margin mix. And the new technology itself at a lower cost point, and, you know, the ongoing effort on reducing cost just all contributes to an improving profile there.

Nikos Theodosopoulos - UBS

Weren't the downstream ports also down sequentially, though? I mean, was there really a meaningful shift or were the were more heavily loaded? I am just trying to get alluded more in trying to understand that?

Bruce McClellend

The number of downstreams were down as well, but I think there was a bit of a shift mix from the product perspective.

Nikos Theodosopoulos - UBS

Okay. And what about going forward? Do you envision that that continue to, that mix shift to continue, or do you think it kind of stabilizes at this rate at this point?

Bruce McClellend

I think we just, we think it's a level that we can maintain and don't see a big dramatic shift going forward, but, again, it's highly variable depending on that mix of products, so.

Nikos Theodosopoulos - UBS Securities

Okay. All right. Thank you.

Dave Potts

Nikos, I am not the only one who says product mix.

Operator

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

Greg Mesniaeff - Needham & Company

Yes, thank you. I was wondering if you can address the difference, obviously your bookings were up significantly, and as well as your book-to-bill was above one, and your deferred revenue was down sequentially. Any color on that?

Dave Potts

A bit, so I guess within the deferred revenue we do have the normal services which come in the first quarter, but a bit of the product revenue was down, which is somewhat a function of just timing of the projects. And that would be in the MCS segment.

Greg Mesniaeff - Needham & Company

Right. Okay. And then just a quick follow-up, could you give us an update on your activities vis-à-vis the MDX 9000 platform an better view?

Bryant Isaacs

Yeah, Greg, this is Bryant, as you know in the first quarter we introduced the MDX platform as well as SMX platform. We are in the process of conducting mostly lab evaluations at the moment, and customers at that this point are not, are not names we are able to share, but the work with that platform and the introduction of it is proceeding according to plans as described earlier this year.

Greg Mesniaeff - Needham & Company

Thank you.

Operator

Your next question comes from the line of Hasan Imam with Thomas Weisel. Please proceed.

James Bauer

Hasan, are you there? Hello, Hasan. Maybe we'll go on to the next question. We seem to have lost him, Stacy.

Operator

Your next question comes from the line of John Vinh with Collins Stewart. Please proceed.

John Vinh - Collins Stewart

Hi, thanks for taking my question. First question is for Bob. You kind of talked about kind of the timing of the things starting to turn around in kind of mid-quarter. It seems like some of your customers are maybe having a little bit better visibility or more confidence in their business right now. Can you talk about what has driven some of that improves in or kind of more optimistic spending on their part in terms of their kind of forward outlook?

Bob Stanzione

I think it's a combination of things. First of all, I think towards the late fall, early winter, like the September, October, November, December months, we were all stunned by what was going on in the marketplace. And folks just didn't want to make any decisions during that period of time, and therefore, nobody really knew where we were heading in early January. And budgets were slow to get deployed. But I think as things started to stabilize, perhaps at a level that we don't like, but still at least begin to get some clarity as to where the world was going. The operators realized that really nothing to changed in that internet traffic continues to grow at a breath-taking pace, because of the all of the video traffic that's being transported. Competition continues to intensify from the telephone companies, as well as the satellite providers, and that's happening worldwide, and cut consumers are more demanding than ever in terms of their use of the network.

More video on demand, more on-demand in time shifted television is being watched, and so on, and furthermore, the need to reduce operational costs is coming to for more than ever. So, all those things I think are starting to kick in here. I'm not saying that we are going to see booming business this year. But I think that because of the product lines that we have in our portfolio, that are focused on these growth opportunities we can do pretty well this year relative to capital spending in the industry, which I think is going to proceed at a fairly reasonable rate this year, as I said, probably down 5% or 10%. I saw the Time-Warner announcement this morning. Their spending is down about that much during the first quarter. But I think it is going to gain momentum as the year goes on.

John Vinh - Collins Stewart

Great, thanks. Just a follow-up question on BCS, kind of a two part question. It seems the outlook for CMTS has improved meaningfully since the last quarter. One, do you think CMTS can grow for you this year, and then the second part of that question is on the CPE side, do you think we bottomed in Q1 on the CPE side? Thank you.

Bob Stanzione

Yeah, I think if you are comparing year-over-year, we think the CMTS business is growing year-over-year, and you can kind of see that in the guidance the next quarter. We're hopeful that first quarter was the bottom on CPE, and it kind of goes back to more traditional levels, and if it's down, say, 10 to 15, we get back to a similar run-rate as we go to the rest of the year, and the mix of DOCSIS 3.0 here continues to grow as the year progresses.

John Vinh - Collins Stewart

Great. Thank you.

Operator

Your next question comes from the line of Ehud Gelblum with JPMorgan. Please proceed.

David Cohen – JPMorgan

Hi, it’s David. Thanks for the questions. Couple of things, just first of all on share and the market let's start from that perspective. Bob, you said you thought in general CapEx would be down around 5% to 10%. Would that be, I guess industry or whole, if we assume your entire revenue line kind of falls in to that, you were down 7% in Q1, Q2 guidance would put you sort of flat with what you did in June of '08 of last year. So, presuming your Q3 and Q4 are not going to be down, you are going to outpace that down 5% to 10%, you will end up closer to flat for the year even if you just sort of flat Q3 and Q4 versus June. A, is that kind of how you see it so therefore you are intending to gain share?

B, do you expect to not gain share, therefore, Q3 and Q4 would kind of go back down to the market down 5% to 10%. And if you are gaining share is that primarily coming and can you give us a sense of where you think your share is now and where is going to be?

Bob Stanzione

Yeah, I think consistently said that I think as a percent of total CapEx spend, I believe that we can gain this year. And I said we could do that last year, and we did. I think that where spending is down the most, are areas where we don't play that much. Now, we are impacted pretty heavily in the infrastructure side of the business, and that's why ATS business has suffered the decline that it has from a year ago. But in the areas where the most growth is, I think we have got good product position. CMTS, MTAs, operations support systems, VOD and I do think we are going to see a bit of revival in the ATS businesses as the year goes on. So, I think that ARRIS will do better than the CapEx trend this year.

David Cohen – JPMorgan

So that kind of have to do with total cable CapEx?

Bob Stanzione

I wouldn't, I wasn’t nail it to a particular number at this point beyond our second quarter guidance, and I think that's what you just said.

David Cohen – JPMorgan

So, your comment was on, I guess, all of cable, including much more than just VoIP, and CMTS, you are including --

Bob Stanzione

Right.

David Cohen – JPMorgan

-- boxes and everything else?

Bob Stanzione

Right.

David Cohen – JPMorgan

For the mix shift? Okay. Understandably. If you look at gross margin on the ATS and MCS businesses obviously they were down, is that primarily due to volume, and as volume comes back up in those businesses do the gross margins recover?

Dave Potts

It's mix and volume. In ATS we saw more RF product go out than we had a year ago. We had more optics in the mix a year ago, I believe. And then certainly volume has come in to play. There also in MCS, the on-demand and Ad insertion products or sort of a hardware and software, hardware, whereas the OSS products are pure software, and we saw a mix shift occur there.

David Cohen – JPMorgan

Okay.

Dave Potts

ATS side there is supply element, so it just depends upon how much that is something overall percentage of the segment.

David Cohen – JPMorgan

Okay. And that will be a drag in the gross margin?

Dave Potts

Right.

David Cohen – JPMorgan

Okay. Cool. The last thing is when you are looking at next quarter and you are looking at the up sequential growth that you are seeing, I believe, Dave, you mentioned that both Comcast should bounce back as well as international should bounce back. Can you just give a sense or quantify how much of each of those bouncing back goes in to the up tick next quarter? Is it equal parts?

Dave Potts

I think I have to say there's moving parts obviously we do believe those are factors within it the revenue range and factors add it, having moving pieces of it.

David Cohen – JPMorgan

Okay.

James Bauer

As I said in my comments we see growth in the second quarter in every single business segment, in all three business segments. We're focusing growth internally. We'll see how it turns out. Some may grow more than others, but it's not one product. It's not all segment. We think all three are going to experience better results in the second quarter.

David Cohen – JPMorgan

Okay. Appreciate it. Thanks.

James Bauer

Sure.

Operator

Your next question comes from the line of Simon Leopold with Morgan Keegan. Please proceed.

Simon Leopold - Morgan Keegan & Co.

Great, thank you very much. This morning Time-Warner Cable announced DOCSIS 3.0 rollout in New York finally. Can you offer some thoughts on DOCSIS 3.0 adoption moving beyond Comcast?

Bob Stanzione

Well, we have a lot of customers beyond Comcast, and Time-Warner has been a great CMTS customer. I don't think we can comment beyond that right now, unless you know something, Bruce, I don't know.

Bruce McClelland

No real specifics that we can share in that area.

Simon Leopold - Morgan Keegan & Co.

So, but you have acknowledged you are selling the C4 in to Time-Warner already, correct?

Bob Stanzione

Yes.

Simon Leopold - Morgan Keegan & Co.

So logical they would be upgrading. I would like to see if maybe they can get an update on the Edge QAM product, the D5 in terms of where that is in terms of traction, you know, following kind of the head fake last year?

Bruce McClelland

So I guess the two areas that I think the most interest at this point is switch digital. I think there's a number of expansion projects underway in the second half of the year with operators expanding the number of channels that they are running switch digital and so that's an opportunity that we're focused on. And the second, clearly it's an element in a M-CMTS architecture and the secondary that continues to grow as the year progresses, and operators do deploying for DOCSIS 3.0 if there not with I-CMTS at least there is another element with the QAM that we can participate in.

Simon Leopold - Morgan Keegan & Co.

Now is it D5, I think you are saying likely to make more material contributions in the second half of this year it's pretty minimal in the first half?

Bruce McClelland

We're not breaking that level of detail down, but certainly we're hoping that business continues to grow.

Simon Leopold - Morgan Keegan & Co.

Okay. Well in the spirit of trying to get your pre count a little bit more detail, I want to shift gears also to the CPE discussion. You talked about a total CPE number, I believe $1.3 million. Even if we can't numbers, if you can talk a little bit about trends, the multi-line unit trends in particular, because I'm assuming that, that’s helping the margin a bit, and I'm really trying to discern that?

As well as the DOCSIS 3.0 contribution, you talked about that in the prepared remarks, kind of kicking in later in the year. I would like to see if we can get some thoughts over, how that trends long-term as 3.0 adoption really ticks in, 2010 kind of directionality?

Bruce McClelland

So on the multi-line and the gateway products; they are a fairly meaningful piece of business for us at this point. Not to get in to the specific number breakdown, but they are fairly significant. The interest in expanding in to the home network and offering, wireless integrated devices seems to continue to grow, so that's healthy, and the small business arena is another growth area, so, again, both of those have grown quarter-over-quarter.

The DOCSIS 3.0 mix is still in the single-digit range, for the quarter, so it's not as large yet at this point, but we are beginning to see signs of that business growing, and plans as far as how to deploy that service, how to price and how to market it in the advertising. I think you can see more and more of that almost on a weekly basis from several of the operators here in the US market.

Simon Leopold - Morgan Keegan & Co.

Great, and just one last question. This one is a little bit more big picture, but when we think about kind of the DOCSIS 3.0 cycle, I think the data point we and certainly as an analysts are getting, is the homes past number, particularly Comcast talking about homes passed, not homes connected. And obviously that is what matters for sales. Is there some guidance you can give us in terms of how to think about the longevity of this DOCSIS 3.0 cycle?

James Bauer

Actually homes connected is not right now the key metric, because the DOCSIS 3 capacity is being used by customers that are not, that don't have DOCSIS 3 modems.

Simon Leopold - Morgan Keegan & Co.

That's right.

James Bauer

So but the cycle, you want to comment.

Bruce McClelland

Well, I think it's an extended cycle. I mean, I don't think it's a short-term upgrade cycle that completes in a six-month window or anything like that. I think it's a very extended new net assets as well as replacement cycle what happens over three to five year period. It's an extending cycle and I think it's a range of devices. I think there will be a range of products built on this technology. Voice, data, and video, right, that take advantage of all of the features that are in DOCSIS 3.0. It's an extended cycle. That’s kind of what you are trying to get of here.

James Bauer

Very similar to DOCSIS 2.0 and DOCSIS 1.1. It was cycle that lasted until the next generation of product came out and as long as internet traffic continues to grow or the traffic through the edge continues to grow then capacity expansion has to take place. And so as long as we see that growth, the cycle for DOCSIS 3, until DOCSIS 4 comes along which is probably several years out.

Simon Leopold - Morgan Keegan & Co.

Okay. Thank you very much.

Operator

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

George Notter - Jefferies & Co

Thanks very much. Thought of ask about M&A, obviously you guys pursued some acquisitions in the video processing space in a few instances, and those deals didn't work out. And I know you are partnered with review as well here but any new thoughts on acquisition of more video company, and at the same time is it more interesting to you now, given the stock is up where it is? And what is the thought there? Thanks.

Bob Stanzione

We remain interested in expanding our portfolio in the direction of video products and M&A could become a part an element of that strategy as we described in our March conference, when I think you were here George. The planets have to align, and up until now they haven't. In the meantime, we're investing fairly aggressively in programs within our R&D camp here for some net very interesting next generation video products.

George Notter - Jefferies & Company

Got it. Okay. And then just shifting gears, what's the comment now on the mix of DOCSIS 3.0 on the CMTS side. I think you guys said that you are still shipping 40% to 60% with DOCSIS 2.0, but where does that mix stand right now? And what do guys see in terms of the pace to change on that? Thanks.

Bruce McClelland

It does kind of change quarter-to-quarter or month-to-month a little bit just depending on the customer mix. It's still in the same range in that kind of 40 to 60 range. I do think it shifts as the year progresses stronger towards DOCSIS 3, but it hasn't done so yet.

George Notter - Jefferies & Company

Great. Thanks.

Bruce McClelland

Yep.

Operator

Your next question comes from the line of Blair King with Avondale Partners. Please proceed.

Blair King - Avondale Partners, LLC

Hi. Thanks guys for taking the question. Just one question with respect to the strength in the ATS segment, I was hoping to get some sense as to some of the specifics going on within that segment, driving the acceleration off of 1Q. And perhaps, in a sense specifically if you see some of the optical transmissions pieces of that business progressing through 2009, which I think, Bob, you had made just a brief comment on just a minute ago?

Bob Stanzione

Right. Again, strength in this is the word strength is haven't heard that around the ATS segment lately. Last weak we do see it bouncing back, Blair. I think that certainly we expect second quarter to be a marked improvement over the first quarter in ATS. More optical products going out the door and that has to do with node splits primarily, I believe. That continue a pace in the industry, in spite of the fact that not much infrastructure is being built. And there are opportunities that we're pursuing outside of the US, that add to the upside.

Blair King - Avondale Partners, LLC

All right. But nothing specific with respect to core wave or for commercial services or any of that stuff going on specifically?

Bob Stanzione

I wouldn't say specifically, but I wouldn't exclude those by any means. Those are important for us John's not here with us today, but we could get back to you if you need more detail.

Blair King - Avondale Partners, LLC

No.

Bob Stanzione

But those are really key elements in our ATS portfolio.

Blair King - Avondale Partners, LLC

Okay. Thanks for taking your time to answer the question.

Bob Stanzione

You're welcome.

Operator

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

Mark Sue - RBC Capital Markets

Bob when you say cautiously more optimistic, does it mean linearity is also improving? And can we see some catch up spend from Comcast and others, in the second quarter was it more of just a normalized return and if you could give us your thoughts there?

Bob Stanzione

I think it's more of a normalized return. I don't think we're going to see a catch up in the second quarter and then a slow down in the second half. I think that, again, there was a marked reduction in January from what we've seen in years gone by, and I think that we were past that point, and I think we are on a normal spend rate, but, and I'm optimistic about the second half of the year. I truly am, but, I can't quantify that at this point beyond the second quarter. I do think the third quarter is going to be a good one, but we'll have to wait until about three months from now when we give the guidance on that.

Mark Sue - RBC Capital Markets

Got it. And your share gain seems to be coming at the expense of Cisco and the CMTS side, have you factored that in to your guidance and does that actually represent upside to your $290 million?

Bruce McClellend

I guess we watch market share retroactively as opposed to kind of planning it in. I mean that we're, it kind of just falls out from what happens, so I don't think we think of it that way to be honest with you. I mean, what we're showing you for second quarter, still the active projects we're engaged on, that we think we have a high shot at winning here, so that's how we come at it.

Bob Stanzione

I think we described before what our process is for developing the guidance we have our sales team constantly updating the projects that are in the funnel, and putting probabilities on those projects. So we develop the guidance based on that.

Mark Sue - RBC Capital Markets

Got it. And third quarter is when you actually become cautiously even more optimistic?

Bob Stanzione

Right. Well I just said cautiously more. Next time it will be cautiously even more.

Mark Sue - RBC Capital Markets

Thanks, gentlemen.

Bob Stanzione

All right.

Operator

Your next question comes from the line of Larry Harris with C.L. King. Please procced.

Larry Harris - C.L. King & Associates

Yes thank you. Couple of questions if I could, on the C4C how should we be thinking about it? Will there be initial revenue recognition on that in the third quarter? Are you seeing, greater interests from domestic operators than international or certainly more than you had expected, and could this create a step function in terms of revenues within the BCS business?

Bruce McClellend

So most new products go through a fairly extensive incubation process to get through certifications, field trials and deployment, and, we're cautiously optimistic that we'll be able to accelerate that with the C4C given the commonality in the technology and architecture in plot and everything. Having said that, I think it will take a bit of time to get through the labs and in to deployment, so indirectly answered your question, but I think you understand where I'm headed there.

Larry Harris - C.L. King & Associates

Understood. Understood. In terms of the downstream speeds, we've had cable vision announce 101 megabits per second of course, with a customer in Japan you are doing 160 megabits per second. Are you seeing greater interest on the part of cable operators in terms of faster speed? And would that change the types of products that you would be selling to the operators?

Dave Potts

Yeah, I think so, Larry, I really do, and the public speed that is advertised, it's kind of only one factor, obviously there's, an engineering effort for those seem to understanding how many simultaneous users and all of these things, right they have to get analyzed and everybody has a different way of getting at it. But there are significant benefits to the DOCSIS 3.0 technology, even to operators offering a 20 megabit service. The ability to share upon the downstream and get these efficiencies of the wider channel actually it makes a fairly significant difference at anything above say, 20 megabit per second and offering.

So I think you'll see a whole range of offerings from 20 megabits through to 160, that are actually taking advantage of the DOCSIS 3.0 platform, not to mention, sorry Paul mentioned most of the 3.0 capacity going in network today for traditional 2.0 service and then they'll start to augment it. They deploy 3.0 modems and 3.0 grade services. And that will demand more capacity expansion. I mean very quickly they'll exhaust the capacity that they put in, and they have to augment that again. And that's the nature of the technologies and the infrastructure, which is what drives things like switched digital video, and the need to deploy that technology to reclaim bandwidth, to allocate it more towards HP or for IP and, that's just kind of three to five-year upgrade cycle that we see happening as the repartition, the 5 gigabit per second bandwidth they are giving in the home its simply a matter of repartitioning that bandwidth to services they want to offer.

.

Larry Harris - C.L. King & Associates

Understand, and then finally, Motorola has started a retail distribution of DOCSIS 3.0 modems and I recognize that most of CPE sales are EMTAs and you do a little bit, I guess in DOCSIS 2.0 in terms of kits, installation kits, what's your current thinking in terms of retail sales, DOCSIS 3.0 modems.

Bruce McClellend

Yeah, I think we're pretty focused on the direct service provider model, as opposed to the retail channel modeling at this point, Larry.

Larry Harris - C.L. King & Associates

Understood okay thank you.

Operator

Your next question comes from the line of Todd Brady with Wachovia. Please proceed. Mr. Brady, your line is open. Your next question comes from the line of [Craig Brar] with Goldman Sachs. Please proceed.

Craig Brar - Goldman Sachs

Yes hi. I just one remaining question I just wanted to get a little bit more color on the change in tables. It seemed to have changed rather significantly, and I know you mentioned it briefly in the presentation.

Bryant Isaacs

Yes kind of, at the end of the year, we had high payables which is frankly just a timing of when we received goods in the fourth quarter to when [audit] and we expected it to come down and it did.

Craig Brar - Goldman Sachs

Okay so its nothing, its just timing issue.

Bryant Isaacs

Yes.

Craig Brar - Goldman Sachs

Okay. All right thank you very much.

Operator

Your next question comes from the line of Todd Cooper with Stephens, Incorporated. Please proceed.

Johnny Brown - Stephens, Incorporated

Hey, guys this is Johnny Brown on for Todd Cooper. I wanted to kind of focus on DOCSIS 3.0 CMTS equipment again. At your Analysts Day you had pretty positive comments regarding how your integrated CMTS system was competing with, say, Cisco's modular CMTS. I wondered if you could give kind of an update there, and talk about any pricing pressure that you are seeing or things like that.

Dave Potts

No, I'm trying to think of anything to add since the meeting we had in that area. Again, it's not a topic that has a lot of discussion as we make our offering to the market, right? And again, there is values on both sides and some operators have bit of a preference one way or the other, but it does come down to, the economics and the expansion plans that they have. Clearly the vendor that has the incumbent position in an operators network has an advantage not just in having the equipment in place to be upgraded, but the relationship with the engineering team and the operations teams and those sorts of things. That is a much bigger factor than is it in a modular architecture or integrate architecture. So what we do know is, our products seems to have gotten some very solid customer acceptance. We work hard every day to go win the business. It's not to see to complete at all, but we're pretty pleased with how it's worked out so far.

Johnny Brown - Stephens, Incorporated

Okay. And, I see that Cablevision, announced a deployment using Cisco's equipment you guys are clearly having some success as well. I mean do you have a clear feeling as to the breakdown for DOCSIS 3.0 equipment? Whether or not you are gaining share there?

Dave Potts

At Cable Vision specifically?

Johnny Brown - Stephens, Incorporated

Well no, just in general, with any MSO that's deploying the service?

Dave Potts

Well, we've seen it, we're hoping we are gaining share. Last quarter, we had some pretty positive indications that we gained some share. We'll see how the numbers for first quarter end up landing. We just don't know for sure, and clearly, this is the business we're focused in, so we're not really, doing a lot else than chasing every opportunity around the world for this. And so we think we're pretty focused on making sure we get our share.

Johnny Brown - Stephens, Incorporated

Okay. And then the Infonetics data point that you mentioned earlier, talking about worldwide market share, kind of neck and neck, was that talking about specifically DOCSIS 3.0 CMTS.

Bruce McClelland

No it's kind of a general, a total combination. And it's of course apples and oranges sometimes when you are comprising. So you got to take all of those with a grin of salt. And again we don't focus on that as a forward-looking thing. It's nice to get an indication how you are doing competitively. But we're really focused on the value proposition to the operator and doing the best we can to make them successful.

Johnny Brown - Stephens, Incorporated

Okay. Thanks a lot, guys.

Bruce McClelland

Okay. John.

Operator

Your next question come is that follow-up question with Hasan Imam with Thomas Weisel Partners. Please proceed.

Shubho Ghosh - Thomas Weisel Partners.

Hi. This Shubho Ghosh for Hasan. First of all congratulations on a great quarter, and wanted to focus a little bit on international sales and you did mentioned that you had seen some weakness in international sales this quarter. I also wanted to revisit an earlier statement. I think you had made that you had seen strength with MSOs especially in Latin America, with Telmex, Telefonica and others, if I were to kind of combine those two statements, how should I think about things in Q2 and going forward? Is that a weakness that is temporarily a weakness like the bid that we saw from Comcast, and we should expect it to come back? Or is this for more of a prolonged weakness going forward.

Bob Stanzione

I'm not sure, I can give you a precise answer but, I am sure I can't give you a precise answer but I believe that in the second quarter, we'll see the percent of our revenues from international customers returning to the more normal level, which has been just under 30% and it dropped to about 26, 27% in the first quarter. Dave might comment on the one I think the unique complicating factor in the international business has been currency that has been fluctuating.

Dave Potts

And this is certainly has that to become more expensive to do deals in US dollars for international customers, and this really is across all of our products there has been a bit of a weight for kind of effect. And as the currencies are now starting to stabilize in fact I have been talking to our sales guys about these last couple of days, it seems like it's getting to be a little bit more open for business again on some of those deals. Really did folks were really cautious as to what to do, further from December, really through February.

Bob Stanzione

And the rate of change on it both on the currency, the big issue is put a business plan together, based on a set of assumptions, and they all changed underneath within a 38 planning period everything gets locked up.

Bruce McClelland

In some countries they were changing 30%. It was just startling how much was going on, but it seems to have settled down, and the order input seems to be returning to a more normal level. Now whether it will hit back to 29, 30 in the second quarter, I couldn't, I wouldn't bet, but it seems to be heading back that way.

Shubho Ghosh - Thomas Weisel Partners.

Great. Thank you.

Dave Potts

Welcome.

Operator

At this time, I would like to turn the call back over to management for closing remarks.

Bob Stanzione

Okay. Thank you, Stacy, and thank you for all of those who participated on the call. I got some good questions I hope that was helpful to you. That concludes the first quarter 2009 earnings conference call, and we're going back to work to make the guidance.

James Bauer

Thank you all.

Operator

We thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect, and have a great day.

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