Executives
Erica Abrams – IR, The Blueshirt Group
Amir Bassan-Eskenazi – Chairman, President & CEO
Ravi Narula – CFO
Analysts
Blair King – Avondale Partners
Victor Chiu – Morgan Keegan
Larry Harris – CL King & Associates
BigBand Networks, Inc. (BBND) Q3 2010 Earnings Call Transcript October 19, 2010 5:00 PM ET
Operator
Good day, ladies and gentlemen. Thank you for standing by. Welcome to the BigBand Networks third quarter 2010 financial results conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Tuesday, October 19th, 2010.
I would now like to turn this conference over to Ms. Erica Abrams. Please go ahead, ma’am.
Erica Abrams
Thank you, operator, and welcome, everyone. If you’ve not seen our earnings press release, it can be found on the Investor Relations section of our website at www.bigbandnet.com.
Joining me on the call today are Amir Bassan-Eskenazi, CEO; and Ravi Narula, CFO of BigBand Networks. We will discuss the financial results for the third quarter ended September 30th, 2010 as well as outline the company’s outlook for the fourth quarter of 2010.
Before I turn the call over to Amir, let me remind you that the matters we will discuss today may include projections and other forward-looking statements and as such are subject to the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, including those risks and uncertainties discussed in our report on Form 10-Q for the quarter ended June 30th, 2010.
Now, I will turn the call over to Amir. Please go ahead.
Amir Bassan-Eskenazi
Thanks, Erica. Hello and thank you all for joining us today, as we report our third quarter 2010 results. As you know from our press release, our performance in the quarter was in line with the outlook we provided last quarter. Revenues were $26.8 million and our non-GAAP results were $0.06 per share. During the quarter, we used $10.8 million in cash. We expect to continue and use cash in the fourth quarter.
R&D expenses remain a high priority as we invest in our product and technology for achieving certain milestones, specifically in bringing new application to our MSP platform. Earlier this morning, we announced a latest advancement in our MSP platform that will converge our innovation in ultra-dense QAM with our high-availability multi-application MSP.
The differentiator of the product are QAM modulation in the same platform as media processing, high reliability that our customer demand, rapidly deployment of applications and capacity expansion, as well as unique capabilities such as dynamic allocation of bandwidth between services.
BigBand’s platform based QAM architecture marks a shift from the traditional single-purpose box approach and provides a level of reliability, configuration, monitoring and overall simplicity that are a paradigm shift in the industry. In addition to the platform benefits, we believe our MSP QAM is the industry-leading product in terms of density, which is critical as our customers start deploying an increasing amount of narrowcast services.
We have been working closely with tier-one customers on trial of the MSP QAM and have received positive feedback. Shifting to another application of the MSP, local ad insertion, we achieved a key milestone in the quarter when we received booking from both cable and telco customers for this application.
While these bookings were modest, we believe this initial success validates our product strategy and the market potential of the MSP.
Moving to our SDV product, we remained a clear market leader in SDV. We have over 37 million household pass. The household number did not increase in the quarter as customer deployed previously purchased SDV systems. Our next type of customers, however, including customers outside of North America is evaluating our SDV technology.
We are also working with existing customers on expansion of their footprint as they deploy additional HD services as well as plan their IPTV rollouts over our vIP PASS solution. Shifting to our broadcast solutions, they remain a steady contributor of our performance. We have a number of initiatives in this category where we are working on extending the functionality of the solution suite.
Moving to the international opportunity, we continue to invest and make progress with our channels and partners. During the quarter, we furthered our strategy to diversify our revenues with the help of one of our Board members, Harald Braun, whose background and expertise makes him a perfect fit for this activity. As you know from our 8-K filed earlier today, Harald has agreed to join us as an executive for an intervening period to oversee the execution of our global growth and market strategy, including our international strategy.
In his glittery [ph] role, he will work closely with me while also remaining a Board member and continuing to add tremendous value to our Board. Harald has more than 25 years of experience in delivering networking gear to various [ph] cable, Telco and wireless carriers worldwide. First, the CEO of Siemens Communications in the U.S. and is an executive in Nokia Siemens and then a COO of Aviat Networks. Together with the rest of the team, I look forward to Harald’s leadership in refining our execution efforts as well as moving forward with several important customer opportunities.
In summary, during the first quarter, we made significant progress in advancing and investing in key areas of our product portfolio, especially in regard to the milestones we discussed with the MSP. We believe the MSP is a highly differentiated platform that address key requirements of our customers and position us well for success in 2011.
We will be showcasing this latest advancement at the upcoming SCTE Cable-Tec Expo in New Orleans and I encourage you to stop by our booth to demonstrate our new product.
Now, I’ll turn the call over to Ravi for a financial review of the quarter.
Ravi Narula
Thanks, Amir, and thanks everyone for joining us this afternoon. I’ll first review some of the details of our third quarter 2010 income statement and balance sheet and then provide you with our outlook for the fourth quarter of 2010.
During today’s call, I’ll outline our financial results on a non-GAAP basis unless I specify otherwise. This means that the third quarter non-GAAP results exclude stock-based compensation expense of $3.3 million, restructuring benefit of $139,000 and related income taxes. A reconciliation of GAAP to non-GAAP financial measures can be found attached to our press release. For the third quarter of 2010, total revenues were $26.8 million as compared to $26.4 million in the second quarter of 2010.
Our SDV continues to be impacted as some customers delayed purchasing decisions. Our 10% customers included Time Warner Cable, Fox Communications, and Verizon during the third quarter, with Time Warner Cable contributing greater than 30% of our revenues. Our top-five customers represented 76% of our third quarter 2010 revenues, as compared to 79% in the second quarter of 2010.
On a geographic business, 93% of our revenues in the third quarter were from the U.S. as compared to 89% in the second quarter of 2010. As Amir mentioned in his remarks, we’re working towards expanding our customer base in international markets and expect to see results from the first two applications starting in 2011.
Gross margins for the third quarter 2010 were 53% as compared to 55% in the second quarter of 2010. During the third quarter of 2010, we recorded a charge of $1.5 million related to purchase technology that we believe will not be fully realized in the near future. Without this charge, gross margins for the third quarter would have been 59% due to a favorable product mix and higher service revenues in the quarter.
Our non-GAAP operating expenses in the third quarter were $18.2 million as compared to $20.1 million reported in the second quarter of 2010. This improvement reflects our continued efforts to manage costs while still investing in R&D to accelerate development of our new solutions. In the third quarter of 2010, we achieved the full benefits of our cost reduction efforts taken in the second quarter of 2010 and expect operating expenses in the range of $18.5 million to $19 million in our fourth quarter of 2010 numbers. On a non-GAAP basis, our net loss was $4 million or $0.06 per share in the third quarter of 2010, in line with the outlook we provided last quarter. We used approximately 59 million shares to compute our third quarter loss per share.
Now, let me review our balance sheet. We closed the third quarter with $152.3 million in cash and marketable securities, down from $163.1 million at the end of our second quarter of 2010. The cash usage in the quarter reflect the investments we are making in new product development as well as enhancing our distribution strategy. DSOs were at 19 days at the end of the third quarter, down from 23 days at the end of second quarter. This decline in DSOs is a reflection of collections and also due to timing of orders and shipments.
Deferred revenues decreased to $30.3 million at September 30th, 2010 as compared to $41 million at June 30th, 2010. This decline in deferred revenues is primarily due to slowness in orders and shipments mentioned above. We ended the third quarter with 475 employees, down from 479 employees as of June 30th, 2010.
Now, I’ll provide with our fourth quarter 2010 outlook. We expect fourth quarter 2010 revenues to be in the range of $25 million to $28 million. Non-GAAP gross margins are expected to be in the range of 52% to 54% after excluding approximately $500,000 of stock-based compensation expense included cost of goods sold.
Non-GAAP operating expenses are expected to be in the range of $18.5 million to $19 million after excluding stock-based compensation expense of approximately $2.5 million. Based on our revenue outlook for the fourth quarter 2010, we expect a GAAP net loss per share in the range $0.09 to $0.11 and a non-GAAP net loss per share of $0.05 to $0.07.
In summary, we continue to work closely with our customers and partners. And as we plan for 2011, we remain optimistic that the 2010 initiatives will yield positive results. This will end the formal part of our call. And now, we will open the line for your questions. Operator, please go ahead.
Question-and-Answer Session
Operator
Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from the line of Blair King. Please go ahead.
Blair King – Avondale Partners
Yes, thank you. Just a couple of questions. First, Amir, if you could talk a little bit more about the new edge QAM that you guys announced today, that’s interesting to me. In particular, given the quote from Comcast that within that press release on how it fits into CMAP architecture would be helpful. Any color you can give and how you think about that for 2011 as a good opportunity for you guys?
Amir Bassan-Eskenazi
Sure. So, we’re very excited about the two milestones with MSP and the one with the MSP QAM that we have announced today is a great step forward. We believe that it is a paradigm shift in the industry as our customers are moving to lower-cost [ph] services I think to scale the existing services they have and add newer services. The importance of QAM at the edge of the network and specifically QAM and high density with high manageability, high agility and all the functions that are unique integration of the QAM into the MSP enable our customers, we think would be a key in where the industry is going. And we’re very excited about this. We’ve been working on this for a long while and it's a very big moment for us to be able to openly speak and tell people about the strong differentiation it will be for the market, specifically because of the fact that it’s a pretty different approach than our competitors that typically take a single-box approach and our platform and what we'll bring to the market here we think is very, very important.
CMAP is an important initiative for the industry, and one was the design towards this world of narrowcast services. And we’re very happy to be associated with CMAP. We are participating in developing the specification. We concur with other industry participants and this is an important area for us and one that we’re looking forward to talk about more in the future. What I can tell you is that the vision of CMAP as a narrowcast services [ph] as an MSP work hand-in-hand.
And we are looking to be very, very (inaudible) one of the applications that will be on top of our MSP QAM is by far the only application and we expect in our deploying or in trials, we’ve – our customers (inaudible) other applications that CMAP would fit into.
Blair King – Avondale Partners
Okay, that’s helpful. Thanks, Amir. And just sort of following up on that, you had mentioned also in your remarks, I guess some early ad insertion bookings, although being modest both in telco and cable on the MSP platform. Is there any way you could add some color around that as well?
Amir Bassan-Eskenazi
That’s right. Another milestone we had in the quarter is the fact that we’ve seen booking coming for other application for MSP from both cable and telco, and this is a validation for the fact that the MSP platform is being recognized on customer on both sides as an important platform for them and the advertising application is continuing and developing. We talked before about the fact that we were in trials. And those trials, as we can see here, are materializing and give us confidence, both in our product differentitation in the platform roadmap that is very important for our customers and in the 2011 contribution that we expect to get to a meaningful level as this product contributes to our top line.
Blair King – Avondale Partners
Okay, one last question. On that same topic, is it fair to say that telco customer is a new customer to BigBand or is it an existing customer?
Amir Bassan-Eskenazi
I don’t want to talk too much about this because we are not liberty to say but what I can tell you is that we believe the application would participate and the approach we take is broad industry initiative that touches multiple type of operators, both locally and internationally. And I think we’re going to see both our existing customers buying into this platform and approach us as well as other customers with time. When we are able to share more information, we’d be feel [ph] to do so in the future calls.
Blair King – Avondale Partners
Okay, just to be clear. These are commercial deployments to that insertion? These are extended trials that are being paid to support it, right?
Amir Bassan-Eskenazi
We’re in the process of rollout of commercial services and different operators are at different stages, but the intention there is specific, a contribution to us and to our customers in 2011.
Blair King – Avondale Partners
Okay, thanks, Amir. Appreciate it.
Amir Bassan-Eskenazi
Thank you.
Operator
Thank you. And our next question is from the line of Simon Leopold. Please go ahead.
Victor Chiu – Morgan Keegan
Hi, this is Victor Chiu in for Simon Leopold.
Amir Bassan-Eskenazi
Hi, Victor.
Victor Chiu – Morgan Keegan
Hi, how are you? I just wanted to delve a little bit more into the international front. If you could just provide us with a little more color, I think last quarter you mentioned that some of the softness that you saw was due to the lower edge QAM sales in the international markets, Latin America and EMEA. Are you seeing any improvements in that trend and you know, just kind of a little more color on that?
Amir Bassan-Eskenazi
What we see is actually a bit different. We actually see a significant opportunity in the rest of the world, frankly, across multiple theaters. What we did talk about is the fact that we felt we need to invest more into channels and distribution and developing the relationship with customers that are currently not – have not been historically our customers. So I think in terms of the demand side, I don’t have too many or feel pretty comfortable saying there is significant demand. The problem that local customers have in terms of managing their bandwidth, adding more video services, going digital and value adding to the services across multiple networks, (inaudible) we see pretty much in every region that we involve with. What we do feel is we need to accelerate and invest more into the international market in terms of building our presence, building our relationships. We mentioned last time that we signed up channels and we expect that – and we saw – you know, we get there, some more initial visibility as a result of that. But we still we need to do much more around that. And the statement I made earlier and the fact that Harald Braun is joining us and the effort and attention we’re going to be giving is very important, (inaudible) of that belief.
And if you take a step back and look at what’s happening, pretty much across the, you know, the world, Asia-Pacific, Latin America, Europe, all broadcast is in the process of going digital and all video services are in the process of going from broadcast to more value-added narrowcast, video-on-demand, more HD. So the problems that operators have in deploying those services fall very nicely into the kind of value proposition that we offer our customers. The fact that we tend to trend around the 90% in North American revenue is not because of the demand side, because of our go-to-market efforts to date and we are looking to change that. And I think it’s going to become noticeable in our numbers in 2011.
Victor Chiu – Morgan Keegan
Yes, okay, I was going to say, do you have any more sense around the timing of that in 2011 or not?
Amir Bassan-Eskenazi
I think it’s too early to tell. We’ve seen, like I said, we are engaged [ph] with this and where we engage with this opportunity but the conversion of that to revenues take several steps and like our prepared statement mentioned, we take this very seriously. We take it very strategically. And I think you will see it in 2011 but I can give you a specific time frame of that point.
Ravi Narula
And Victor, this is Ravi here. We are working towards a 2011 budget right also. So we will have more clarity as we go into 2011. But at this point, we are focused on investing in growth and international markets with our time and efforts.
Victor Chiu – Morgan Keegan
Okay, great. Just really quickly. Just in terms of your visibility, is that holding up well? I mean, I think last quarter you stopped guiding for the full year. So, are you seeing improvements in terms of your visibility or are you still…
Ravi Narula
Victor, so as I mentioned just now, we are working with our customers and trying to get a better sense of the 2011 in terms of visibility. They are also going through their budget cycles. And we are also working towards it. So in our future calls, we definitely will have more clarity. But right now, we are guiding for Q4 given the budget cycle and the visibility we have for the current quarter.
Victor Chiu – Morgan Keegan
Okay, great. (inaudible), thanks.
Operator
Thank you. (Operator Instructions) And our next question come is from the line of Larry Harris. Please go ahead.
Larry Harris – CL King & Associates
Yes, thank you. I’m intrigued by this MSP-based QAM, the new product you announced today. Is it in trials now or when do you think you’ll be, you know, commercially shipping the product in quantity?
Amir Bassan-Eskenazi
As we introduce this MSP QAM, like we mentioned before, it’s a pretty different architecture and platform than other offer and we think, you know, we are in the process of introducing these two selected leading customers and we expect to see that contributing to revenue in 2011, I said probably we can think of it as the middle of 2011 in terms of where you’re going to notice this in the numbers.
The important point here is the differentiation and what that product enabled them to do beyond just a specific growth of the quantity. So if you think about it, we made the statement and we feel great about the effect that it’s in fact, we believe, the highest density QAM available in the market which is very important because of the amount of stream that have to flow over the QAM in the last mile. But it does much more than that by the fact that full media processing and through the platform approach we give better manageability, better reliability and things that are going to be critically important for our customers as more and more of their subscribers are, in fact, being connected to a narrowcast service.
And the service provider network is differentiated in the quality of experience, the uptime and the reliability of the services that flow through that versus the alternative. So some of these functions and some of these capabilities are being tested as we speak. And I think it’s going to be an ongoing effort that will get us into position in the market in 2011 like I discussed.
Larry Harris – CL King & Associates
Understood. All right, thank you.
Amir Bassan-Eskenazi
Thank you.
Operator
Thank you. (Operator Instructions) And there are no further questions at this time. That does conclude the conference for today. This conference will be available for replay after 4 o’clock Pacific Standard Time today through October 26th, 2010 at midnight.
You may access the replay system at anytime by dialing 1-800-406-7325 and entering the access code of 4373838. Thank you for your participation. You may now disconnect.
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