Harmonic Inc. Q1 2008 Earnings Call Transcript

Apr.24.08 | About: Harmonic Inc. (HLIT)

Harmonic Inc. (NASDAQ:HLIT)

Q1 2008 Earnings Call

April 23, 2008 05:00 pm ET

Executives

Patrick Harshman – Chief Exec. Officer, Pres

Robin Dickson – Chief Financial Officer, Principal Accounting Officer and Sec.

Analysts

Brian Coyne – Friedman, Billings, Ramsey & Co.

Vivek Arya – Merrill Lynch

George Nader – Jet Raise & Co.

Tim Savageaux – Merriman Curhan Ford & Co

Greg Mesniaeff – Needham & Company

Blair King – Avondale Partners

Todd Cooper – Stephens Inc.

Larry Harris – C.L King

Jack Monte – Lehman Brothers

Brian Coyne – Friedman, Billings, Ramsey & Co.

Paul McWilliams – Indie Research

Amitabh Pathy (ph)

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2008 Harmonic Earnings Conference Call.

(Operator instructions)

I would now like to turn today’s call over to Mr. Harshman, President and CEO please go ahead sir.

Patrick Harshman

Thank you. Good afternoon, I am Patrick Harshman, President and CEO of Harmonic and with me in our headquarters in Sunny Vale, California are Robin Dickson, our Chief Financial Officer, and Michael Newman our Investor Relations Spokesman. Thank you all for joining us. Today we announced the results for the first quarter of 2008. Once again we had a strong quarter with reported net sales of $87.3 million, up 24% year-over-year. This is Harmonic’s 7th consecutive profitable quarter.

We are very pleased with these results, which demonstrate the strength of our products in business, as well as the ongoing successful implementation of our global vision. Court of this vision is our continuing success is clear technology leadership, in the video delivery arena.

Now our newest solutions are being selected to power an increasing number of high profile digital video deployments in Asia, Europe, Latin America, and here in the US. We are also winning prominent industry awards, including Frost and Sullivan’s recent recognition of Harmonic as its 2008 Global Digital Media Infrastructure Company of the Year.

We see our market leadership position expanding and strengthening across both applications and geographies, driving strong growth and continued revenue diversification. We will also improve in our gross margins and profitability. Looking ahead, we continue to see tremendous momentum in the deployment of compelling new video services worldwide.

Correspondingly, we see significant growth opportunities for Harmonic, enabling both new and comment service providers to deliver a competitive, high quality and innovative new video services. We continue to invest in the future of our business, and to introduce powerful new products that address the equally powerful trends towards more high definition, on demand and any time any where video, which we are reshaping and expanding the global video delivery market place.

Now as Robin will cover the financial aspects of the quarter, and I will then return with some of our recent business development and strategic initiatives in more detail, Robin?

Robin Dickson

Thank you Patrick, good afternoon everyone. During this call we may make projections or other forward looking statements regarding future events of the future financial performance of the company. We must caution you that such statements are only predictions and that actual event or results may differ materially.

We refer you to the documents that the company files with the SCC including our most recent 10k and 10-Q reports. These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections or forward looking statements.

Please note that on this call, we will provide you with financial matrix determined on a non-GAAP or pro forma basis. These items together with the corresponding GAAP numbers and the reconciliation to GAAP are contained in today’s earnings press release, which we have posted on our website and filed with the SEC on Form 8-K. We will also discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in the press release and the remainders will be available in a recorded version of this call on our website.

Today we announce results for the first quarter ended March 28, 2008. We reported net sales of $87.3 million, up 24% from $70.2 million in the first quarter of 2007. The strong year-over-year revenue growth reflects continuing success with our long standing domestic Cable and satellite customers, as well as sales to an expanding range of new customers worldwide.

Domestic and international sales grew at approximately the same rate, with international representing 39% of revenue for the first quarter of 2008, compared to 40% in the same period of 2007. Our largest customers in the first quarter were EchoStar and Comcast, representing 21% and 17% respectively of our total revenue.

By market, our Cable customers in the first quarter accounted for 59% of total revenue, satellite 25% and telecom and others 16%. Interestingly it is becoming more difficult to neatly categorize our customers into these market segments. For example, one of our largest customers in the first quarter was a foreign operator that most of you might think of as a Telco, but which also operates a substantial HFC Cable network.

We have a European telecom customer which is supplementing its DSL based IPTV network with a direct to home satellite system for rural areas, as well as several customers who are delivering satellite based content to both DSL and Cable network head-ins.

By product category, video processing product represented 40% of revenue in the first quarter, edge and access products 45% and software services and other, 15%. We saw an impressive sequential increase in revenue from our edge and access products in the first quarter. Our newest edge devices are increasingly being used in advanced configurations for on demand, switch digital video, and modular CMTS deployments both in the US and internationally.

Our non-GAAP gross margins in the first quarter were 50%. These higher than expected gross margins which were up on both a year-over-year and the sequential basis, reflect the success of our strategy to develop and acquire new products and solutions that provide real value to our customers. Our newest edge clients are a good example of the strategy. They represent a flexible platform for the addition of a broad spectrum of capabilities for a variety of advanced applications. Customers increasingly recognize the benefits of our approach to the architecture and our years of experience with these products.

Recently, our gross margins have also benefited from sourcing and cost efficiencies on higher volumes and from continuing product design innovations. As we anticipated on our fourth quarter call, our non-GAAP operating expenses in the first quarter were up on a sequential basis by about $2 million dollars. We are continuing to invest in people to grow our business, particularly in R&D and in international sales marketing and support.

Our total head count at the end of March was 672, up by 14 people from the end of December, and this contributed in part to the increase and operating expenses. However, much of the sequential increase reflects the annual payroll tax cycle which restarted in January, and the tax hit was accentuated because of annual incentive plan pay outs, which were recruited in 2007, but actually paid out during the first quarter. In the next 2 quarters, we expect our operating expenses to remain relatively flat with Q1 levels.

GAAP net income for the first quarter of 2008 was $13.4 million, or $0.14 per diluted share, up from $1.1 million or a penny per diluted share for the same period of 2007. Excluding non-cash accounting charges for stock based compensation expense, and the amortization of intangibles, the non-GAAP net income for the first quarter of 2008 was $16.6 million, or $0.17 per diluted share, up from $5.3 million or $0.7 per diluted share for the same period of 2007.

Our operating performance continues to strengthen our balance sheet, at the end of March 2008, we had cash equivalents in and short term investments of $278.9 million, up from $269.3 million at the end of 2007. The cash increase is net of approximately $4.8 million paid towards our long standing DiviCom obligations of which now are only $1.8 million remain as a liability. We also paid out $2.8 million of the Rhozet purchased price, which was outstanding from my recent acquisition.

Our receivables were $56.8 million, with DSOs at 59 days, down significantly from 72 days in the previous quarter. We are very pleased with the positive trend in our DSOs over the last 6 months, although we do continue to see pressure from some customers for longer payment terms. Additionally, I expect international sales will represent a higher portion of revenues in the next couple of quarters, which is likely to put some upward pressure on DSOs.

Net inventory was $33.1 million, down slightly from $34.3 million at the end of December, while our inventories will inevitably fluctuate from quarter to quarter, we are very pleased to see that our focus on inventory management has resulted and improved to inventory turns. Finally, our capital spending was $1.8 million in the first quarter, and we expect CAPEX of approximately $8 million of all of 2008.

With respect to the outlook, we have healthy back log and differed revenue totaling $82 million, which is down in about $17 million from the end of Q4. Note that historically, our first quarter orders have usually been relatively light, because of seasonal patterns, and in total, this year was really no different.

In the first quarter we have seen a contrast between very strong order intake from our international customers, and a similar what more mixed picture in the US, where this is some uncertainty about the timing of the annual CAPEX spending plans announced by some of our largest domestic customers. But we still remain convinced that the competitive dynamics amongst our customers will continue to drive and to invest an upgrading networks and expanding services. And while the overall global economic picture adds another level of uncertainty, we believe that our competitive position remains very good, and that our diverse customer and product base is a particular source of strength.

So taking all of these factors into consideration, we currently anticipate that our combined net sales for the second and third quarters of 2008 will be in a range of 170 to $180 million. And what we are very pleased to see our non-GAAP gross margins at the 50% level, in the first quarter, we expect to see non-GAAP gross margins in a range of 48 to 50% for the next 6 months. GAAP gross margins for the same period are anticipated to be in a range of 46 to 48%.

We do not anticipate any significant change in our tax position in the next two quarters. You should expect modest provisions in the second and third quarters, which will continue to be in a range of 5 to 10% of pre tax income. In light of our continuing profitability, however, we will evaluate each quarter of the potential release of the evaluation allowance against our tax loss carry forwards. And at that time we would expect to incur a more substantial tax provision, although we would not be paying significant cash taxes. We will continue to provide more information to you in this topic as we move throughout the year.

In summary, we are very pleased with our performance in the first quarter, and in spite of the global economic uncertainties, we remain very optimistic about our industry and our opportunities for profitable growth. Of strong operating results and financial position, give us an excellent foundation to grow the business and continue to pursue selective acquisitions. Patrick?

Patrick Harshman

Well thank you Robin, I think it is clear that our strong financial results reflect both a vibrant video delivery market place that is presenting exciting opportunities in the strengthening Harmonic business that is taking advantage of these opportunities across a broadening range of products and solutions, customers and geographies.

So what I would like to do now is provide you with an update on the opportunities and developments we see and the main customers segment we address Cable, satellite, direct to home, Telco IPTV, and broadcast, as well as provide an update of some of our related new technology developments. For Cable operators around the globe, there is intensifying competition from direct to home satellite players, Telco IPTV providers, and new internet based video services.

Cable’s competitive response is more high definition programming, more and easier to access on demand content and higher speed internet access that can flexibly support IP based video services. Harmonic’s powerful new solutions for each of these applications are setting us apart in the market, enabling us to deepen our relationships with existing customers and penetrate new accounts with significant new customer wins recently in Europe, Asia, and Latin America.

Enabling expanded high definition offerings, our industry leading MPEG2 encoding solutions continue to set the bar for the industry in terms of video quality and compression. Additionally, outside of the US, we started to see select Cable operators adopt our industry leading MPEG4 AVC technology to role on very high quality HD channels at even bit lower bit rates. By continually improving MPEG2 and MPEG4 technologies for high quality HD delivery, will remain important growth drivers for us in the Cable market over the next several years. We are also very pleased with the growing Cable market momentum of our software based solutions for on demand content preparation, management and delivery, with several new customer wins in Europe, including our announced deal with Multimedia Polska and an important not announced win with the major US NSO.

I also want to highlight the excellent progress we are seeing with our latest EdgeQAM based solutions for VOD, switch digital video and Modular CMTS applications. Our customers around the globe are increasingly understanding the power of the universal EdgeQAM architecture, and the unique advantages of our Harmonic solution that marries world class video processing together with Modular CMTS EdgeQAM functionality. Our newest solutions for unified DOD, high speed data and IPTV over Cable networks, have driven several significant wins for us in Asia and Europe, and have been a key driver of the revenue strength we saw this quarter in our edge and access business.

Our leadership in this area was also recently recognized at the IPTV World Forum held in London in March, where we took home the award for Best Cable IPTV Technology. So let us take a look at the satellite direct to home market.

We have also been very active with leading US and international operators where we continue to see our competitive position strength. Our highlight is been the number of new international satellite accounts we have penetrated, including our announced win with Sun Direct TV, which is deploying India’s first MPEG4 direct to home service.

Our expanding customer footprint and both developed and emerging economy markets is a key driver of continued strength for us in the satellite direct to home market. The technology corner stone of our competitive success in satellite continues to be our market breathing MPEG4 compression solutions for standard and high definition video.

Looking ahead, the overall market is still in the early innings of its major move from MPEG2 to MPEG4, and from standard definition to high definition. As more and more HD content becomes available, and as we continue to enhance our MPEG4 technology, we see ongoing waves of investment in this technology.

We also seem to grow up opportunities as satellite operators successfully offer on demand and ITPV services using new high breed video delivery solutions. We previously announced the work we are doing with the STV in Israel in support of their internet based video on demand service. More recently, we announced an expanded relationship with SES Americom and support of their IP prime IPTV service, which now encompasses our full on demand software suite, our scrabbling and stream processing solutions and our HDNST encoding of local programming.

Television New Zealand has recently deployed our latest high and standard definition encoders to role a high breed model of both direct to home over satellite and over the air broadcast services. The Canal SET, the leading digital pay TV operator in France, is using our latest technology to power its delivery of video content to through the DSL networks of multiple regional Telco’s. Overall, we are in the middle of more activity in the global satellite market than ever before.

More on demand video delivery and more HD programming are also key drivers in the emerging IPTV market. Where we further strength in our leadership position with new customer wins around the world, as well as with significant following orders from our established IPTV customers who are expanding their video offerings. For example, we recently announced the PCCW in Hong Kong, a global IPTV leader which employs our on demand software and standard definition MPEG4 encoding solutions, has now launched a new high definition service which is powered by our Electro7000 encoders.

Similarly, our customer Tiscali in the UK has upgraded its IPTV deployment to take advantage of our newest encoding technology. We also recently announced that our new Ion AVC standard definition encoder offers full conformance with the Microsoft media rood IPTV and multimedia software platform, enabling Harmonic and Microsoft’s many common IPTV customers a seamless service expansion solution.

Our new integrated digital ad insertion for IPTV provides an additional growth driver for us, and we are very pleased to see this technology voted best interactive TV advanced advertising technology at the March IPTV World Forum in London. With more than 100 IPTV customers around the world, we are serving over 4 million subscribers. We are very well positioned to continue to benefit as this IPTV market grows and matures.

Our solutions also continue to be deployed by an expanding range of new customers working in other parts of the video delivery value chain, including broadcasters, content aggregators, and content preparation companies. The recently announced that our market leading high and standard definition MPEG4 encoders have been implemented by an Eenadu Television, a leading content programmer and broadcaster in India, and by WRAL TV in the US to provide real time broadcast delivery of 4 simultaneous basketball games and 10 AVI HD format during the recent NCAA basketball tournament.

Our Rhozet Carbon Coder video transcoding solution, is also playing an important strategic role helping us to expand in to these new parts of the video delivery value chain. Carbon Coder was recently selected by the platform of leading broadband video management publishing provider that is the subsidiary of Comcast. Akimbo a pioneer in internet delivered VOD. Sundance Digital, a leading television automation provider, and BBC which is using Rhozet as an essential component for its digital media initiative in the UK.

We are very excited to see Rhozet technology open up these valuable entries for Harmonic into these new markets and accounts. We also continue to be very active and successful in introducing new technology and product enhancements that have application across these different customer markets that we address. We role that a highly innovative approach to low resolution encoding from global video, which will help us play a larger role in that growing market.

A new flex technology, a new universal video and audio decoding module delivers in the promise from us of an all IP head end, by adding video decoding capabilities to our encoders. Our new Animax streamliner coastal work station provides a range of advanced tools for managing assets and resource usage of clusters of VOD servers and our new power link transmitters offer 13net 10 nanometer dense wave division multiplexing, providing our cable customers with a powerful new tool for opening up more bandwidth from their access networks.

In summary, the first period of 2008 was another very strong quarter for Harmonic. We are very pleased with our success with the established customers, and in extending our customer base across a widening range of domestic and international operators. Our powerful and growing portfolio of new video delivery products and solutions, continue to augment our market leadership, and drive our strong sales growth, improve gross margins, and increase profitability.

The key trends towards more high definition, on demand, and any time any where video, continue to intensify and reshape he video delivery market place. We will continue to extend the breath and depth of our product solutions to address these major trends. Working with our expanding global customer based to take their video services and exciting new directions.

This concludes the formal part of our presentation, and now Rob and I will be pleased to entertain any questions that you might have.

Question and Answer Session

Operator

Our first question comes from the line of Brian Coyne with Friedman, Billings, Ramsey & Co.

Brian Coyne - Friedman, Billings, Ramsey & Co.

Good afternoon, a couple of questions, first of all, I was wondering if you could drill down a little bit on the order trends both for your encoding and your EdgeQAM products during the quarter. It sound like perhaps encoders may have been a little weak at least out of the gaited Cable and, and yet Comcast was up about 30% sequentially? And then also, what do you see for the next couple of quarters for those of those products?

Patrick Harshman

We do not break down the bookings to that fine level of details, so I will take it to a top level. And also to remind you that one of the reasons that we are giving 6 months guidance is because we do see big projects, kind of influence what happens in a particular technology or area one quarter to the next. Now, that being said, and I think it is clear that we have seen real strength in our Edge and Access business and particularly driven by the EdgeQAM activity. And it is really the expanding footprint of the kind of things we are involved with in EdgeQAM.

Not only do we see good strength in VOD, both in the US and overseas, but we thought a good pick up of activity around switch digital video, and we are really pleased with the traction that we see again both domestically and internationally in the module with CMTS applications, or again our universal EdgeQAM is playing a very prominent role.

On the video encoder side you asked about, I would say no real surprises. Nothing our of the ordinary, as Robin mentioned in his comments, I would say a macro observation is quite strong booking outside of the US and not unexpectedly, somewhat slower booking in the US, particularly out of the US Cable segment, and that the general top level statement does cover most of our products, Brian, including the encoders.

Brian Coyne - Friedman, Billings, Ramsey & Co.

Just so I am clear, are you saying that the order trends are pretty consistent with what you are expecting throughout the quarter or did it have significant amount of plaque in the first part?

Robin Dickson

On a year-over-year basis, our orders were up in Q1 of last year, I think the most striking thing for me was perhaps as I said, it was really the strength of international offset by probably a little bit more than normal seasonal weakness in the US, but that as Patrick said, really outside of real EdgeQAM strength, nothing particularly notable that we could see in particular product areas, or segments.

Brian Coyne - Friedman, Billings, Ramsey & Co.

Okay, that is fair. You mentioned that in briefly a content software win in the major US Cable operator. I was wondering if you had a little bit of color to that. How big potentially could it be, and how that business and the revenue get recognized over time?

Patrick Harshman

Still in the bigger picture relatively modest revenue contribution, Brian, but for us penetrating some of the big US MSOs where there is strong intense competition is strategically important. So I would say in terms of modest contribution now, but for us we are very pleased to see the progress in this business in the US and of course, as I mentioned also as we have had a couple of announcements at least, we are seeing very good progress with this technology and product in evergreen scenarios, particularly internationally, and where we already have some deployed footprint with our digital head end, or Cable environments where there is EdgeQAM.

We are actually seeing a lot of good success with broader solution bundles that include the content preparation, the on demand streaming and storage, as well as the edge processing.

Brian Coyne - Friedman, Billings, Ramsey & Co.

And does hat get sold or recognized along with related hardware shipments, or anything like that, or just sort of same one?

Robin Dickson

Brian the way I think about it is really, the revenue recognition will get back to the complexity of the integration and the specific requirements that the customer has in each of these particular situations, so it is hard to generalize. I do think the US business that Patrick is talking about will be recognized clearly quickly. I think is some of the newer green field applications that he mentioned in Europe, this may take a little longer simply because it is new stuff for the customer as well as probably requiring significant amount integration.

Brian Coyne - Friedman, Billings, Ramsey & Co.

Okay, and then finally, it gets more philosophically, Patrick, I think you talked a little bit about some progress in other areas as the new value chain, and I guess, would you say, this continuous to be perhaps where a reasonably good amount of your focus is that you think about our now opportunity?

Patrick Harshman

I think that is fair, Brian. I want to hasten to say that broadcast in contemplation is certainly not the exclusive focus, but I think by our own admission would say that we are not as strong there as we could. There is a lot of activity happening there and particularly as we think about more and more content to streaming over the internet, so we think there is a real great opportunity for Harmonic to expand. So both in terms of internal development and applicability of some of the technology that we have acquired, you can see that we have an interest in the space, and I think you will continue to see evidence of that interest going forward.

Brian Coyne - Friedman, Billings, Ramsey & Co.

Okay, sounds good, thank you again guys.

Operator

Our next question is from the line of Vivek Arya with Merrill Lynch.

Vivek Arya - Merrill Lynch

My question is on the satellite business. If my math is right, EchoStar was about 80, 85% of your satellite sales this quarter, and if I look at satellite sales outside of EchoStar, they in fact declined sequentially. So how should we think of a normalized ground rate and growth in your satellite business, especially as EchoStar starts decelerating at some point? What is not right normalized quarterly sales to start at the 10 15 million a quarter, is it 15 to 20 a quarter? Any thoughts on that would be appreciated.

Patrick Harshman

Well Vivek, I think we will not get into that level of granularity, but let me just take a step back as I attempt to answer that.

Remember our satellite business in 2007 grew well over 100% from the previous year. It really stepped up substantially. And we have been, I think, very frank about saying that we do not expect to repeat that kind of growth in 2008. That being said, we have said that we expect despite a really massive growth in 2007, we expect modest incremental growth in the satellite sector in 2008. Certainly existing accounts are a part of that story and particularly off with a very good start. That being said, satellite deals in particular are characteristically lumpy if you will. Big chunks of business depending on what is happening in any one quarter, and, it is true that this particular quarter is just the way that timing and project execution happened to fall. There was a lot of EchoStar activity that we recognized.

Going forward as my prepared comments attended to say, we do expect to see revenue from a growing base of customers, I think from our press releases as well as several unannounced than what we generically talked about, we are now in trench in getting in trench in more satellite video uplink centers than we have ever been before. And, we see that this business is carrying on and continue to be a small contributor for us with that same top level guidance of modest growth in 2008 over what we achieved in 2007.

Vivek Arya - Merrill Lynch

I see. Now, I know that it is probably a little early to talk about 2009. But, how far along are we in this EchoStar deployment of HD? I know that they are committed to 100 local markets and 100 national channels by the end of this year. But then, what happens in 2009, are they going to decelerate dramatically? And if yes, how do you sort of offset that kind of decline?

Patrick Harshman

Let me first be clear of that. None of my comments can be by EchoStar specifically so let me again address this more generally. I think that it is important to remember that Harmonic and even DiviCom business before Harmonic was heavily involved and was quite successful in the satellite direct home business. I think that for nearly ten years before MPEG4 and high definition MPEG4 came along. And then, what we saw was consistent adding of new channels as well as consistent improvements in MPEG2 technology which led to sequential upgrade cycles that drove pretty tall business for nearly ten years. So, I think that that is an important perspective to have now as we think about the future.

So, here we are looking to the future and we see not only that ongoing kind of paradigm but we see big moves to MPEG4. MPEG4 technology is relatively immature. We expect that although we do great things with it, if we think about what the MPEG4 technology will be two years from now, we think that it is going to be dramatically better. And so, we see that kind of cycle ongoing. We see high definition as being another wrinkle, a positive wrinkle in the equation which drives further growth.

That being said, with any one customer, this kinds of cycles are inherently selected therefore we have embarked on a good strategy that we are executing against of number one, customer diversification. And I think that now, we have done a great job of taking market share from some of our competitors being more present and more international satellite directed home accounts than ever before. The second thing that we have done as we are going forward is broadening the product offering. And again as I have mentioned, I think that it is not correct to think of a satellite business in 2009, let us say, it is exclusively about broadcasting direct to home channels. We think that satellite operators of all stripes, in all geographies are increasingly looking at more advanced delivery architectures, business models that bring on board like things like on demand.

So, as we think about 2009, we remain very optimistic about the satellite market. We got more customers than we have ever had before. We got more HD content coming in mind, we see a lot more both domestically and internationally HD content going up there. We see continuous significant investment in MPEG4 technology as it gets better. Not only to have incremental channels but actually go back and do a better job in MPEG4 channels that maybe were not solved a year ago. And, we see a broadening technology footprint beyond encoding to encompass things like on-demand delivery, these hybrid models that I have mentioned such as with SES Americom and Canal SET. And putting it all together, we see a fairly bright future and fairly bright 2009 with satellite.

Robin Dickson

It is not just a pile on but I think that another element I think is the importance of some of the emerging markets. We have talked about this on TV when in India but I think that that is simply one very good example of a pay TV model which is emerging in those kinds of markets where really pay TV is not been very wide spread simply for economic reasons and as the emerging markets grow and disposable incomes rise, people want more choice and picking it forward to pay for more choice and satellite is very often the easiest and the most cost effective way to get pay TV service to large numbers of people in large geographies. So think South Asia, Russia and Eastern Europe, Latin America and so on.

Vivek Arya - Merrill Lynch

Just two other very quick ones, Robin, you brought up this growth prospects outside and you have done very well outside the US, what impact does more international sales have on things like visibility, revenue recognition and gross margins?

Robin Dickson

I do not think that in any of these circumstances, maybe I have some degree of difficulty but I do not think anything that we cannot manage or cannot handle. Predictability is a little bit more difficult with the timing of some of these international orders. They are very often dependent on this new companies getting adequate financing or adequate regulatory permission or so forth because sometimes you think that they are coming and they will take a couple of quarters or sometimes they will come more quickly than you expect.

So there certainly are some of those kinds of factors at work. But I think that once things are on our books and we can plan and we have a very strong worldwide service integration capability so regardless of whether it is in India or Indiana, I think that we are very well equipped to assist our customers with integration. And the better that we do that, the easier the consequent fall on those activities like revenue recognition which gets correspondingly easier to deal with as well.

Vivek Arya - Merrill Lynch

This is the last thing. Robin, I know that you are working through the tax rate issue but is it possible to have a place holder like 30%, 35%, whatever, that sort of use consistently across all the model that can perhaps help eliminate some of the confusion in the models?

Robin Dickson

Well, I think I can really only do best deal with that when we are closer to the point when we are going to do it, to reverse evaluation and allowance and have a tax charge that we can talk to you about. As you might imagine, we are still working very hard at ways to try to minimize the tax rate going forward and we are still looking at a number of ways in which we can accomplish that and not all of which are by any means and place yet. So, it is a little bit difficult.

I think that I would say that if you would think of something in the mid to height 30’s range, I think that that would be a starting point. We would certainly hope to drive it lower than that either right away or certainly overtime. But as a starting, I think that that would be the best guidance that I could give at this point.

Operator

Our next question is from the line of George Nader with Jet Raise & Co.

George Nader – Jet Raise & Co.

I think that I want to ask you about Comcast. There are lots of conversations around there in terms of slower than expected role out with STV although it seems like certainly you have a fairly big quarter with Comcast. I guess that I was just trying to figure out how much STV is running to the model now. And in terms of your guidance for the 170 to 180 over the next two quarters, how dependent is that on Comcast STV role as well?

Robin Dickson

George, again, after your frustration, I am going to back off from talking specifically about Comcast. But I will address STV more generally. There was some contribution from STV but not driving that edge and access revenue. So, I would say that it is somewhere above modest but certainly not significant contribution. Perhaps, if you put it a little bit differently, it is frankly a little less than we would have anticipated six months ago.

And, we do see switches on video not moving quite as fast. At least as we and perhaps others in the market perhaps forecast it about six months ago. So, the guidance that we have given is kind of with that thinking in place.

George Nadir – Jet Raise & Co.

I was thinking about the overall guidance with 170 to 180. The run rate you are at here in Q1, the $87 million already kind of equates to your guidance in semi-annual form or the next two quarters. Yes, this is a seasonally slower quarter by our admission across pretty good swaps and the Cable space. Again, it sounds like the STV was fairly minimal this quarter. Potentially, it would get better going forward again certainly maybe it is slower rate than we thought. We figure that we get some more satellite business in here over the next couple of quarters from the international side. You get some more business on Rhozet. I am just still trying to figure out the 170 to 180 guidance. Does it feels like it is conservative in either of those things or is there something that I am missing?

Robin Dickson

George, I would suggest that what you may be missing on the EdgeQAM side is the brand of what we are doing. I think that Patrick’s acknowledges and I would acknowledge too that the STV part of it was lower than any of us expected six months ago. But in the other applications in VOD, there is ongoing strength across the board and I think too, as we have talked about modules with our CMTS deployments where the universal HKLM is an integral part of the old architecture. I think that it is a series of puts and takes. But just look at our edge and access revenues for the quarter and the gross margins, I think that the whole EdgeQAM story maybe what you are missing.

George Nadir

I am sorry. Just to clarify, you are contemplating the edge and access business getting smaller potential around a couple quarters. Do the VOD trying the baits or…?

Robin Dickson

No. I think that there are two pieces of this. I was just addressing just the way that we are thinking about the EdgeQAM business. And the second part of your question, I think that guidance. There are two ways to look at it I suppose. You look at what we did this quarter and you could say, “Gee! It looks like the business is just carrying forward but we think that it is also important to look at where we were this time last year”. The quarter, we have just reported 24% up year-over-year, and increasingly, in part driven by recognizing revenue that came from strong booking flight last year.

So, we saw a big push and strong business last year. We do see that we are all strengthening the business but as we have said here, we saw somewhat lighter bookings in Q1 and it is really in light of the bookings that we saw in Q1 as well as our outlook on the business and as well as looking at where we were this time a year ago that we actually think that the guidance that we have given is the most accurate representation of the way we see the business going. But we would point out that it does represent a significant step up from where we were a year ago.

Operator

Our next question is from the line of Tim Savageaux with Merriman Curhan & Ford.

Tim Savageaux - Merriman Curhan Ford & Co

Okay. Thank goodness. Nice quarter guys. Just a number of questions, first, Robin, before we get all tied up on the tax rate, can you remind of the size of the NOL.

Robin Dickson

Let me get back to you in a second on that Tim.

Tim Savageaux – Merriman, Curhan Ford & Co

I know that we are going to need a reserve and all that stuff but we are going to have to think about cash at some point. And following the last question about guidance, in light of sort of deciding at least some – in US Cable from a booking standpoint. The guidance has still increased from the range that you have had before. So, I am curious to why you would do that if on the margin, you continue this and not look in satellite and talk a bit on maybe things a little bit shadier and Cable. Why increase the guidance?

Robin Dickson

In general, we are quite confident in our business and what we see. There is an extra too many letters of psychology here Tim. We have looked at it. We believe again that most of what we saw in terms of weakness in Q1 is part of a historical pattern. We looked at the public statements that have been made about CAPEX and we looked at what is happening competitively in the market. We look at how our products are technologies are positioned. We think that there are certainly and we found it here in some notes of caution or uncertainty on hold that we think our business is going very well. We think our customers across the different segments and across the different geographies are going to be pushing forward here over the next six months and we think that we are going to be right in the middle of what they are doing.

Tim Savageaux - Merriman Curhan Ford & Co

Do you think Comcast may not just pack it in competitively this year? Decide if they are going to give up or something like that.

Robin Dickson

I would say let Comcast speak for themselves. But if I just go back to the public segments that they have made, I think that it is quite clear. They had a great business and they are doing great things and I think that they have signaled to the market a strong CAPEX plans for the year.

Tim Savageaux - Merriman Curhan Ford & Co

I think that the gross margin and the light business is probably the most interesting thing that I see in the quarter which is to say that edge and access was pretty sharply. I think that you would signal for a year that EdgeQAM might be a low margin product when enrolled. Yet, your margin went to 50%, how on earth did that happen?

Robin Dickson

I think that we are doing a good job of reinventing the product and I mean that from a technology point of view. We are not selling actually just one EdgeQAM. There are different varieties of EdgeQAM which we are increasingly looking at it as a platform. A hardware platform that is carrying different kinds of software that can support VOD, Switch Digital Video, combined VOD or Switched Digital Video pools and as we have said, modular CMTS applications. And particularly, modular CMTS application, we are taking that as an example. There is a lot of value for our customers in that architecture. And in architecture, that actually allows them to unify or virtualize the hardware to support these different applications. And I think that by developing really sharp applications that are writing on this hardware platform, I think that we have been very successful and our customers are increasingly selling the product and working without our customers to really realize the power of this unified EdgeQAM architecture.

Tim Savageaux - Merriman Curhan Ford & Co

I hear that with Robin historically with encoders down and edge up you adjust gross margins down sequentially 10 out of 10 times.

Robin Dickson

Well, I would say 9 out of 10 times. This is the exception I think. With what Patrick said, we have done a lot of innovative things with the product line. This is not just anymore a commodity box where it is mostly about how much it costs or how much the customers are willing to pay for it. I think that we have done some very good things as Patrick said in terms of different capabilities and different functionalities. I think that we have done. I am going to add that we have done some pretty good work on the cost side both through design and working with our contract manufacturers. There is a whole lot of elements to it. There is not one silver bullet.

I think that the other thing maybe more from market perspective is that there is a lot of international traction here as well. While your CMTS is certainly coming in the US but I think that we are seeing it already here in some selected international locations and that is part of the all around strength here. I agree with you. This is perhaps a little surprising to a lot of people that we have been hard at work.

Tim Savageaux - Merriman Curhan Ford & Co

Okay. Final question on the Telco business which was down sequentially with over 40% from last year, Telco really did not grow in 2007. It seems like things are straightening out a little bit there. You had a big upsurge sequentially last year and there is a one time factors to that. But, what are your growth expectations? You touched on satellite with the modest growth and I understand that. It seems like it could be a better year for Telco than 2007. Your year-over-year comps are pretty good so far. I wonder if you could talk about your expectations there. And then, I will pass it on and say congratulation again especially on the 50% gross margin.

Patrick Harshman

Yes. Our expectations for growth and the Telco IPTV area are greater and we think that we are seeing evidence of that over the past couple of periods. We think that in many places, the market, some of the early customers that we want in 2006, we think that their business plans are coming together.

We see them coming back for High Definition to add more channels. I mentioned some of the added surge in technology, the solutions, the spans for video processing, as well as storage and streaming is actually coming into play for us, so that the portfolio of the solutions that we are bringing to our telephone operators is expanding and it feels like in a lot of ways 2007 was a little bit of a breather for the industry.

We see some second movers are starting move, particularly in some emerging markets. To think that a combination of first movers is going back for a refresh, some second movers starting to move, as well as Harmonic having an expanded offering for Telco, all these things together, leave us failing to guess. We expect 2008 to be a little bit a stronger growth than we saw in the segment in 2007.

Operator

Our next question is from the line of Greg Mesniaeff with Needham & Company.

Greg Mesniaeff - Needham & Company

I just a quick follow-on regarding this whole Comcast issue, Robin I was hoping maybe you can clarify. Clearly, Comcast has 17% customer, the EdgeQAM sales in the quarter seemed very robust and yet, we all know about the pause and switch digital video deployments over there. In fact, I have written about that myself and I cannot help, but think that perhaps that there are other applications for the EdgeQAM, for example in the area of notes, the are used for that product, so maybe you can comment on some other areas, where that would explain what appears to be a pretty good number in overall EdgeQAM sales.

Robin Dickson

I think it goes back to some of what we are saying before that our EdgeQAMs are being used for a variety of applications and I do not want to speak for Comcast, but there are no questions that they did make public statements in their February call that the footprint would be last than most people expected, so that is a factor, but from what they said, at least it is not going zero. So, there is some activity there, but again I point to some of the things that we are seeing at other customers, both on the US and internationally and again, we are talking VOD, we are talking about Switch Digital, we are talking module CMTS, so there is a lot of places that both geographic and then, in the network, where the EdgeQAM goes and I think that is really the main story here.

Greg Mesniaeff - Needham & Company

A little further on that same topic, as Comcast and other MSOs get ready to roll out 3.0, beginning in the second half of 2008. I realized that Harmonic I think has at least a peripheral role to play in that ramp and maybe more than just a peripheral role and I am wondering if you could give us a little bit of perspective there.

Patrick Harshman

Part of the old DOCSIS 3.0 spec is related to module CMTS architecture, so it is very much part and parcel of what we are talking about. I think the deployments that we have been speaking about though are DOCSIS 3.0, but you can also deploy a modular CMTS kind of architecture.

So, absolutely the module CMTS piece of the equation, we expect to be gaining momentum, domestically and internationally and I think DOCSIS 3.0 comes into its own. I think we will see nothing, but that trend go stronger and absolutely a universal EdgeQam is a key part of that architecture and given our strong position, I think globally and number one in the market, in terms of deployed EdgeQAMs, I think we have to feel that we are well-positioned to benefit from greater modular CMTS architecture in deployments.

Greg Mesniaeff - Needham & Company

Great that is very helpful, thank you.

Operator

Our next question is from the line of Blair King with Avondale Partners.

Blair King - Avondale Partners

Patrick, I was hoping maybe you could talk on a fairly high level again with respect to the IPTV opportunity and maybe specifically more with regard of the second and third tier or so community in North America. The reason I asked, is there seems to be a lot of frustration with the availability of inadequate middleware to support reliable deployment. So, I was just anxious to hear your views on whether or not you would anticipate, slow down in the deployments of IPTV and that segment? And, if so would that affect your Telco business at all?

Patrick Harshman

I do not think that there are any real changes in what we see in the tier 2, tier 3 IPTV environment. We partnered with a number of strong, incredible middleware players, so I have to say that I am a little bit lost on the comment. I think video is becoming more important and viewed more importantly strategically for this tier 2, tier 3 Telcos in the US and we see some gets in our situation in places like Eastern Europe, Latin America and we actually think that the ecosystems are half coming or coming together quite nicely, set-up box, middleware and of course, the different pieces of the video solution that we offer.

Both through native headings with the Telco and through these hybrid models what I was talking about, where you see some really video experience satellite players offering a video services to the smaller Telcos. Part of our positive view on the global IPTV market does contemplate positive progress in the US tier 2, tier 3 market. It is a market we feel about and is one that we think will move forward fairly well in 2008.

Blair King - Avondale Partners

That is good to hear, I appreciate it. Just one last question, if you do not mind, just shifting gears a little. In terms of bandwidth reclamation among Cable operators, what impact have you seen with respect to the attention operators are giving, perhaps the better compression that working alternatives, relative to the some of the other technologies or even processes maybe available to make their use of existing networks and if you have seen some of that, is that something that might be material to your business?

Patrick Harshman

I am not sure exactly what you are referring to, more generally we think about bandwidth reclamation and more generally there is a bandwidth challenge. More HD content, more on demand content means consuming more bandwidth and almost regardless of what the physical media and places, there is a need to finalize and use that bandwidth more efficiently. We think it comes in a lot of different ways, certainly better compression in the MPEG2 domain is an important part of that equation and Cable operators are continuing to look for the latest and greatest technology. It is a big part of what we do for Cable operators is continuing to push our innovations still in the MPEG2 compression domain. Of course, which this role broadcast is really all about a different way of getting at the problem of conserving bandwidth.

And, finally I think it is important to point out that the access part of our edge and access business also continues to be quite healthy and we see Cable operators dealing with the challenge also by putting more bandwidth than with the access network and that really is the main driver of the HSC access business, it is not so much new built the way it was several years ago. But, in fact continuing segmentation of the HSC network, so Blair we think it is kind of a tool kit and our discussions with Cable operators really involve all of those different dimensions as they work on ways to improve, particularly the HD and VOD carrying capacity of their networks.

Blair King - Avondale Partners

Okay, that answers my question. I really appreciate it, thanks.

Operator

Our next question is from the line of Todd Cooper with Stephens Inc.

Todd Cooper - Stephens Inc.

I have a couple of more general type question and the first one runs, I think contrary to some of the previous questions on margins, they more really dig into your end markets we are struck by the share number of companies involve in the coder business and given your leadership position in this segment, can you discuss the competitive landscape and pricing pressures and margin pressures in that market?

Patrick Harshman

We have not seen actually in the last couple of years, there are no really any changes in the competitive landscape, it is by in large been the same couple of companies that we found ourselves up against, when it really comes to high quality encoding and it is very difficult technology, there are just a very few companies that have really have expertise and I think they play the premier league level, if you will.

In most architectures, cost, particularly we are talking about encoding is not the number one driver. The last question was really was about bandwidth efficiency and in general, putting more fiber under the nature of workers, putting more satellite transponder face up in the sky is generally much more expensive, actually than availing yourself of the latest, greatest and best compression technology.

We would not say that we do not see price pressure and we certainly see price pressure across our different product lines. I would actually tell you that the high end of the encoding space is probably one of the areas that we receive the least amount of price pressure, simply because the focus and the return of investment of ultra high-quality video at a minimum bit rate. The economic just points you towards compressing, as much as you can and encoder price really does not figure as prominently into that kind of economic thinking, as pricing and other parts of the network infrastructure.

Todd Cooper - Stephens Inc.

Okay, that is very helpful and secondly as we talk to service providers, including obviously some of your customers, it seems that they generally employ one of two strategies. They buy the best in class products and consequently use multiple suppliers or they go to a more turn-key approach with one or just a few suppliers. I view Harmonic is a more of a best in classifier, I would expect you to agree with this, so please do. And, how do you think the position Harmonic along this line?

Patrick Harshman

I would not actually disagree, we consider ourselves in the areas in where we work to be best in class and I think first and foremost, our keys to success are the products and technologies and solutions that we provide or the mass that are better than those of our competitors and particularly our larger competitors. I really think that this is a given, our strategy is to be the best, is to be fastest and the most agile and to get there first with the best product and get there first with the next generation of technology. And, we believe that actually in a market that is moving as quickly as this market it with new competitive challenges, new innovative service paradigms coming up more and more frequently, we think speed and agility is really at the top of the list of what our customers are looking for.

With our customers, large or small, we are fortunate to have a very strong reputation in the market place and we find that in this market environment, the customers that we are working with are obviously are the ones who are being successor with. Put a very high premium on quality technology, quality innovative solutions and the agility and speed that I am talking about.

Todd Cooper - Stephens Inc.

Patrick would you concede that at least with some customers, they do look more for one-stop shop type supplier.

Patrick Harshman

Yes, I would. I think that there are some customers. More and more smaller customers with more limited technical ware at hold, who are looking for someone just to come in and do it for them.

Todd Cooper - Stephens Inc.

That is all for me. Thank you.

Operator

Our next question is from the line of Larry Harris with C.L King.

Larry Harris - C.L King

You mentioned earlier that you were number one, in terms of EdgeQAM. In terms of the some of the newer product, like EdgeQAMs or MPEG4, encoders, you have an estimate as to what your current market share might be?

Patrick Harshman

We have some internal estimates, but they are unfortunately, at least to the best of my knowledge, third party studies out there, they talk about that. So, I prefer not to quote what our internal expectations to any degree or specifity, but let me say in EdgeQAM, we feel comfortable saying that we are number one. I think we get a lot of credit for having invented the category and particularly with VOD, we feel quite strongly that in VOD applications, we have well-over 50% of the deployed footprint that is out there today. And, in MPEG 4, I think that is a little bit harder. I would say that we probably think that our market share is less than 50%, but probably greater than 25% and I regret that I really do not have anything more specific at least to my fingertips here.

Larry Harris - C.L King

I understand, thank you. And, in terms of the modular CMTS, I know that early you mentioned that it was being deployed in international geography. They are not seeking specific customers, but are there regions, like Asia Pacific or others, where you are starting modular CMTS being deployed?

Patrick Harshman

We seen it in several regions, certainly Asia, Western Europe and perhaps misspoke if we said it was exclusively there, we have also started to do some nice projects here in North America.

Operator

Our next question is from the line of Jack Monte with Lehman Brothers.

Jack Monte - Lehman Brothers

I just wanted to dig more on to the gross margin performance if I could. I read the release and it seems like mot of the improvement is from new products on a quarter-over-quarter and a year-over-year basis with another bucket coming from cost efficiencies. Is any breakout do you have? Maybe two thirds from new products and 33% improvement from the other bucket and maybe you could help us understand that granularly there?

Robin Dickson

I think Jack you have probably got it right in that the majority, I guess comes from the broad new product, which includes clearly the products from our relatively recent acquisitions, which are more software intensive. That is something we talked about for some quite time that both, in terms of internal development and acquisition strategy that that is the direction that we are moving in and that is I think giving us some success with gross margins, but I think also it does come from of the things we talked about earlier with the kinds of functionality that we are putting on top of some of our fundamental platforms in the EdgeQAM areas are obviously one, but some of the stream processing things that we do with our posting, for example, those kinds of categories. I think it is part of a strategic shift to a different model if you like of product and on top of that and put some stand along software products, as well. So, I would attribute the majority of the improvement to that category.

There is probably some cost benefit we have had, just in amplifying something that we touched on before, having hit 50% gross margin in Q1, some of you maybe wondering, although I do not think we were asked specifically why we are we on slightly lower range, 48% to 50% and I do think that there are certainly cost pressures out there, inflationary pressure on materials, on transportations and particular, and so on and so forth., all the stuff that we know well about that we read everyday. At the given of balance there, I think we certainly had some great benefits and we are going to continue to try to work on that side of the equation, as well.

Jack Monte - Lehman Brothers

And, just one question on linearity, it is right to say that the quarter was more lowered and I guess I am just curious is that a typical season pattern in the first quarter? Thank you very much.

Patrick Harshman

I find it actually difficult these days to think about front-end versus back-end loading. Significant piece of our business is driven now by what we call projects, which are often multi quarter projects, where revenue is recognized over a period of time or possibly at the end of the contract, depending on the specific terms and so, that is really driven more by the work that is done on those project, during the quarter, which tends to be fairly linear in most instances and so, this probably close to half of our business these days is that type of activity, and so it is hard to think of it as front-end loaded or back-end loaded, when much of the business is actually progressing on a relatively even pace as these projects are worked upon and completed.

Operator

Our next question is from the line of Bryan Coyne with Friedman, Billing Ramsey.

Brian Coyne – Friedman, Billings, Ramsey & Co.

Two quick ones, back to the cash question and sort of MNA, I mean you are suggesting that the deal you might consider probably would not be transformational probably more additive in terms of your technology perhaps divisioning in different markets and would probably a smaller deal. We still have pretty big chunks of cash there; do you have any other thoughts about what you do with the rest of that cash? And then the second question, going back a little bit trying to understand what the trend might have been in going back to your old legacy bandwidth division relative to the growth you saw on the EdgeQAM side, I just want you to give us a characterization of how that did (audio gap).

Patrick Harshman

On the cash question, the strong balance sheet. We said frankly that we raise more money for two reasons: one, we simply felt it was a prudent as we see our business expanding particularly overseas to have a stronger balance sheet that allows us to fully to stand; we are head-to-head with some of our larger competitors and particularly overseas some customers in new markets that they perhaps do not know us as well. Having a very strong balance sheet will actually serve as well as we break into some new geographies and new accounts.

That being said, we also issue a question, we said that we plan to continue to be and perhaps even more so be aggressively looking at the right times of MNA deals. So we previously signaled that we are quite pleased with the way our Rosette and interim transactions have been playing out for us and certainly the default position is to continue to look for those kinds of deals.

That being said, I do have to caution that we do not rule out anything larger or more significant. That is not just our ambition. But it is good to have the flexibility. I think it is important to have a strategic flexibility to be able to look at a range of targets and to have the capability to execute several deals. I am not telling you much except for that from our perspective, we like having the flexibility and we think the flexibility will serve us and the company well as we particularly in this market as we continue to look for ways to add value.

On the second question on the HSC business, well again we will stand by the policy of not breaking out specific product lines. But I made a comment earlier to an earlier question that we actually continue to be quite pleased with the way our HSC access business go. So we have very strong position in many accounts, strong and stealth-based, and we continue to have great technology. I mentioned one press release around some new WDM technology. We have got a very strong pipeline there. We have to be focused, and we see this technology as being very viable to us as part of a broader solution offering for our Cable customers. It continues to be an important part of our business I think HSC bandwidth the augmentation is in general an important part of the equation for our Cable customers as they look at bandwidth congestion on the network in involving their service at caring capability both downstream and upstream. And, it is a business we continue to feel strongly about.

Brian Coyne – Friedman, Billings, Ramsey & Co.

Could you say access group sequentially?

Robin Dickson

Our first quarter is typically, this is again the seed nowadays Brian in the first quarter is generally is lighter in the outside plant space.

Operator

Our next question is from the line of Paul McWilliams with Indie Research.

Paul McWilliams – Indie Research

Congratulations on the gross profit, very good move. I have a linearity question that is a little bit different from the one previously asked. What I am curious about is about linearity of Cable demand in the quarter, can you give me any color on that?

Robin Dickson

Do you mean order input Paul?

Paul McWilliams – Indie Research

Yes, I am sorry. I am more concerned about US than I am internationally.

Patrick Harshman

I think that is just too deep of a level. I mean I would I do not think that there is any golden nugget there in terms of information but I think we just prefer not to get into what happened in January, February and March. I am sorry about that but I think we would prefer not to get into that level. But I will tell you that I do not think that there is anything material there that we or you by extension would extract in terms of broader dynamics.

Paul McWilliams – Indie Research

Could you ship a little bit into what maybe you would envision for Q2 and Q1?

Robin Dickson

Again Paul I think most of our, certainly much of our business today really is not about whether we can ship a product on the last day of the quarter or not. It really is the major variables that really end up being the progress that we make in some of the large installations that we are doing. I mean notably in satellite in Telco but also in Cable as well. So I really think the linearity question is probably best; what is better in pure hardware and pure software business is that where we are in the; with a lot of integration installation project-type of activity is really driven against. It is not by what we shipped on the last day or the last week or the last month, it is really more how well are we and our customers progressing on the installations that we are doing, whether it is encode or upgrade or an edge climbing installation or whatever.

So as Patrick said I do not know that there is a whole lot of useful information they are even if we were to reveal some of the monthly, weekly, whatever progressions.

Paul McWilliams – Indie Research

Let me tell you what I am trying to get to here; you had a wonderful year-over-year growth this quarter no doubt. Now, the implied growth for the next six months based on the midpoint of your guidance would be about 13.9%, clearly slow in significantly from the first quarter. It is a little bit less growth than I was expecting and I am trying to see if maybe some of that growth was recognized, maybe that is a better word than shipped, in the first quarter.

Robin Dickson

I do not think we have ever held out that we would grow at 24% or 25% on a year-over-year basis. We have not given any guidance to that effect. We really have not given any formal guidance for the year. So I think if you will look at the nine months and you take the 24% from the first quarter and the 13%, 14% for the next six months, I think that gets into a growth range that is one that we talked more broadly about recently. So again I do not think we have held out that we can maintain the pace that of last year’s revenue growth of 25%, 26%, I think it was, or the 24% that we saw in the first quarter.

Paul McWilliams – Indie Research

What is it that you have held out so I can understand that clearly?

Robin Dickson

I think on our last conference call when we were pressed on the year-over-year growth that when we said yes we can do something in the 15% to 20% range.

Paul McWilliams – Indie Research

The next six months are a little bit below the consensus; I realized you do not write this consensus. And, for the full year based on the consensus and using the midpoint, you would have to do about $102 million in Q4 to hit that before your consensus. So I am just trying to put some numbers together here to make sure I am modeling as best I can with the information I have available.

Shifting over here to a more specific question; software and service revenue was down sequentially, did you address that in your prepared comments I may have missed it.

Robin Dickson

Not specifically. I think one factor is probably, and I do not know if all the data in front of you, but one factor is probably that the service portion would be a little bit lower in the first quarter. Again because there were some projects that did not get completed or it tends to fluctuate with the project activity that is going on. And, again that is particularly associated with the video processing space and it was done sequentially so it is not unusual for the service portion which to a large extent goes with that to be done also.

Paul McWilliams – Indie Research

But we might expect a rebound in the next quarter on that?

Robin Dickson

Yes I would think so, yes.

Paul McWilliams – Indie Research

Back up to Q3, Q4 levels maybe?

Robin Dickson

I do not know. I do not want to be specific as of yet but it does tend to roll along with the video processing activity.

Paul McWilliams – Indie Research

A general question here on the US MSO’s; do you think that there will be a ship to impact for it at some point in time? And, if so when do you think that might happen?

Patrick Harshman

We definitely think it is a ship eventually. I think it is probably; I think a broad ship is probably three years out. Although I think it will not happen overnight. I think we will start to see, it may have already started to see set top boxes delivered and start to be deployed to support both MPEG2 and MPEG4. And, the kind of things you hear discussed; high definition video tier or some kind of high tier product that is targeted at these boxes or additional boxes rolled out on the context of some premium tier like that.

I think that the MSO’s will continue to, over the next several years try to maximize the return on the quite substantial investment they have made in MPEG2 boxes. But I think it is not a question of where but simply when we will see broader introduction of MPEG4 technology in US Cable space.

As I mentioned in my prepared remarks, we are seeing particularly in markets where there is not such a large install-based of set top boxes internationally we are seeing. And, I think we have announced a couple of deals perhaps one in Latin America and other in Korea where MPEG4 is being introduced or there is a hard switch now to MPEG4 with Cable operators.

Paul McWilliams – Indie Research

Let me cap off one very general question, based on what you see today versus what you saw January 1st shall we say do you see the aggregate demand environment? I am not trying to get a forecast for you, but the aggregate demand environment for your type of equipment as being better or worse or about the same for 2008 as what you saw at the end of the year?

Patrick Harshman

I think marginally better flat 2 to marginally up.

Paul McWilliams – Indie Research

Wonderful, execution has been great I really appreciate your hard work and the changes you made. Thank you.

Operator

Our final question comes from the line of Amitabh Pathy (ph)

Amitabh Pathy

I just have a couple of question around the balance sheet. Robin I was wondering if you could just update us on the status of the auction rate securities in your balance sheet?

Robin Dickson

Yes we have as we have reported in our 10-K we had about, I think it was $1 million with the number we have reported at that time. We have since worked that number down somewhat with either successful auctions or in some cases redemption. We will be coming down below the mid 20’s shortly. We have concluded at least at this point and we will review this private filing our 10-Q but we have concluded at this point that the value of this is not impaired and so we have not made any provisions for impairment in our income statement. And, we will have a more complete disclosure of course when we file our 10-Q.

Amitabh Pathy

Okay got it. And, then the second question was it looks like your days payable outstanding dropped quite dramatically in the quarter, just wondering what happened there?

Robin Dickson

I cannot figure of anything particularly unusual. I think we probably did take in a few might of immaterial in the latter stages of Q4 for shipment during that quarter not necessarily revenue recognized in that quarter but for shipments in that quarter and I think those balances were paid down in January, February. I cannot think of anything particularly notable about accounts payable other than just the general movement of inventory and inventory purchases.

Amitabh Pathy

Should we expect that to see or maybe go back to a more normalize level that we saw last year?

Robin Dickson

It is a little bit low. I think we are also with our greater cash reserves. We are in some cases taking advantage of cash discounts with our suppliers and so our paying, in some cases, not everywhere but in some cases paying more quickly in order to take advantage of discounts.

Amitabh Pathy

Got it, and my final question for Patrick. Patrick you have talked about module of CMTS as a driver a couple of times actually several times today; just wondering I mean from your perspective; I assume most of that is somewhat correlated or related to interest in 3.0 just wondering from your perspective, would you say that the momentum building around 3.0 has accelerated the last few months? Any color you can shed in terms of the acceptance low around 3.0?

Patrick Harshman

I had not picked up any real change in the market or customer sentiment. I do want to emphasize that modestly and chest architecture has some really advantage even in the context of 2.0 architectures. And, you should probably know we have been thinking out some very innovative ideas in the market place about how, even in the context of 2.0 the technology can be merited up with some very innovative ways of delivering video and IPTV services over the Cable infrastructure. So from our perspective the driver has been a combination of the architectural enhancements that have been realized, even on the context of 2.0 together with a lot of interest and appreciation for and movement towards some of these more innovative video delivery solutions that we can able once the modular CMTS infrastructure is in place. So for us I do not know is in plate even more the drivers than any change positive or negative around 3.0.

Amitabh Pathy

Okay great, thank you. I appreciate it.

Patrick Harshman

Thank you very much and I would like to thank everybody else for participating in the call and we look forward to speaking with you again very soon.

Operator

Ladies and gentlemen this concludes the First Quarter 2008 Harmonic Earnings Call.

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