Executives
Amir Bassan-Eskenazi - Chairman of the Board, President, Chief Executive Officer
David Heard - Chief Operating Officer
Erica Abrams – The Blueshirt Group
Analysts
George Notter – Jeffries & Co.
Scott Coleman – Morgan Stanley
Anton Wahlman with Thinkequity
[Tal Leone] – Merrill Lynch
John Anthony – Cowen and Company
Simon Leopold – Morgan, Keegan & Company, Inc.
[Tarik Sadiki] – Manning & Napier
Carter Driscoll – Stanford Group Company
BigBand Networks, Inc. (BBND) Q4 2007 Earnings Call February 7, 2008 5:00 PM ET
Operator
Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the BigBand Network’s fourth quarter 2007 earnings conference call. During today’s presentation all parties will be in a listen-only mode and following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, February 7, 2008. I’d like to turn the conference to Erica Abrams. Please go ahead.
Erica Abrams – The Blueshirt Group
Welcome everyone. If you have not seen our fourth quarter earnings press release it can be found on the Investor Relations portion of our website at www.BigBandNet.com. With me are Amir Bassan-Eskenazi, Chairman and CEO and David Heard, Chief Operating Officer of BigBand Networks to discuss financial results for the fourth quarter ended December 31, 2007 as well as outline the company’s financial goals for the first quarter of 200
Before I turn the call over to Amir let me remind you that the matters we will be discussing today may include 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 most recent quarterly report on Form 10Q as filed with the SEC. We are also presenting some non-GAAP financial information. A reconciliation of GAAP to non-GAAP items can be found in the press release issued today as well as on the Investor Relations portion of our website. BigBand Networks assumes no obligation to and does not intend to update forward-looking statements made on this call.
With that let me turn the call over to Amir. Please go ahead.
Amir Bassan-Eskenazi
Thank you all for joining us today as we report fourth quarter and fiscal year 2007 results. On this call today I will discuss our fourth quarter results and outlook for the first quarter, the overall market trend affecting our business and our progress in 2007. David Heard will then provide additional color on our operational achievements in Q4 including our financial performance. We will then move to Q&A.
Q4 was a solid quarter for BigBand Networks on the heel of a substantial reorganization of our business to focus on pure play digital video. Revenues for Q4 were $30.7 million in line with our expectation as were GAAP net loss per share of $0.23 and non-GAAP loss per share of $0.12. Importantly we made great progress in winning new [inaudible] footprint and expanding our TelcoTV and Verizon activities. We reported $13 million in positive cash flow from operation while meaningfully increasing our deferred revenues and closing the year in a solid position.
We are focused on executing the opportunity in pure play digital video. Our operational cadence is improving and our outlook for Q1 is trending in the right direction. For the first quarter, we expect revenues to be in the range of $35 to $39 million, GAAP net loss per share in the range of $0.08 to $0.11 and non-GAAP net loss per share in the range of $0.02 to $0.05. While we will continue to transition our business and improve our visibility into customer’s plan, we will only provide our outlook on quarter at a time for now. Our business continues to be driven by three fundamental trends that will persist for the foreseeable future. One, huge demand for HD content; two, cable industry’s move to switched architecture; and three the proliferation of TelcoTV.
The first driver for our business is the urgency for cable operators and Telco carriers to deploy many more HD programs in response to pressure from satellite promise to deliver 100 plus HD channels. The demand for HD is the primary driver for all of our solutions, switched digital video, TelcoTV and our more traditional broadcast solutions. The second driver for our business is the ongoing adoption of switched architecture by cable operators. Given the bandwidth challenges of scaling high definition and other services, cable operators are migrating to a switched architecture. We believe they do so because SDV presents the cable operator best option for getting 100 and more HD channels, up and running quickly and without losing subscribers.
Our calculations suggest that SDV is cheaper than plant upgrade by a factor of 5 to 10x and cheaper than a transition to all digital by a factor of 3 to 4x. In addition, speed to deploy and lack of disruption to the network are clear advantages for SDV. We expect substantially all large North American cable operators to deploy some level of SDV functionality within 2008. Finally, Telco operators worldwide are executing plans to delivery television services. In particular Verizon’s rollout of FiOS TV continues to gain momentum and market share and recently achieved 1 million plus subscribers. We expect Telco operators worldwide to continue to invest heavily and gain footprint.
Different platforms are designed to leverage these trends and enable service providers cable and Telco alike to rapidly deploy new video services on their existing network. Overtime, we expect a fourth trend to emerge. We are beginning to see evidence that service providers will leverage their two-way network to offer individually personalized video services. Our platforms are built to migrate the network from broadcast delivery to personalized video and enable new revenue generating models such as advanced advertising.
Now, let’s discuss our business model and our progress in executing it. Our business model is based on winning footprint that then yield expansion opportunities in future periods. Our business grows in the expansion phase by adding incremental services such as adding more channels or adding more HD content or adding more functionality such as advertising. The expansion phase is expected to yield at least as much revenue as the initial footprint and typically at higher margins. In 2007 we made some significant progress in executing to this business model. We started the year with two SDV customers and ended up the year with six. We have deployed, or are in the process of deploying SDV in cable systems that pass more than 12 million households. We continue to be the market leader in SDV.
We operationalized SDV and have successfully demonstrated our ability to deploy our solution in under 90 days. For the second year in a row, we believe we will ship more [quans] than any other vendor. We grew our installed base of approximately 3,000 platforms deployed for traditional broadcast solutions which represent a critical network real estate for future expansions still in front of us. We continue to expand our TelcoTV presence, most notably Verizon. We remain the sole provider of edge video platforms to Verizon for their FiOS TV rollout. We continue and invest and expand our platform toward IPTV and personal TV offering over Telco and cable. We close the year with strong balance sheet at more than $150 million in cash and investments and lastly, we’ve learned important lessons and reorganized the company. This has helped us emerge as a stronger company, more focused on what we do best and what our customers value most, video.
I will now pass the call to David to take us through operational and financial highlights. David, please go ahead.
David Heard
I will now describe the progress we’ve made in Q4 in executing our business model with a pure play digital video company. During this period we had our heads down executing and have taken steps to address the issues we noted in our last earnings call. First, we focused on executing our critical SDV projects which are expected to fuel future growth and allow us to maintain that market leading position that Amir just spoke of. We significantly improved our visibility and supply chain management of our TelcoTV products and lastly, we successfully exited the data business executing a restructuring plan to emerge as a much stronger pure play video business.
In the fourth quarter, our switch digital video platform gained additional traction and footprint with MSO customers. We won one new customers and initiated deployments with two we named last quarter, Charter Communications and an unnamed international customer. We are seeing early demand for SVD on multiple continents and I look forward to providing you with more color on future calls. Our SVD solution comprised of our QAM platform, SVD Server, head end equipment and switch video analysis application continues to perform well in the field and I am pleased with the response we are getting from our customers regarding the ease of deployment and robustness of the solution. Our customers are adding content to their systems at an aggressive pace allowing them to add a significant number of HD channels to their existing plan, thus competing with the likes of satellite and Telcos. In Q4 we also made excellent progress in the Motorola set-top environments and we are now in the process of deploying in systems that pass more than one million Motorola set-top households which we believe makes us the deployment leader in this environment as well. Most importantly we believe we are the only vendor switching customers in both SA and Motorola set-top environments. In recognition of this technology leadership the National Academy of Television Arts & Sciences recently recognized us along with Time Warner at their Emmy ceremony.
Turning to our more traditional broadcast business which is primarily an expansion business driven from an increase in programming especially HD content and the addition of advertising on a retail basis. Our customers are using our platforms to carry more HD streams over their existing plan, splice advertising and for digital transport. In most cases they do this by deploying our software upgrades. By comparison our competitors recommend expensive overlays or additional boxes to the network.
Our TelcoTV business continues to be driven by footprint growth as Verizon continues to deploy FiOS TV in new regions. BigBand continues to be the sole source provider for this important rollout and we believe we’ve made significant progress increasing our visibility with this important customer. We expect Verizon to remain a significant customer through 2008 and beyond as they expand their network deployment, content and add features to the network.
I will now provide detailed financials for the fourth quarter on a non-GAAP basis. As a result the amounts provided will exclude stock based compensation of $3.1 million, amortization of intangibles of $143,000 and one time charges of $3 million for restructuring activities. For the fourth quarter we reported revenues of $30.7 million as compared to $38.5 million in the prior quarter and $63 million in fourth quarter of 2006. Video product revenues were $18 million as compared with $24.2 million in the prior quarter and $44.8 million in the year ago period. In the fourth quarter of 2007 data product revenues were $4.8 million as compared with $5.7 million in the prior quarter and $11.9 million in the year ago period. Hereafter we will not break out revenue from data products because they will not be material. For the fourth quarter service revenues were $7.8 million as compared with $8.6 million in the prior quarter and $6.3 million in the same period in 2006. For the fourth quarter revenue from our top five customers accounted for 79% of revenue as compared with 90% in the fourth quarter of 2006. 10% customers in the fourth quarter of 2007 include Verizon, Time Warner, Cox and Comcast. On a geographical basis 81% of our revenues in Q4 2007 were within the United States. This compares to U.S. revenues of 96% in the same period a year ago.
For the fiscal 2007 total revenues were $176.5 million mostly unchanged from 2006. Video product revenues were $121 million in 2007 as compared to $121.9 million in 2006. CUDA revenues declined to $23.7 million in 2007 as compared to $32.1 in 2006. As you know we retired our CUDA platform in the fourth quarter. Service revenues for 2007 increased to $31.8 million as compared to $22.6 million. This increase reflects support revenue from our growing installed base and installation and professional service revenue related to our switched digital video product solutions.
Non-GAAP gross margins for the fourth quarter were 45.2% as compared to 51.1% in the prior quarter and 57% in the fourth quarter of 2006. We had expected lower margins in the fourth quarter obviously due to lower sales volumes and lower utilization. As sales volume increase and we recognize a higher portion of revenue from our switched digital video products we expect margins to return to higher levels. For the first quarter of 2008 we are anticipating margins in the range of 52 to 54%. As you know we expect quarter to quarter lumpiness in margins as we balance new footprint wins with expansionary orders. 2008 will be about securing footprint that may lead to some margin compression. Over the long term we believe our business model has operating leverage to positively impact these margins.
Non-GAAP operating expenses for the fourth quarter of 2007 were $23 million down from $23.5 in the prior period as we reduced headcount and retired our CUDA product line. We ended the year with 518 employees down from 603 employees at the end of Q3. We believe non-GAAP expenses for the first quarter of 2008 will be in the range of $23 to $24 million as we continue our focused investment strategy in digital video.
Interest and other income net was $1.7 million in the fourth quarter. Non-GAAP net loss per share for the fourth quarter was $0.12 on a fully diluted weighted average shares of approximately $61 million. For the fiscal year 2007 we reported GAAP net loss of $25.4 million or $0.52 per share and non-GAAP net income of $437,000 or a $0.01 a share. Non-GAAP net income excludes $11.6 million in stock based compensation, $5.6 million of CUDA product realignment expenses and $5 million in stock warrant expenses, $3 million in restructuring expense and finally $572,000 in amortization of intangibles.
Now onto the balance sheet at December 31, 2007. We ended the year with cash, cash equivalents and marketable securities of $154.5 million up from $140.8 million in the prior quarter. Accounts receivable were $27.9 million down from $39 million in the prior quarter. DSOs were 82 days as compared to 92 days at the end of Q3. Deferred revenues increased in the quarter to $67.3 million as compared to $58.2 million at the end of Q3.
Turning to 2008 our fundamental business imperatives are to (1) focus on the operational execution of our business for Pure Play video products and services, (2) to continue to penetrate and expand switched digital video to maintain that number market share, (3) to expand our position in TelcoTV while retaining our sole provider position with FiOS video edge, (4) to leverage our position in that broadcast video market by delivering network expansions and enhancements driven by the flood of HD content and advertising functionality and lastly to continue to invest in platforms and technologies that leverage our network position and experience in personal TV, IPTV and advanced advertising for cable and Telco as Amir alluded to earlier.
I now want to take a moment to thank our employees for their commitment to BigBand particularly through this transition to creating this Pure Play digital video company. Now, it’s time for us to look forward in 2008 and execute.
Operator, please go ahead.
Question-and-Answer Session
Operator
We will now begin the question and answer session. (Operator Instructions) Our first question comes from the line of George Notter with Jeffries & Co. Please go ahead.
George Notter – Jeffries & Co.
I guess I wanted to ask about revenue recognition on switched digital video. Obviously that was an issue back in Q3. Can you talk about how long the cycle is between product shipment and installation at the customer’s site to when you’re getting that to flow through for rev rec? Is there any improvement or shortening in that revenue recognition cycle you’re seeing? And then secondly I also wanted to ask about the outlook on the Verizon business. Certainly they’re a meaningful customer for you guys and it sounds like they’re going to continue a pass a fairly aggressive number of homes, three million homes per year with FiOS. Can you talk about the outlook there?
Amir Bassan-Eskenazi
I’m going to start and answer the SDV question. The revenue recognition was an issue we faced in Q3 and as we discussed we learned a lesson and improved operations greatly there. What we see moving forward is that we continue to win new business, we continue to deploy the systems and it takes still six to nine months from the receipt of order to revenue recognition it’s been pretty similar to the situation it was in the second half of 07 and the pressing item remains really the readiness of the system, the ability to put the whole solution together. As I mentioned earlier we got to the point where we deployed as quickly as 90 days but the real pressing item for the ability to deploy is the system specific situation relative to where they are in their own deployments and other solutions they’re deploying at that time. So you see that in our deferred at the end of 07. As David mentioned the system is working well. We’re very happy about the response we get from customers as we deploy switched digital and we continue and deploy systems and at the same time replenish the deferred with new orders. And that’s the situation we’re going to see through the first half of 08. David, you want to take the Verizon?
David Heard
I’ll just add just one comment, George, on the switched digital piece. I think the good news as we go into a customer that has experience and where the regions have cross pollinated in terms of the learning curve and what they need to do to prepare their network for switched digital, we found a compressed period in terms of getting the technology up and running. And I think you want to delineate between revenue recognition and when the customer says, hey we need some help, ship some equipment and let’s get some HD capacity running across our networks. Those period have been relatively compressed to get switching up relatively quick once the network is prepared. The second piece of multi-element revenue recognition for getting the total solution prepared is the secondary item that I think we’ve gotten much greater visibility into over the past two quarters at understanding where our customers are along those lines.
On to the Verizon question, I think the good news here is I think we’ve done some fundamentally sound work in understanding and better preparing supply chain on our behalf and understanding what Verizon’s demand plan is for FiOS TV in 2008. The outlook there is that we understand their inventory position, we understand what their expansionary needs are going to be for adding new service sites to increase the service of FiOS TV out to their customer and in addition what their additional feature requirements will be that afford additional opportunities for us on top of that platform.
George Notter – Jeffries & Co.
Just one quick follow up. On the question relative to switched digital video could you tell us how much revenue recognition you guys had flow through here in 2007 for SDV? I think at one point you gave us a number for the first half of the year in 07, it was – if memory serves me – something like 10% of sales. But would love to know that number for the full year.
Amir Bassan-Eskenazi
We actually do not break the revenue by different solutions. Suffice to say that SDV is an important driver for us into 08. With the drive into HD when more operators are deployed is you’re going to see more and more visibility in terms of footprint and the different metrics that we talked about, but we do not break it in terms of revenues.
Operator
Our next question comes from the line of Scott Coleman with Morgan Stanley. Please go ahead.
Scott Coleman – Morgan Stanley
I’m curious if there’s any additional progress you can tell us about in terms of the Telco solution adoption outside of Verizon? What you might be seeing both internationally and in domestic market?
Amir Bassan-Eskenazi
We actually did not announce plans in terms of international Telco as of yet. As we talked in previous calls see a huge opportunity in TelcoTV – All service providers that carry video over the network have significant bandwidth issues and processing is lacking on their network to be able to sustain a robust high quality quantum over the network let alone the amount of HD that’s going to flow through that network to give a competitive portal. IPTV and DSL networks are no different and definitely on the international market a huge portion of the opportunity is to get to the over a billion TV households that’s out there is going to flow through this type of network. We take this very seriously. We mentioned that we invest to expand our platforms into these networks for IPTV over Telco and cable but [inaudible] that and when in due course when we announce our plans beyond we’re going to do so and be able to add some more content in this type of course as well.
Scott Coleman – Morgan Stanley
If I could follow up? It would seem to me that things like addressful advertising in DSL based networks, applications like that that are of the switched platform would really seem to be the way to get the foot in the door. Are there particular applications we should think of like that or would it be a more broad platform that you think over time will start to build the Telco opportunity for you? Thanks Amir.
Amir Bassan-Eskenazi
The fact that TelcoTV starts on day one through the sale with a personal service by the fact that the network is architected in a way that a single stream goes to a single household really pushed the envelope in what they can do once they overcome their initial hurdle of deploying in terms of personalizing content and we definitely see addressable advertising as a big driver for that, not only because of the capability to do so but because of the business mold that affords to get revenue stream for the service provider on top of just the subscription. Now because initially what we see with Telco provider is they do not have the master footprint that cable and satellite have in terms of being able to blanket tens of millions of subscribers they want, they are even more so motivated with addressable advertising and that’s why I agree with you that’s one of the applications that people are much more focused on over the last I’d say year and we see a lot of traction on that side. Having said, that we believe that just like any other cable providers they’re going to have a multi-application network. The network is a platform on top of which they put advertising on demand in that application and our plans – It very much plays into our strong pseudo giving this kind of capabilities at the edge of the network and in that sense they’re not going to be any different from what we’ve done so far with Verizon with fiber to the home and with cable with HFC to the home.
Operator
Our next question comes from the line of Anton Wahlman with Thinkequity. Please go ahead.
Anton Wahlman - Thinkequity
A few questions here. First for you David, a housekeeping thing. You rattled through the division between data and video, I think you said $4.8 million data and should I just assume that the rest of the product revenue then is video? I mean, are obviously right but what was the exact number?
David Heard
Yeah, you got it. $4.8 million was data and I believe $18.8 in video products.
Anton Wahlman – Thinkequity
You mentioned, Amir, a little bit about, also and you David, that one of the biggest hurdles was in terms of some of the time to deployment preparing before your equipment came in. Can you maybe go into what this preparation consists of? It sounds like sort of the process of paving a road here, that’s kind of the groundwork. What is this groundwork, the preparational groundwork that needs to be done to make these installations successful?
David Heard
That’s a good question, Anton. Some of it is, you can think of it as hard and soft, right? There are some hard issues associated with just preparing facilities power interconnect, updating the IP network for the service provider that are kind of the typical networking functions that in a rollout of any new technology whether it be video telecom, historically, you go through a learning curve. There are softer elements that in the cable environment for switch, in interacting with a number of different clients - and in our environment we’re interacting with six, seven clients - I think more than anybody else out there and given that we’re now in the fifth generation of our technology, we’re kind of getting to second order, third order, fourth order, fifth order corner case tests to ensure the appropriate functioning, robustness and quality of the networks that we provide and so we as bump into those we’re making sure that we care for them and deploy out them in the software solutions that we basically integrate out for each and every customer. We expect these to begin to diverge in 2008 as that number of that client environment goes down and I think as the service providers, whether it be Time Warner or whether it be Cox, gain experience that we regionally cross pollinate and thus become easier to deploy on a case by case basis. Did that answer your question, Anton?
Anton Wahlman – Thinkequity
It was extremely helpful. I guess in follow up to that I was thinking now that both Motorola and Cisco have far reaching ambitions in this base and are starting some species of deployments even though they are behind you, are you finding that given the fact that they have so many other pieces of the network and the head end as well as the set top and other pieces of software and Lord knows what else. Are you finding that they are playing nice in the sandbox or have you found that at some point basically because you have some pieces that obviously compete with their ambitions in this base that they’re putting in some squeaky wheels into the mix here?
David Heard
I have to have admiration for our competitors, Motorola and Cisco, so I wouldn’t want to insinuate anything to that effect. I think that certainly they’re incented in some cases for their CPE sales and that sometimes makes me skeptical. But I’ve got to tell you that we have successfully in both the Cisco, S.A. environments as well as the Motorola environments and we’ve done it successfully. So nothing in particular of note that requires that. I never find that competitors play beautifully together in the sandbox but no, nothing that is an operational challenge for us.
Anton Wahlman – Thinkequity
Well, you’re not doing the CPE anyway. But I was thinking more on the other elements where you actually do sell. But it sounds like everything is nice and chummy. That sounds good. Good.
David Heard
Just to clarify. The client environments that we do go into, certainly that and the network make a solution. So that’s where we’ve been spending a good fraction of our time and experience.
Anton Wahlman – Thinkequity
Two more things quick. First of all you do mention in your press release specifically the company continues its progress in TelcoTV deployment. I just didn’t hear any examples of that. Maybe I missed something.
Amir Bassan-Eskenazi
We focused on the Verizon deployment FiOS TV. We mentioned in previous cases other customers including SureWest and others that we continue to work with. We did not mention other customers at this point, but I can assure that we – like I said, see TelcoTV is a huge opportunity in front of us and we spend the resources, attention and work accordingly and when we’ll have more to announce, we will absolutely do so.
Anton Wahlman – Thinkequity
Finally just on the deferred revenue stuff. I’m trying to figure out here. Of the revenue that you reported in the quarter, the $30.7, can you say what portion of that was from deferred revenue and what portion of the guided revenue for Q1, the $35 to $39 did you expect to come from deferred revenue? I’m asking that in particular in the context of you said earlier, Amir, that you obviously have, as every company has and you in particular, some deferred revenue and you also replenish that obviously with new revenue in the pipeline. So I’m trying to figure out the relative size of the replenishment and the drawing from the reserve, as it were. Are you replenishing it at the same rate or are you replenishing it currently at a lower rate than the addition? That’s kind of what I’m getting to.
Anton Wahlman – Thinkequity
First, we do not break the quarter or any other period in terms of the different mix in the deferred. When I said that switched digital is an example of a solution go through six to nine months and like David said, we go in with – we ship the system, we deploy the system, so you understand it always go through the deferred revenue. So things go in and out all the time. It’s the course of business. What I can tell you is that we’re very happy with the rate of how we deploy the systems and the customer satisfaction with that and I don’t expect to see any material amount of stuff get stuck in the deferred before it goes out. I think it just goes through the system and as the market continues and grows, we mentioned winning new customers, new system and so forth. I think all those things turn in the right direction. I think we would want to leave it at that.
Operator
Our next question comes from the line [Tal Leone] with Merrill Lynch. Please go ahead.
[Tal Leone] – Merrill Lynch
I have a few questions. First have you discussed – I joined the call a few minutes after you started and I don’t know whether you discussed your efforts to find a new CFO. This is the first one. Second in 2008 I think if I understand correctly the mix of revenue is going to change because you have follow on orders from existing customers so capacity expansion and you also have new footprint. How is the gross margin changing because of the mix shift? Is it positive or negative? And then the third question I have is about cable, the sensitivity of spending to overall kind of spending decision. Time Warner was kind of cautious on spending on the conference call. Do you spending on switched video kind of sensitive to overall spending? I’ll start with this and then I have a few more.
Amir Bassan-Eskenazi
Let me start with the CFO question. We are in what I would characterize as final stages of our search for CFO. I think we’ll be able to make our decision in the coming period and obviously when that happens we would absolutely make the announcement. It’s obviously a critical role that we’re looking in the context of the next five years and how we build the company so we focused on getting the right feet for the team and for the business model and the other things that we’re looking at here. So I would characterize it as final, that’s in terms of the CFO. Let’s talk about quickly the cable spending. I’ve jumped to your third question here. Our internal view is that spending is going to be probably flat and that’s the assumption we took when we started out for the capital industry and we started out our planning process but from our perspective the areas we serve are really enhancing the most strategic element of its customers’ business, their network and specifically in the flood of HD that’s coming in and that’s what subscribers seem to be valuing most right now, the investment there I do not expect to be flat. In fact, I expect it to increase. The fact that we give solutions that are alternative to solutions that cost between three and four in the case of all digital and ten times more in the case of planned upgrade while enabling our customers to do what they absolutely feel they need to do and that’s very evident in their own calls with you guys, I think is a good strong backwind for us to enable us to continue and execute our business plan. So I don’t expect in that case the spending to have a very material effect on our planning. If anything we should see some positive impact. David, you want to take the question about the expansion and shift?
David Heard
I think I’ll add just a little bit to the capital spend piece. I think the good news is when we meet with our customers there’s kind of a Mason-Dixon line or a spend line of things they just have to do and competing with – as Amir mentioned those three strong drivers at the beginning of our discussion today – certainly the competition of HD is above that line and I think that puts us I think in a good position. So we’re kind of keeping our heads down and making sure we’re executing to deliver them the capacity to do so. On the margin question, excellent question. Certainly as we exit the legacy CMTS business and look into 08 as a pure video business we guided to 52 to 54 points of gross margin at the 35 to 39 revenue level that we talked about. Certainly that is in our peak operating leverage at that model as well as – You talked a little bit about expansionary versus green field deployments. I think the interesting thing that we’ll see in 08 is – Amir mentioned the business model being that we first we lay out the green field deployments out there to lay out enough [Quangs] and infrastructure to be able to begin switching in the switch tier. Every time we do that we expect to see at least that amount in capacity expansion as they continue to increase the content and functionality across their network and increase the number of HD channels to compete. I don’t believe, and to date, I can you that we haven’t had much of that expansionary. We are very much in the green field phase, we think that 2008 is very much also about snapping up the green field as we begin to expand the expansionary projects with what we do. So I think we’ll see some quarter to quarter lumpiness as to the margins but the overall trajectory or tend of the margins should be positive on two fronts. One mix, and the other as we get operating leverage and scale. Does that answer your question?
Amir Bassan-Eskenazi
I was counting this as the meter, the short term with the mix between green field – We always talk about 50 to 55, you’re probably going to continue to think of this as the middle of that point for the remaining period until we see this expansion materializing. For the long term there’s no doubt that the expansion will come because the HD is coming and that’s forced the issue.
[Tal Leone] – Merrill Lynch
Now more customer specific questions. Starting from a high level, is 2008 going to be a back loaded year? And the reason I’m asking it is because there’s some inventories that Verizon will need to work through, expansion will probably come toward the end of year and maybe we start the year with some kind of sluggishness in terms of spending. So do you expect the seasonality of this year to be kind of back loaded or you don’t, or my kind of logic is wrong? Second, can you give a little bit more color on Verizon? I just didn’t get it. It was 40% customer at the peak and it’s very public knowledge today that they’re going from the analog digital to all digital. What are the implications? Is there any implication at all on your system? Do you need to go and replace any of your systems that you have deployed in the last few years or not? Could we see Verizon going back to what they were before? Let me finish with that.
David Heard
First of all I think from a seasonality or back end or front end loaded – Since we’re not providing full year guidance we’re going to kind of defer that question. On the second piece of Verizon, I think you’ve seen a little bit of a diversity change in our business mix and I think as you see more switched digital deployments going off and as we’re having those deployments and our deferred continues to grow, we expect Verizon to continue to be a major customer meaning 10% plus reporting for us. Again since we’re not reporting full year financial it’s difficult for me to give you an absolute value as to what that will be but we believe that the diversity will improve versus what it was in the past, meaning not 40%. In addition you’ll see more switched digital vectoring in. You asked the question about analog to digital conversion. Well, certainly that is going on, there is a slight erosion on the average price point per location that is expected over time to be offset by the addition of additional functionality and features that we’ll be adding to the network.
Amir Bassan-Eskenazi
Just to add one point in terms of what you said of changes in the network. At this point when Verizon offers services to new subscribers, and that’s public information, they offer all digital offering and at some point in the future that probably leads to some of the systems that were previously deployed with analog cards to be upgraded and expanded with more digital cards to replace the previously deployed analog cards. As David said, and we said multiple times before, we don’t guide for the year and so timing and impact are probably premature at this point.
David Heard
The good news on that front is we’re prepared to take any kind of network migration from them, analog, digital, at their convenience and as they see the network and we’re very tied in to what their deployment plans are, but obviously aren’t at liberty to disclose what they are.
[Tal Leone] – Merrill Lynch
One follow up on your answer. You said that Verizon will continue to be strong but you believe it will be below the kind of peak contribution we’ve seen in 07. Is it because Verizon in absolute terms, in dollar terms, could decline in 08 versus 07? Or is it because the rest of your business, Verizon is going to grow?
Amir Bassan-Eskenazi
I think it’s going to be both. What you’re going to see with Verizon when they build up their network and before we go into what I describe as rhythm between the company, as we described in previous calls orders went into peak center and then were distributed as the company aligned their process and interlocked them. I think this kind of inventory build up has happened before, both companies don’t really need it any more. We saw some of this impacting our second half of 07. I don’t think it would go back to this model as a result the run rate is going to be much smoother, but the peak we had in the first half is not going to repeat itself. The rest of the business is obviously growing driven by everything we talked about and that’s the second impact on the percentage impact of Verizon in particular. So both side of the question, the answer is yes.
Operator
Our next question is from the line of John Anthony with Cowen and Company. Please go ahead.
John Anthony – Cowen and Company
A couple questions. I think just a few minutes ago you commented that the majority of the revenue from switched digital thus far has been initial deployment versus expansion. Can you give us a sense, kind of a ratio for how much has been initial versus expansion?
David Heard
While we don’t intend to report green field versus expansion in the future, I’ll say a relatively insignificant amount has been expansion.
John Anthony – Cowen and Company
So far?
David Heard
So far.
John Anthony – Cowen and Company
And that’s true of both what’s in the deferred revenue and what’s already been recognized?
David Heard
Correct.
John Anthony – Cowen and Company
What gives you – I think, Amir, earlier in your prepared comments you said that you expect expansion revenues to pick up. What are you seeing that makes you say that and I guess are you seeing that from more than just Time Warner?
Amir Bassan-Eskenazi
What caused me to say that is we see more and more content flowing through our switched digital video and very importantly and very timely more and more HD content to go through our system and what that causes is more and more of this content flows through the system, the capacity needs to be increased. So we saw across multiple applications, multiple operators and multiple geographies this tend happening and that’s what we expect to drive the incremental expansion on switched digital. In the industry right now there is talk about double digit number of more HD channels being offered to each one of those systems and I’ll put forward that a lot of this is driven by switched digital video’s ability to do so and that’s what we expect to continue to drive the expansion. The timeliness of this across the 20 systems and growing number, again that’s something that’s going to be a portion of how we think we about 08 and we can talk about this more quantifiably probably sometime in the future.
John Anthony – Cowen and Company
And then going forward with respect to the expansion contracts you get, is the revenue recognition on the expansion contracts going to be as lengthy, the timing, is it going to be as lengthy or will it happen at a faster clip?
Amir Bassan-Eskenazi
That’s correct. The recognition on expansion is much quicker because you see the issues that David described do not represent themselves in that context. It’s a pretty straight forward expansion.
John Anthony – Cowen and Company
I know you guys don’t want to give a split or a sense of magnitude in specific numbers, but can you at least kind of give us a sense for how much of the total opportunity that you guys have been awarded, how much of it have you recognized so far? If you look at your deferred revenue and you look at what’s been recognized to date have you recognized the majority of what you’ve been awarded, or is it the vast minority. Could you give us kind of a ballpark sense of what we’re looking at?
Amir Bassan-Eskenazi
Even in the footprint acquisition phase of things what we’re seeing so far is smaller than what is still in front of us in the varying stages of deployment. I really don’t think we should get to more specific than that at this point and it’s going to get more complex moving forward because by the time we talk again, some of this will have expanded and we’re going to get more footprint. It’s extremely difficult to follow this that way. Suffice it to say that the market for switched is extremely far from saturation. Every large operator in North America and we see increasingly in the rest of the world would have to deploy it at some portion of time and it appears sooner rather than later. The opportunity is very, very large and it’s right in front of us.
Operator
Our next question comes from the line of Simon Leopold with Morgan Keegan. Please go ahead.
Simon Leopold – Morgan, Keegan & Company, Inc.
Couple things I wanted to ask. One is the housekeeping. You walked through some commentary on 10% customers for the quarter. If you could give us the detailed numbers for the full year?
David Heard
Detailed numbers in terms of customers?
Simon Leopold – Morgan, Keegan & Company, Inc.
Yeah. So which customers were 10% customers for the full year and what was their contribution?
David Heard
I’ll have to get back to you on the concentration index in terms of the percentage. For the full year 2007 it was Cox, Time Warner and Verizon.
Simon Leopold – Morgan, Keegan & Company, Inc.
In terms of some of the trending, I think you partially answered this before. On the guidance for gross margin, looking at the outlook of 52 to 54%, I think you suggested that an element of the improvement is coming from the exit from CMTS business. If you could give us some sense of what’s driving the movement up towards the higher level, how much of that is about the exit of CMTS, how much is volume, how much s your expectation on footprint expansion? If there’s any way to give us a little more color to think about that?
David Heard
I think that is a good question but tough to break down in those sub elements as we just exit a restructuring of shedding the data business and beginning to focus on pure play video. I think what we’re comfortable with is again the range that we provided in terms of the gross margins for Q1. Again, I think as you look – I guess what you could do is look in our past when we were turning larger amounts of revenue and look at what our gross margin mix was and understand that the data business, the CUDA business, was traditionally a bit lower than our core fundamental video business. I think we’re very, very concentrated, very cost oriented and feel good about the guidance that we provided and we’re going to continue to work that. But as Amir said, as we go quarter to quarter at the mix of green field versus expansion and that the product mix that we’re going to be looking at, it really will be difficult to give you a detailed breakdown.
Simon Leopold – Morgan, Keegan & Company, Inc.
But, I guess it’s fair to say that the biggest piece of it is the change in mix with the CMTS exit. Is that reasonable?
David Heard
Yeah, I think that is a relatively large piece as well as look at the operating leverage of the size of revenue we’re on here in Q1 versus where we were a year ago.
Simon Leopold – Morgan, Keegan & Company, Inc.
And then just to follow up and I think Amir touched on this topic as well is ASPs on the BMR platform. Our understanding is that as we go into a new calendar year you may be meeting some requirements in contracts that suggest price cuts and I think the answer was volume and features will offset it but could you speak to what kind of price cuts are in there ex the offsets?
Amir Bassan-Eskenazi
When you’re dealing with a large service provider, it’s a course of business to have this kind of multi-year contract such as we have and this kind of feature is included there as well. But obviously our guidance includes that and we would argue that the expansion and the functionality increase on deployed platform would more than offset that and I think – Our margins are functioning on all these different drivers but generally what drives our margins in long term like we pointed out is incremental. It’s much more incremental functionality than anything else. In the short term you have to be more careful because of the footprint acquisition and so forth. I think probably if you separate from our guidance like we said before we expect to be 50 to 55 in the period and there’s going to be more footprint grab, we’re probably going to be on the lower side of this range, if there’s going to be more expansion than we currently put into our view, it’s going to be on the higher. At this point for not knowing we limit our guidance for the first quarter as we do.
Simon Leopold – Morgan, Keegan & Company, Inc.
I think what I’m trying to get at is trying to understand not just the revenue guidance but what kind of unit assumption trends we should think about? Is that clear?
David Heard
I think you question is clear. I think the answer is getting asked a question about a platform that sold through multiple segments through multiple applications. That’s the platforms that we build. Some segments in some applications may be more competitive and thus have some price erosion, others are delivering even more value and more benefit that gives us a little bit of margin uplift. That platform that you happened to mention is involved in three product solutions that we offer to our customers today. We’re not going to get into the habit of reporting ASPs and unit margins given the obviously competitive concerns.
Operator
Our next question comes from the line of [Tarik Sadiki] with Manning & Napier. Please go ahead.
[Tarik Sadiki] – Manning & Napier
I had a quick question about – We’ve been talking about some of the expansion versus green field. Could you talk a little bit about how much it costs on a per household basis for an expansion versus a green field, not in actual dollar terms but as percentage, or some idea of how to think about that?
Amir Bassan-Eskenazi
I think what we find depending on where the service provider started the deployment, what we find across all these different operators is that by the time they start expanding there’s at least – What we feel comfortable saying at this point is probably a buck for every dollar we get up front for the footprint in the expansion. That can vary from operator to operator depending on how many channels they put in initially and how many channels they want to put at the end. Some start very thin and wind up going very wide and each one of them is in a different place on this curve. What we believe over time is all of them are going to carry over 100 HD which will drive at least what we got in the initial footprint but at this point we probably could keep it at that kind of granularity.
[Tarik Sadiki] – Manning & Napier
We talked a little bit about competition wise. Is there any other ways that you can sort of quantify how much further ahead you guys are in terms of technology as well as homes passed, homes committed. Any other ways of looking at that in terms of whether it’s starting to affect Atlanta, Motorola or anybody else out there?
David Heard
I think Amir talked earlier about the 12 million homes passed that we are active in deploying and in our switching I think we talked a little bit about our belief being the only vendor that’s providing switched solutions in both the Motorola set top and the Cisco set top environment. We continue to keep our heads down with our customers to offer more HD channels. We see the likes of Motorola and Cisco’s infrastructure providers as certainly credible competitors. While we don’t see them in heavy operations out in the network – Our business is really going with our customers and providing them the solutions to provide more HD channels. We have had some win backs that I think we’ve alluded to on prior calls where we’ve been able to come back into one of those solutions and be able to replace another competitor that’s not working. We think our best advantage is - we’re putting our fifth generation of the technology out – is to use our operational experience that – By the way, our operational experience helps the operator even choose what’s in their switch line up and optimize the network performance of what’s there. Almost a tutorial from beginning to end.
Operator
Our next question is from the line of Carter Driscoll with the Stanford Group. Please go ahead.
Carter Driscoll – Stanford Group Company
Just trying to get a better sense of - Understanding that you’ve gone through a bulk of your restructure, trying to get a better understanding of maybe what your long term operating targets, have they changed dramatically from what you’ve talked about the past couple quarters? Just trying to figure out is there a revenue run rate at which you think you can reach either GAAP or net profitability? Is it on the horizon? Or if you could talk about maybe your plans for total off ex spending year-over-year, just in generic terms? Obviously I know you’re reluctant to pin a particular quarter on it.
Amir Bassan-Eskenazi
Let’s take this thing one piece at a time. The business model remains that mid 50’s for gross margin that we expect to yield the teens when we get to scale on the operating income line. What that means is probably, now with the pure play digital video and more focused company like we mentioned earlier we should be able to get to that sooner than we previously expected. I’d say probably in the $65, $70 million a quarter run rate probably. So we have a bit of work to get there but the business model pretty much remains the same. The upsides and downsides are like we discussed here in terms of higher margin based on value of innovation and the expansion versus the footprint grab, we’re going to see when we get there. But it remains the same business model. Relative to profitability like we mentioned before it’s the same answer, we expect the mid 40’s to bring us to break even and we expect to grow through that. Again we didn’t put a date on this and we’re not guiding here for 2008, but we’re very focused, this is a critical milestone and the next point we’re going to as a company. All these numbers I’m giving you obviously are non-GAAP base.
Carter Driscoll – Stanford Group Company
How about just a little help on the tax line given all the moving parts you have? Do you anticipate this type of cash outlay during 2008 or do you think you’ll be able to avoid the tax man for 2008?
Amir Bassan-Eskenazi
We probably expect the same as we’ve seen before.
Carter Driscoll – Stanford Group Company
You now have essentially a third of your market cap in cash, are there – Obviously you could – It’s a nice war chest to have, but are there are any technologies out there today which you currently don’t address with your own engineering team that you might consider taking a look at?
Amir Bassan-Eskenazi
We’re in a great position in the network to take exactly that with the conversion support at the edge that connects services, bandwidth and subscriber awareness but to be honest at this point just at a yield of reorganization we’re very much focused on execution. We have a lot of work in front of us and future calls after a few more steps down the road, I’ll be happy to address all these other issues. We absolutely will have the opportunity to do so, but I really want to focus everything right now on the execution and the day to day progress we make here as opposed to speculate what we’re going to do beyond that.
Carter Driscoll – Stanford Group Company
Lastly, you’re addressed to a large extent you don’t think the service providers domestically have altered their cap ex plans for SDV. What about internationally? Unrelated to some extent Cisco talked about weakness in Europe from the carrier perspective and obviously it’s a big opportunity for you longer term, have you sensed a change in the way they think about this type of bandwidth management tool than say three, six months ago?
Amir Bassan-Eskenazi
I would have to say no. We see that our service providers internationally are just like locally, they see this is as a critical element to add more content and HD and in that regard I didn’t see any change in direction. I think it’s imperative for them to be in the market, offer the services and I can’t say that I noticed any change.
Operator
Ladies and gentlemen this concludes the Big Band Network’s fourth quarter 2007 earnings conference call. If you’d like to listen to a replay of today’s conference, please dial 800-405-2236 or 303-590-3000 using the access code of 11106774 followed by the pound key. ACT would like to thank you for your participation. You may now disconnect.
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