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Arris Group Inc (NASDAQ:ARRS)

May 15, 2013 6:00 pm ET

Executives

Robert Puccini - President of Telewire Supply

Robert J. Stanzione - Chairman and Chief Executive Officer

David B. Potts - Chief Financial Officer, Chief Accounting Officer, Chief Information Officer and Executive Vice President

Larry Robinson - Corporate Vice President and General Manager of Home Devices

Bruce W. McClelland - Group President

Analysts

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

James M. Kisner - Jefferies & Company, Inc., Research Division

Richard Valera - Needham & Company, LLC, Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the ARRIS Second Quarter Update Conference Call. My name is Tony, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Bob Puccini of Investor Relations. Please proceed.

Robert Puccini

Thank you, Tony, and welcome to the ARRIS conference call with management. This afternoon, we will be discussing our second quarter 2013 outlook. We will be using a series of slides during our webcast, which are also posted on the ARRIS website in the Investor Relations section. With us here at the ARRIS facility are Bob Stanzione, ARRIS' Chairman and CEO; David Potts, Executive Vice President and Chief Financial Officer; Bruce McClelland, President, Network & Cloud; and Larry Robinson, President, Customer Premises Equipment.

There will be a replay of this entire call available several hours after the conclusion of the call, and a replay of the call and the slides will be available on our corporate website for the next 12 months. Before we begin, please go to Chart 2.

During this call, we will be making forward-looking statements, including our outlook and expectations for our industry in general, estimated revenues and earnings, certain financial operating metrics, the timing and introduction of new products and technologies, anticipated spending patterns by some of our customers and expected sales levels of various product categories. It is important to note that actual results may differ materially from those suggested by any forward-looking statements, which may be made during today's call. For further information in this regard and for specific examples of risks that could cause actual results to differ materially from these forward-looking statements,

please see our recent filings with the SEC.

Now if we could go on to Chart 3, Bob and Dave will provide their comments on the quarter. After that, we'll open up for your questions. Over to you, Bob.

Robert J. Stanzione

Thanks, Bob, and good evening, everyone. Today marks 4 weeks since the formation of the new ARRIS, and we're now a vastly different company from what we were before. And so this evening, Dave and Larry and Bruce and I would like to present our assessment of where we stand in this first post-close quarter to update you on our outlook for the rest of the year and our outlook relative to the target model that we presented back in December.

So let's take a look at Chart 5. As a reminder, our target model was to reach a $4.8 billion to $5.1 billion revenue run rate and a $2 to $2.15 GAAP -- non-GAAP EPS after achieving $100 billion to $125 billion of synergies, which we estimate would take 1 year. As of this evening, we believe that these targets will be achieved on the schedule that we planned.

Now let's go to Chart 6 for some background. Dave will walk you through the details in a few minutes, but let me start by commenting on our expected sales levels for the first half of the year.

When added together, the pro forma non-GAAP Q1 sales of the 2 businesses would have been $1.105 billion. And we expect that Q2 pro forma non-GAAP sales will be slightly lower, in the range of $1.028 billion to $1.078 billion, centering on about $1.053 billion or about $52 million below the Q1 combined number. Frankly, we expected some decline, but these results are a bit weaker than our original estimates. We'll have some work to do before meeting our target run rates.

As you know, prior to the acquisition, Motorola Home sales had been in decline. Over the past 2 years, the business went through the long process of being acquired by Google and subsequently being auctioned off. Some momentum was lost due to the internal distractions and customer reluctance to expand their business with Motorola Home given the uncertainty around its ultimate disposition. It's clear that the management teams put a lot of time and effort into the auction process, and the uncertainty throughout the process took its toll on the employees.

An executive of one of our largest customers told me very candidly that his company was holding back on new business until they were satisfied that Motorola Home would land in a good place. Over the past few weeks, I've met with other major customers who have expressed similar sentiments as well as an eagerness to get on with some of the projects that they've been planning for quite some time.

Despite these distractions, the team has done a remarkable job in moving forward with several important initiatives that are going to move the needle in the very near future.

This is a good time for me to also mention that AT&T has granted ARRIS, or actually formerly the Motorola Home division, its 2013 Supplier Award. Please take a look at yesterday's Wall Street Journal, Page A7, to see that announcement.

Going to Chart 7. So I look out beyond this quarter. I see several good reasons for sales and profitability to improve. First of all, the spending environment in general is improving. The economy seems to be slowly recovering, and this is the first year in a long time that service providers are announcing plans for increases in CapEx. A large portion of the increased CapEx will be directed toward infrastructure improvements to expand bandwidth, and the broad deployment of new in-home devices, particularly Whole Home Video gateways capable of delivering cloud-based applications. These products are in our sweet spot and are poised for growth. We're working with major service providers, both domestic and international, to launch new Whole Home Video solutions and high-speed data gateways.

We're also in the early stage of the launch of the E6000 CCAP-ready Edge Router, and our new APEX 3000 QAM is ready for delivery. Additionally, we see increased deployments of our DreamGallery multi- stream -- multi-screen software solutions occurring as the year progresses.

Moving to Chart 8. This chart describes our view of the growing total addressable market for in-home devices. This study, which is based on Infonetics as well as ARRIS' research, indicates a 6% compound annual growth rate for the overall category and a shift towards the adoption of video home gateways, which is an area of strength in our portfolio. This is an important point because much has been said about the demise of the set-top box business. As this chart points out, the business is not going away. It is undergoing a substantial change, which opens a window of opportunity for strong, innovative, experienced players such as we are.

Moving to Chart 9. In a few words, I'll start about the synergy targets. Our goal is to reach $100 million to $125 million run rate by the end of 1 year. Programs are well under way, and we've -- we're already meeting or beating the timelines. Sales and marketing synergies are essentially complete. Supply chain analysis is confirming our savings estimates, and actions are under way. G&A and R&D integration plans are also well under way. These will take a little longer to achieve. And with all that said, I see the business regaining upward momentum in the third quarter and achieving our original sales, earnings and cash flow targets within the next year.

So to Chart 10. In summary, the integration of Motorola Home into the new ARRIS is going pretty well. We're a stronger company with a broader portfolio serving a more diversified customer base. We're well positioned to capture a larger share of a growing market. Most importantly, we remain confident that we will materially increase shareholder value.

I've mentioned that I've been very encouraged by my many conversations with our major customers. I've also visited our major facilities and met with both Home and ARRIS employees across the globe. I can tell you that we're graced with an incredibly talented, enthusiastic and dedicated employee base, which I believe is the best in the industry. We're ready to provide the transformative technologies and equipment, which will secure the future of home entertainment and communications for our customers worldwide. This is truly an exciting time with the new ARRIS. Many of these solutions will be on display next month at the NCTA convention in Washington D.C., and we'd love to have you attend and go through our facility there.

Now over to Dave who will provide a more detailed look at the numbers.

David B. Potts

Well, thanks, Bob. Thanks, everyone for joining us today. Let's move to Slide 12, please.

Now let me just start by describing our new segment and reporting structure. Now beginning in the second quarter of 2013, we'll begin reporting in 2 product segments: Network & Cloud and CPE. In a moment, I'll describe the product alignment in the 2 segments.

For the 2 product segments, we'll report sales and direct operating contribution. Direct contribution equals gross margin less direct operating expenses, while global sales and marketing expenses, corporate G&A, advanced technology, equity compensation and annual bonuses will be reported in the category of Corporate and Other.

Now let's move to Chart 13 and look at the new segments first [ph] . So Network & Cloud will include the former ARRIS CMTS EMP, ATS and MCS products. It will also include the former Home, Video, headend, CMTS equipment as well as the converged experience products. And CPE will include both cable and DSL modems, EMTAs, gateways and set-top boxes from both companies.

So let's turn to Chart 14 and look at some of the historical data. As you know, our 10-K and 10-Qs will only reference back to the historic ARRIS information. So while not required, to help you understand the historical data, we've made our best efforts to be able to provide you estimates of both the sales and operating income for the combined business. We hope this helps you out.

So as you can see, each segment at the direct operating contribution level contributes to the bottom line, more or less in the proportion and fashion relative to sales. And again, for clarity, the global marketing and sales force, corporate G&A, Advanced Technology, equity comp, annual bonuses for the entire company are captured in Corporate/Other category. And we've adjusted GAAP numbers to non-GAAP where it's relevant and have attached a reconciliation to this presentation. In 2012, equity compensation is part of the difference, as well as purchase accounting impacts particularly related to the purchase of Motorola Mobility by Google. In 2013, equity comp is again part of the difference, as well as the impact of the Comcast investment I described in our first quarter call.

Let's turn to Chart 15, where I've given a 5-quarter trend for the 2 product segments. As I mentioned earlier, the direct operating contribution for each of the product segments is relatively proportional to the sales, but we did see some decline in the first quarter of '13 from the first quarter of '12 in the Network & Cloud segment. But we do anticipate new product introductions in the second half of 2013 in both product segments, which will drive growth.

Let's turn to Chart 16 and get into the second quarter. The second quarter will have several anomalies. First, given that the deal closed in mid-April, we will not have a full quarter of results for the former Home business. Also, as with any acquisition, there are significant acquisition accounting adjustments that will impact the go-forward results. Now we're still in the midst of completing our acquisition accounting, but for purposes of providing you initial guidance, we've put our best estimates in at this time, but they will undoubtedly change a bit. Some of the acquisition accounting impacts are relatively short in duration. For example, the revaluation of inventory, deferred revenue impacts and the amortization of the fair value of the backlog. Others, of course, will impact the results for years to come, in particular, the amortization of the fair value of intangibles.

So let's turn to Chart 15 and look -- 17 look at some of the Q2 estimates. To provide you with the best possible information, we have shown estimates of Q2 with and without the pre-close results from April 1 to 16 for Motorola Home. For that period, Home has estimated sales of about $66 million, and we estimate that the earnings per share impact is about a $0.15 loss. This is not unusual as expenses are relatively linear whereas revenues tend to be more back-end loaded in a quarter. So as you can see, we estimate that non-GAAP revenues will be approximately at $1.028 billion to $1.078 billion, including the pre-close results of Home and $962 million to $1.012 billion for the period, excluding the pre-close results. The corresponding non-GAAP EPS is a range of $0.06 to $0.13 per diluted share, including the pre-close results of Home, and $0.21 to $0.28, excluding those pre-close results. And as Bob described earlier, the Q2 sales are down, but we do anticipate growth in the second half of the year. And of course, I've included the estimated GAAP outlook, and we've also included a reconciliation of GAAP to non-GAAP and it's attached to the back of the presentation.

Now let's touch on operating cost synergies on Chart 18, please. As you can see, we're making progress. In both -- in 2012, both ARRIS and Home lowered their run rates. The average of the Q4 '12 and Q1 '13 run rate is approximately $254 million a quarter. Since we've closed the deal, we have taken some initial cost reduction actions, particularly in the sales and marketing area, and we're working through further actions that will lower the run rate through 2013. And we believe we're on track to achieving our target run rate 4 quarters after the close of the acquisition.

Let's turn to Chart 19, please. So as Bob said, essentially we believe we're on track to achieving the target model we presented in December 2012, and we expect that we will achieve the model run rate approximately 12 months from the close of the acquisition. And the new product introductions we expect in the second half are a key element to achieving that plan.

So on to Chart 20, please. So as I said previously, we've been targeting to have about $300 million of cash on hand after repayment of the convertible notes and have access to a $250 million revolver. We have approximately $650 million of cash at the moment. We still have some acquisition costs to pay, and, of course, we'll have some costs associated with the restructuring that we'll undergo. With respect to our final borrowings, we borrowed $1.1 billion Term Loan A and $0.8 billion Term Loan B, and I've shown you the respective interest costs on the chart. And at this point, we do anticipate hedging a portion of the facilities to help protect the LIBOR floor.

So with that, I'll turn it back over to Bob, and we can take your questions and give our answers.

Robert Puccini

Thank you, Dave. With that, we'd like to open the lines up for questions. Tony, would you come back on, please, and let our participants know how they can ask their questions?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mr. Simon Leopold of Raymond James.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

A quick clarification first on Slide 19. Looking at the operating expense guidance post the synergies, the $930 million to $980 million, I see the footnote says that, that number includes stock-based compensation. Could you remind us how much stock-based compensation you would assume would be in there?

David B. Potts

The run rate probably over time gets to about $60 million, Simon. It might be a little less than that as we get into the initial and sort of just at that 12-month mark. But when we sort of look at ultimate model, we get to a run rate of about $60 million.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay. And by the way, thank you for sliding the call out a little bit later to avoid the conflict. It still makes for a crazy evening, but it does help. So thanks for that, Bob. So Cisco reported a video business that was pretty healthy tonight. And you talked about the Motorola business weakness, which I think is understandable, given the state of uncertainty as to its outcome and where it was going. But the gap between what Cisco's saying and what you're experiencing with Motorola seems fairly large, and I guess I want to try to understand how you're thinking about the healthy business Cisco's experiencing in its service provider video relative to what the Motorola business is doing.

Robert J. Stanzione

Well, actually, I think that is consistent with what we're seeing. What we believe is that it's a fairly vibrant market out there right now. We also believe that the Motorola Home team, the Motorola Home business had lost some momentum and some market position over the past 2 years as they've gone through this incredibly disruptive period. I will add, though, that from the time Google acquired Motorola Home until the closing with ARRIS on April 17, that there was no letup within the R&D programs, that the teams did, I think, a marvelous job of continuing those programs and there are a number of things coming out of the pipeline right now that give us the confidence that we've expressed on this call, that the sales will pick up in the third quarter and certainly gain momentum as the year goes on. I certainly would believe that.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay, 2 more things I just wanted to check on in terms of that rate. One is I want to understand the gross margin assumption for the -- this June sub-quarter.

David B. Potts

So we've only done -- we've only done -- we're going to go to direct operating contribution, Simon, so we have not guided, if you like, on gross margin percentages.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay. And so if we think about the trajectory -- and sorry for cutting you off, Bob (sic) [David] . I think this may be where you were going, how -- what's kind of the revenue rate do you think you need to exit 2013 in order to make the 2014-ish post-synergy guidance you've given? You're reiterating that full guidance to $4.8 billion to $5.1 billion, which is encouraging, but it certainly requires a pretty steep ramp from the -- this June quarter. So it would help to understand how you exit 2013.

Robert J. Stanzione

Well, that would be given -- giving pretty specific guidance on a fourth quarter number, and I wouldn't want to do that. I just would point out that we're pushing -- we're proposing here that within 12 months, we're going to reach our pro forma target numbers. So the line with which we're going to get there is not certain yet. We'll give you quarter-by-quarter guidance to get there. Clearly, we have to stop going down and start going up, and I think we'll begin to do that immediately in the third quarter.

Operator

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

Mark Sue - RBC Capital Markets, LLC, Research Division

If I look at the trends of all the major players in this market, Cisco seems to have gained market share and I guess ARRIS standalone has gained a lot of market share during a period when Motorola lost some momentum. So now that it's combined, I'm just trying to see what would make the Motorola component really rebound during the second half, because ARRIS standalone, I could understand the trends there and might -- that might continue. But combined, well, one would still struggle, I would imagine. Or do you see some turn that the customer reaction, which are positive -- is that turning into actually orders or not yet? And what can you point to for that turn in the business for Motorola Home?

Robert J. Stanzione

Yes, this would be a good for me to introduce Larry Robinson, who runs the Customer Premises Equipment piece of the business, to explain some of the programs that are going on and some of the customers that will affect those programs.

Larry Robinson

So just to kind of follow up on your question, as we look into second half of this year, there's a number of product transitions that are taking place, and we have several programs that are in the midst of development right now, either in product qualification or trial phases. These programs really center around gateway-type products, both in the video space as well as in the high-speed data area. So as you know, the industry is going under -- undergoing a pretty significant transition from more traditional set-tops to ones that are more built around the Video Gateway architecture. And that transitioning is really happening right now, and we're working with many of the major service providers, both in the cable and telco space, on those programs as we speak and are looking forward to them launching in the Q3 timeframe.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. And then maybe, David, for you, Slide 18, the trends in reduction in operating expenses.

David B. Potts

Yes.

Mark Sue - RBC Capital Markets, LLC, Research Division

I guess to start out, a lot of that as well will come up from duplicate sales and marketing. Where else have you -- what are some of the other areas you've targeted for OpEx reductions? I understand you want to keep R&D where it is for both of the entities, but maybe some other areas that you could extract a [indiscernible] initial.

David B. Potts

I'll start with G&A as we get further out in time. We're in the process of weaning ourselves, if I can use that term, if you like, Mark, from Google/Motorola for some of the back-office pieces. That will take us a bit of time, but there are actually some pretty big dollars that we believe that we can eliminate once we get off into transition services agreements with them.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay.

David B. Potts

Probably takes into Q1 of next year. I'm trying to do it earlier. And really, we're having to put in place some of the structure that they have to do, but I believe we can do it for less money and actually, in some cases, [indiscernible] than the historic. And then the other part...

Mark Sue - RBC Capital Markets, LLC, Research Division

You're actually paying them now for that service?

David B. Potts

Oh, yes. Oh, yes, we are, sure. And I think we also will ultimately discover there are some product overlaps, and we'll get into those programs as we get in. Remember, it's only been 4 weeks. And as we worked through the HSR process, we really weren't able to get into that. But I know I'm pretty comfortable we'll get into that -- get down to that level. And the chart does not really talk about any of the synergies that we should be able to see in the cost of sales side. Jim Brennan, who's the fellow who's heading up the supply chain, has really gone off and has done things like card analysis and has already began to implement places where we're getting better prices on one side versus the other. So the normal blocking and tackling parts that go with that. Back to your first question, I think there's other product sets that are also in the second half going up in the Network & Cloud piece that -- and then, Bruce, if you want to talk [indiscernible] , that'd be good.

Bruce W. McClelland

Yes, Mark, you're fairly familiar with -- I mean, certainly, the deployment of the E6000 starting this quarter is certainly the major flagship throughout the rest of this year. Bob also mentioned the new APEX QAM platform from Motorola Home is starting to launch this quarter as well. And then a variety of different video compression products which we can get into at the next kind of analyst briefing session that we have.

Robert J. Stanzione

Also, some software products within the DreamGallery.

Bruce W. McClelland

Yes. And Mark, I think as we talked about during the last couple of sessions, the combination of what we've done on the Moxi software solution, combined with really the portfolio of products with things like DreamGallery, which is a next-generation user interface technology, SecureMedia which is a DRM technology and a number of other elements that go with that to provide a, kind of a seamless multiscreen experience, are in pretty extensive trials and early deployments with customers, and we expect to see some acceleration in the second half of the year that go further into the softer side of the business.

Mark Sue - RBC Capital Markets, LLC, Research Division

That's all very helpful. And then, David, just on the reconciliation, if I do -- what would be the total share count, fully diluted share count, with the converted, with everything included in the outlying years? Would that be the...

David B. Potts

140-ish or so.

Mark Sue - RBC Capital Markets, LLC, Research Division

140-ish? Okay. Would -- even with the convert, everything else, that's all?

David B. Potts

Well, the convert has little impact at the moment. Remember, ultimately, that convert, which I'll remind folks is a late Q4 event this year, it's only the portion that's in the money that becomes into the -- and shares, the base, 232, is paid in cash. And again, part of our strategy from the very beginning is to have sufficient funds on hand, which I've tried to show on the last chart that we would be able to have it. And so keeping that excess. And I think we we're well on the path on that.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay. And then the inventory fair value, I guess, adjustment, that would, I guess, wind down after this current quarter?

David B. Potts

Very, very quickly because the -- one of the very good things that is -- that we've discovered in sort of the business of the former Home is that they have high velocity of that inventory. So we anticipate that, that would turn itself out in the first quarter of operations to really in the second. So it's a big -- it's a -- one -- big onetime blip, if you like, in terms of that. Similarly, with the customer backlog, that would have a short life cycle. Deferred revenue is not that large, but we would see some turn of that really over multiple quarters. But in terms of scale, the market is not as large as some of the others. But, no, it sits on the reconciliation for you.

Mark Sue - RBC Capital Markets, LLC, Research Division

Got it. The biggest one would be, for you, the intangible assets?

David B. Potts

Oh, yes. And, I mean, we're -- as you can imagine, we're just in the midst of that work, getting set for the -- through purchase accounting that -- this will result -- at the end of the June quarter.

Operator

Your next question comes from the line of Mr. James Kisner of Jefferies, LLC.

James M. Kisner - Jefferies & Company, Inc., Research Division

Just a clarification first here. On Slide 17, you've given your EPS guidance for the quarter. I was a little bit confused by that. I mean, I think I had you guys doing $0.25. You did $0.25 since last quarter. I would -- you said next quarter would be -- the quarter end would be as -- at least as good as Q1. So is Motorola Home not contributing anything to the bottom line in Q2? And could you go through again why that is? I thought they had positive operating earnings?

David B. Potts

Well, certainly. They -- in the quarter, if you take the middle section and go to the right, we will have that $0.21 to $0.28 non-GAAP. So that's benefited by the centerpiece [ph] because indeed, in the first 16 days of the quarter, the sales of 66 did not have earnings associated with it, which is really common because in tech companies, much of the sales comes in the last month of the quarter, right? So we'll benefit from that. But indeed, on the indigenous Homes side, with the sales levels we have, the earnings are not robust, and we see that turning in the second half.

James M. Kisner - Jefferies & Company, Inc., Research Division

Okay, that's helpful. So...

David B. Potts

And again, well, we've tried to lay this all out for you so you can see all of the components, right? So we're just trying to be very transparent on both this and on the segment stuff that we'll have.

James M. Kisner - Jefferies & Company, Inc., Research Division

So basically, this -- that Motorola Home business is -- on a full quarter basis is just kind of hovering around break even, potentially?

David B. Potts

I'd have to go do the math, but...

James M. Kisner - Jefferies & Company, Inc., Research Division

Yes, and as far as the $0.25 and...

David B. Potts

Yes. And virtually none of the synergies happened, right?

James M. Kisner - Jefferies & Company, Inc., Research Division

Okay. that's fair, that's fair. I just want to understand where we're at now. Okay, I...

David B. Potts

And don't forget -- we will have interest expense as well. Don't forget that fact. That would be for, I will say, $18 million or something.

James M. Kisner - Jefferies & Company, Inc., Research Division

You're saying $18 million. So still $75 million-ish a year. Is that still right?

David B. Potts

Yes.

James M. Kisner - Jefferies & Company, Inc., Research Division

I think you've guided for -- okay. So on this -- the other thing here was -- I wanted to ask about was Verizon [ph] -- one of your major customers was talking about their cable JV and new products launching at the end of the year, and I'm still just trying to understand like perhaps, like it sounds like some of these multiscreen products like software and encryption could be related to that. Could you -- would you be willing to draw a line between what was said by some of your largest customers around launching new products in -- at the end of the year? Is that part of what's benefiting you here?

Robert J. Stanzione

I wouldn't want to draw a direct line between anything we said and any specific single customer, James. Just we don't have license to do that. However, I will point out that we -- these are major programs that we're referring to that affect many of the large customers, both domestic as well as international. So we're talking about 5 or 6 programs that are in the -- on the launchpad right now.

James M. Kisner - Jefferies & Company, Inc., Research Division

That's helpful.

Bruce W. McClelland

And James, it's a combination of software, like you mentioned, plus these new Gateway products that Larry mentioned.

James M. Kisner - Jefferies & Company, Inc., Research Division

Got it, okay. And I guess just one final thing here. I was just trying to do the math around how -- $300 million in cash. Your goal to get there. I mean, I guess -- and you mentioned integration costs. I don't know if you can give us any more detail around like whatever you spend on cash integrations costs and what's left. And maybe kind of what cash generation you might expect from that organically in Q2 just to help us figure our bridge to how you get to $300 million net cash.

David B. Potts

I can't really give you the Q3, Q4 cash bridge. That would be sort of be leading. But I'm guessing we spent $10 million or so on fees and integration acquisition costs so far. We will have some more. We have some of our bankers fees left to pay. And then now, as we're layering in some of those synergy costs, we will have some -- obviously some costs in the quarter related to that as well. But if you think of it, the $650 million that's -- that we have in the bank account, less the $232 million, so that's for -- in change, and we're targeting for $300 million. We've got a $100 million buffer. Some of that we can use to pay down the debt. But I just want to get a bit further out, understand the cadence of all those cash flows. And I also just want to see how we go through the -- all those restructuring costs. So frankly, I'm pleased with where we are on the balance sheet at the moment.

Operator

Your next question comes from the line of Mr. Rich Valera of Needham & Company.

Richard Valera - Needham & Company, LLC, Research Division

I just want to clarify. Are you -- you will be reporting an overall gross margin going forward, is that correct?

David B. Potts

Well, we will be on the face of P&L, yes, but we will not split it by segments. Like many companies, we'll use that operating income split to the 2 segments as the metric.

Richard Valera - Needham & Company, LLC, Research Division

Okay. Are you willing to give any rough color on the historical gross margins of those segments?

David B. Potts

No, I -- we -- no, we think we would stick to the direct operating...

Richard Valera - Needham & Company, LLC, Research Division

Okay. I just want to make sure I understood the Q2 guidance. Should we think of the right-hand column, the Q2, excluding Home pre-close period, as kind of the right baseline in terms of the profitability of the business in Q2 in terms of obviously the implied gross margin and OpEx and assume that it scales up from that level?

David B. Potts

So I guess it depends upon how you look at it. So -- and as -- which is why kind of we've done it this way. The right-hand side is what we'll report, and we're benefited by the fact that we would not have -- we have basically proportionally less expense to revenue, as you can see from the center column where as you would have in the first part of the quarter sort of lower revenues and higher expenses. So we'll be benefited from that. But on the left-hand side, we've tried to show you basically if you were to look at this on a full quarter perspective,, adding the 2 businesses together, that's what it would look like. So we ultimately believe we'll get the growth from those new products sold in time, and we'll begin to get the synergies coming in, which will help the the direct operating profit.

Richard Valera - Needham & Company, LLC, Research Division

Got you, okay. So really, the sort of the normalized one is really the left-hand one? And -- but you will not be actually reporting that number or...

David B. Potts

Probably not. But I -- we've tried to be incredibly transparent for you. But...

Richard Valera - Needham & Company, LLC, Research Division

Right, understood. And then I saw the slide about that TAM, and it certainly, from that slide, looks like the TAM you guys address in terms of set-top box plus Video Gateway would be growing. I just wonder if you can put some color around, I mean, there's one school of thought that as you replace several video set-top boxes, fixed set-top boxes with a single Gateway and relatively thin clients around the home or, in some cases, no clients depending on what the client -- what's receiving the video, that the net, sort of, TAM in the home would go down. The cost to the cable provider or the consumer would go down. But I was just wondering if you can put any color around that, how you think the individual, sort of, content for home goes when you transition from multiple set-top boxes as well as your traditional data voice products to a Gateway.

Larry Robinson

So Rich, this is Larry. The perspective we have on the home and its migration to really an IP architecture is one where the overall pie, if you will, inside the home ultimately would be growing. So we view the need for -- obviously for set-tops or devices -- and let me define what a set-top is. Devices that connect to, in many cases, legacy TVs, if you will, being required for many years to come. But the number of IP-capable devices that are looking to access service provider content is increasing exponentially. So we see there will certainly be -- if you look at just the set-top box and Gateway, there is a CapEx benefit, if you will, to our service provider customers based on the actual configuration of the home, right? So in that respect, there is an expected and forecasted decline in terms of dollars for those devices per home. But fundamentally, we believe that the number of devices, what -- not actually cannibalize that business to a great degree, right, because I think consumers are bringing a lot of their own devices to access that content.

Operator

Your next question comes from the line of Amitabh Passi of UBS.

Amitabh Passi - UBS Investment Bank, Research Division

Bob [ph] , first question for you, and I apologize. I think a lot of us are juggling several things tonight. The $4.8 billion to $5.1 billion revenue range, is that the cumulative revenue expectation over the next 4 quarters, or do you expect to exit 4 quarters from now at that annualized run rate? I just wanted to clarify that.

Robert J. Stanzione

It's the latter. We expect to exit at that run rate.

Amitabh Passi - UBS Investment Bank, Research Division

Okay, I appreciate it. And then I guess, well, if you -- are you able to give us any sense of the $100 million to $125 million in synergies that you're targeting? What has been achieved? I think you said all the sales and marketing synergy expectation have [ph] been realized but, can we -- can you give us some sense of what has been realized?

Robert J. Stanzione

Oh. I think no.

Amitabh Passi - UBS Investment Bank, Research Division

Yes. Okay.

Robert J. Stanzione

I think no. Dave, can you add any color?

David B. Potts

Oh. Anyway, I hate to throw a number out there. But it's...

Robert J. Stanzione

What?

David B. Potts

North of -- certainly north of $10 million and probably more north of that. Like we're on our way.

Amitabh Passi - UBS Investment Bank, Research Division

Okay. And Dave, maybe just on Slide 18, if I look at the way you've laid out that slide, the average OpEx from 4Q '12 to 12 months post-close, do I assume about half of your synergies are coming from OpEx and then the other half from sort of the COGS line? Is that the way to interpret it just based on what you presented here?

David B. Potts

No, I think there's more. So if you go back at some of the targets, of which really we're up, Q3, Q4 numbers and a little bit before, we've taken actions and we will have actions that go down into that range of 12 months post close. And again, in the first quarter of '14 [ph] , I think there will be a step-down in G&A. But I guess I'm optimistic that we can get that -- a good chunk of it through the OpEx lines.

Amitabh Passi - UBS Investment Bank, Research Division

Okay. And I guess, Bob, for yourself. As we ramp towards your annualized run rate for, I don't know, let's say of $4.9 billion, $5 billion, how do you expect the ramp to be over the next 4 quarters ought to be? Sort of gradually trending up? Do you expect a step-up function in any given quarter depending on your pipeline or new programs? I'm just trying to get a sense of the trajectory.

Robert J. Stanzione

Yes, that -- I had a similar question on that earlier. I don't want to lay a number out on that or a ramp rate up on that. We'll give you quarter by quarter guidance. We think it's going to be steadily up over the next 3 or 4 quarters.

Amitabh Passi - UBS Investment Bank, Research Division

Okay. And then just the -- sorry go ahead?

Robert J. Stanzione

We see some good things happening in the third quarter. We see those gaining momentum in the fourth quarter and so on.

Amitabh Passi - UBS Investment Bank, Research Division

And I think a couple of people have asked this. On the good things that are happening, do you see that across your customer base, cable and telco, do you see it mostly towards cable?

Amitabh Passi - UBS Investment Bank, Research Division

No, I think it's across cable and telco. Everybody here is nodding. Yes.

Amitabh Passi - UBS Investment Bank, Research Division

Okay. And then just I -- I just had a couple of quick ones and I'll hop off. The -- Slide 8, where you showed the 6% CAGR and the shift between traditional set-tops and Video gateways. Is there any way to think about the margin implications of that shift? Too early to say? I'm just curious, what does that mix entail in terms of margins? Is it accretive? Neutral?

Robert J. Stanzione

Well, I think it's a neutral. It's closer to neutral than anything else, although there are software elements that come along with this, and those are, of course, accretive to the margin. The question is how big that is and how, a little bit, spread across the business.

Amitabh Passi - UBS Investment Bank, Research Division

Got it. And Bob, did you guys also inherit some of the PON business from Motorola? I think those DSL modems, I believe they always had a PON business. Is that a business you'll stay in? Or do you think you should have exit that over time?

Bruce W. McClelland

Yes, there's a fiber-in-the-home PON business with a number of -- a small number of telco providers today that we continue to maintain and ship equipment and support them. It's not a large piece of business, and it's really strategic to the overall relationship with the customer.

Amitabh Passi - UBS Investment Bank, Research Division

Okay. And Bruce, final one for you. Any update on the DOCSIS 3.0 upgrade cycle? I mean, I think a couple of quarters ago, you felt that we're about 30%, plus or minus, penetrated. I just wanted to get an update where are we today, what is your expectation over the next 2 to 3, 4 quarters for just the 3.0 ramp?

Bruce W. McClelland

Yes, I would get into trouble when I throw a number like that. Let me go back and check. And it's obviously substantial. We've been shipping a large number of 3.0 devices. I think last quarter, I think we reported 92% or something of total shipments for 3.0. What we're actually seeing now is yet another refresh cycle as the operators are putting all these WiFi gateways out. And we know they're on a cycle now this year to go and add more capacity into the network. You hear operators talk about being upgraded to 3.0. Well, that was kind of the first wave. Now they're going back and saying, well, we got to extend even further. Eight channels per service group is not enough. We need to expand capacity beyond that. And so that drives new CPE devices. And then, obviously, the investment in the new head-end infrastructure as they continue to try and add more capacity in the same space, footprint, power, real estate, head-end equipment, and so...

Amitabh Passi - UBS Investment Bank, Research Division

So relative to 2012, does your CPE infrastructure mix stay relatively constant? Or do you see a mix back towards infrastructure?

Bruce W. McClelland

We do see a cycle that continues. We think the infrastructure business certainly has the potential to grow here as that reinvestment in the network side catches back up with all that CPE gear that's been deployed.

Operator

There are no questions in the queue at the moment. Please proceed, Mr. Bob Puccini.

Robert Puccini

Thank you, Tony. Bob, any final words?

Robert J. Stanzione

My final words would be to please try to get Washington D.C. on -- I think it's June 10 or so for the national cable show. There'll be a lot of technology that we'll be displaying there. And a lot of our customers are going to be there. It'd be a great chance for you to hear from them what they think about what we're doing. So with that, I think we will adjourn.

Robert Puccini

Thanks, everyone. That concludes our call.

Operator

Ladies and gentlemen, thank you for attending today's conference call. You may now disconnect, and have a great day.

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