BigBand Networks, Inc. Q1 2008 Earnings Call Transcript

May.15.08 | About: BigBand Networks, (BBND)

BigBand Networks, Inc. (NASDAQ:BBND)

Q1 2008 Earnings Call Transcript

May 1, 2008 5:00 pm ET

Executives

Erica Abrams – IR, The Blueshirt Group

Amir Bassan-Eskenazi – President, CEO and Co-Founder

Moe Castonguay – CFO

David Heard – COO

Analysts

Tal Liani – Merrill Lynch

Scott Coleman – Morgan Stanley

Anton Wahlman – ThinkPanmure

George Notter – Jeffries & Co.

Simon Leopold – Morgan Keegan

Eric Buck – Brean Murray

Blair King – Avondale Partners

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the BigBand Networks first quarter 2008 earnings conference call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, Thursday, May 1, 2008. I would now like to turn the conference over to Erica Abrams. Please go ahead, ma'am.

Erica Abrams

Thank you, operator, and welcome, everyone. If you have not seen our first quarter earnings press release, it can be found on the Investor Relations portion of our Web site at www.bigbandnet.com.

With me today are Amir Bassan-Eskenazi, Chairman and CEO, Moe Castonguay, Chief Financial Officer and David Heard, Chief Operating Officer of BigBand Networks.

We will discuss financial results for the first quarter, ended March 31, 2008, as well as outline the Company's financial goals for the second quarter of 2008. Before I turn the call over to Amir, let me remind you that the matters we will be discussing today may include projections and other forward-looking statements and as such are subject to the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, including those risks and uncertainties as discussed in our recent annual report, as filed on Form 10-K with the SEC. We will also be 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 Web site. BigBand Networks assumes no obligation and does not intend to update forward-looking statements made on this call. With that, let me turn the call to Amir. Please go ahead, Amir.

Amir Bassan-Eskenazi

Hello. Thank you all for joining us today. Before we dive into the first quarter financial results and strategic highlights, I want to take this opportunity and welcome Moe Castonguay to BigBand Networks. Moe has been with us for two months. He's a great addition for our team and he's already having a positive effect on our business.

Today I'm going to review our Company and financial highlights. Moe will then discuss our detailed financial results. Then, along with David Heard, we will take your questions. As you may remember, coming out of our last earnings call, we identified three major areas of focus for our business. First, executing to our business plan, second, continuing to leverage our leading position to win new customer footprints for our platforms and, finally continuing to refine our business model as a Pure-Play Digital Video Company.

In the first quarter of 2008, we made solid progress against all three of these. Starting with our execution, I’m pleased to report a strong first quarter for 2008. Revenues for the period were $39.9 million, up from $30.7 million in the prior quarter. Importantly, video revenues increased 50% over the previous quarter. Also in the quarter, we realized 61% gross margin as a result of unusually high mix of software content and expansion orders in our product revenues. This contributed to better-than-expected earnings.

We reported the GAAP loss per share of $0.03 versus our guidance for loss per share of $0.08 to $0.11 and non-GAAP earnings per share of $0.02, versus our guidance for a loss per share of $0.02 to $0.05.

Second, new footprint growth. In the first quarter, intense service provider competition, especially around the addition of more high-definition programming, drove new footprint gains to our platform. This competition is driving all sectors of our business, namely our switched digital video, TelcoTV and Digital Simulcast solutions.

Third, with regard to our business model, we remain bullish about our long-term opportunity for next-generation personalized television applications and are aligning our R&D resources accordingly. I’ll now briefly cover the different areas of our business, starting with switch digital video. We remain the undisputed market leader of this industry-changing technology that enables significant high-definition channel growth.

BigBand's SDV solution is now deployed or in the process of being deployed to more than 14 million households across six leading operators networks. This is up for 12 million households in the prior quarter. Our deployments are proceeding well and our customers are pleased with the benefits that we're providing the networks. SDV was a major contributor to revenues in the first quarter, following successful deployment of our fifth-generation SDV solution with a number of MSOs and across multiple large networks. As you may recall, our business model is driven initially by footprint wins followed by expansionary purchases.

During the quarter, we made progress on both, as our customers continued to invest in SDV and we expect them to continue to do so in the future. This footprint is a critical element of our business plan, as it enables future revenues, from capacity and functionality expansion later on. From a competitive point of view, we feel that our SDV solution differentiation is stronger than ever. This is demonstrated by the fact that in the first quarter, we won back key cable markets that had been previously awarded to our competitors.

In the first quarter, we also benefited from multiple strong SDV expansion opportunities. One example was Cablevision's expansion of its previously deployed SDV system with the addition of 15 high-definition channels. We believe these Q1 expansions represent the beginning of a multiyear trend that will sweep across all service providers' networks and will drive a significant amount of HD content to subscribers' homes. We believe the shift will be as dramatic as color TV replacing black and white television.

Over time, we believe that this trend will cause substantially all of our SDV sites to meaningfully expand their initial deployments, resulting in incremental revenues. We do not yet know exact timing or magnitude of this expansion and our focus for the next 12 months to 18 months remains on footprint growth as we win new systems.

Turning to our progress with Telco TV. We continue to make great strides with Verizon's FiOS TV deployment, with them recently reporting over 1.2 million subscribers for FiOS TV services. This business is clearly in the footprint grab stage and our growth is linked to the addition of more central offices that are equipped with our platforms for digital video services. We believe that the majority of this opportunity is still in front of us. Our visibility into actual deployment schedule continues to improve through greater supply chain management.

We expect Verizon to remain a very significant customer through the foreseeable future, though not at the levels we experienced in late '06 and early '07. In summary, our partnership with Verizon is developing well and we remain the sole supplier of video edge platforms for the FiOS TV rollout. We continue to believe that IPTV is a significant growth opportunity for us. Our interaction with global Telco providers validates that the long-term opportunity is significant and that it matches directly to our differentiated products and technologies.

We're excited about the progress we made in the area and are looking forward to discussing this further in the future. Digital Simulcast continues to be an important area for our business. In the first quarter, we experienced solid results, primarily driven by HD expansion and Digital Ad Insertion by U.S. operators. We're also seeing new business from international customers, with the growth coming from new digital deployments in China, further broadening our presence internationally.

BigBand now counts more than 40 cable operators in China utilizing our platforms to deliver digital video services. Building upon the success of all the platform areas that I just spoke about, we continue to invest in research and development to bring new innovations to the market. As digital television has transformed from a broadcast medium into a truly personalized, one-to-one viewing experience, we expect BigBand platforms to be at the center of enabling this transformation.

As evidence of this, we recently announced a 91% increase in our QAM platform shipments in 2007, as compared to the prior year. Much of this growth is based on customers selecting BigBand QAMs due to what we believe to be a significant product differentiation in the areas of reliability and better subscriber video quality. We believe this puts BigBand in a market-leading position with regards to this important network Edge element. Moreover, in Q1, we also announced our next-generation video management system.

We believe this system offers significant operational benefits to customers who have multiple element video networks, such as that being deployed by Verizon and those being deployed by our SDV customers. Our customers are expecting us to bring further innovation to the market to enable them to offer more and better services to their subscribers. We'll continue to raise the bar and we'll demonstrate those innovations in an upcoming National Cable Show that will be held in New Orleans next month. These include improvements in video quality and QAM density, with variable-bit-rate video, addressable advertising, as well as IPTV over switched digital video.

In summary, we had a good quarter of execution and demonstrated our platform is differentiated, our competitive position appears stronger than ever, as we continue to win new footprint and we're taking important strides to achieve our business plan.

Now, I would like to turn the call over to Moe for a financial review.

Moe Castonguay

Thanks, Amir, hello, everyone, and thanks for joining us today as we report our first quarter results. As Amir indicated, this is my first quarter as CFO of BigBand, and I'm happy to be part of the team. Today, I'm going to provide a little more details on our first quarter financial results. After I've reviewed some of the highlights of the P&L and balance sheet, I’ll provide you with our outlook for our second quarter. While we're pleased with our results for the quarter, we would like to inform our investors that we’ve benefited from a number of factors this quarter that resulted in exceeding our revenue, gross margin and EPS guidance.

The most significant factor that positively affected our first quarter operating results were higher gross margins that benefited from orders with higher software content and higher-margin SDV expansion orders. This favorable mix of factors will not be as prevalent in our second quarter and we expect to return to more normal levels of gross margins.

On our call today, I will be providing the financial results on a non-GAAP basis unless I specify otherwise. This means that the first quarter non-GAAP operating results will exclude stock-based compensation of $3.2 million, amortization of intangibles of $143,000, restructuring expenses of $335,000 and income tax expense of $95,000. These amounts were offset by a $468,000 benefit from selling CMTS product inventory that was previously reserved for in a prior period.

For the first quarter of 2008, we reported total revenues of $39.9 million, as compared to $30.7 million reported in the prior quarter and $52.8 million reported in the same quarter one year ago. As a reminder, the drop in revenues from one year ago resulted primarily due to Verizon's building inventory early last year in anticipation of its FiOS deployment, as well as $4.9 million drop in CMTS revenues due to the discontinuation of that platform in 2007.

Product revenues in the first quarter were $32 million, as compared to $22.9 million in the prior quarter and $45.7 million in the same quarter one year ago. Service revenues in the quarter were $7.9 million, as compared to $7.8 million in the prior quarter, and $7.1 million in the same quarter one year ago. Our top-five customers accounted for 80% of revenues in the first quarter, as compared to 78% in the prior quarter and 83% in revenues in the same period a year ago.

Cablevision, Cox Communications, Time Warner Cable, and Verizon each accounted for more than 10% of our revenues this quarter. On a geographic basis, 87% of revenue was domestic, as compared to 81% in the prior quarter and 90% in the same period a year ago. Gross margins for the quarter were 61%, as compared to 45% in the prior quarter and 58% in the same quarter one year ago. First quarter gross margins were above our expectations as we benefited from strong mix of software and SDV expansion orders in the quarter, as I discussed earlier.

Operating expenses for the quarter were $24.3 million, as compared to $23 million in the prior quarter and $24.8 million in the same quarter a year ago. We ended the first quarter with 496 employees, as compared to 518 at the end of last quarter and 607 employees at the end of the first quarter a year ago.

Operating income for the quarter was 30,000, as compared to an operating loss of $9.2 million in the prior quarter and operating income of $5.9 million in the first quarter of last year. Interest and other income was $1.8 million in the first quarter of 2008, this compared to interest and other income of $1.7 million in the prior quarter and interest and other income of $400,000 reported in the same quarter a year ago.

Provision for income taxes during the first quarter of 2008 was $370,000. This compared to $507,000 in the same quarter one year ago. Non-GAAP net income for the first quarter of 2008 was $1.4 million. This was significantly above our guidance, due to our unusually high gross margins. Non-GAAP diluted earnings per share was $0.02 in the quarter, as compared to a loss per share of $0.12 in the prior quarter and earnings per share of $0.09 in the same quarter one year ago. And on a GAAP basis, our basic and diluted loss per share was $0.03 in the quarter, as compared to a loss of $0.23 in the prior quarter and a loss of $0.05 in the same quarter one year ago.

Shares used to compute first quarter 2008 basic EPS was 62.4 million, as compared to 60.7 million in the prior quarter and 18.3 million in the same quarter one year ago. Shares used to compute first quarter 2008 diluted EPS were 67 million, as compared to 62.2 million in the same quarter one year ago.

Now let me address the balance sheet. We ended the quarter with cash, cash equivalents and marketable securities of $150 million, as compared to $154.5 million at the end of 2007 and $145 million at the end of the first quarter one year ago. DSOs were 58 days, as compared to 82 in the prior quarter and 70 days in the same quarter one year ago. Deferred revenues were $63.7 million, as compared to $67.3 million in the prior quarter and $56.6 million in the same quarter one year ago.

Now I'd like to take a moment to provide an outlook for our second quarter of 2008. We will not provide any outlook beyond our second quarter. We also have no plans to update this outlook as the quarter progresses. The following guidance applies to the second quarter GAAP outlook. Net revenues are expected to be in the range of $40 million to $43 million, GAAP gross margins are anticipated to range from 52% to 55%, based on current outlook for product mix and the balance of a new footprint to expansionary business for Q2. This is a more normalized rate. Earlier today, we initiated a minor restructuring, which resulted in the elimination of approximately 5% of employee positions.

This restructuring was undertaken to allow us to redeploy scarce resources to focus on growth opportunities in pure-play digital video. The financial impact of this headcount action is that the Company will take a restructuring charge of approximately $400,000 in the second quarter. As a result of planed hiring this calendar year, there will be no net reduction in people costs in the year. Also as part of the restructuring, the Company will report a facility-related restructuring charge of $800,000 in the second quarter. The total people and facility-related restructuring charges anticipated for the second quarter are $1.2 million.

GAAP operating expenses, inclusive of the restructuring charges, are expected to be approximately $28.5 million to $29 million. GAAP operating loss is expected to be between $5.5 million to $7.5 million. Interest and other income is expected to drop to approximately $1.3 million, reflecting lower interest rates on cash and investments. GAAP provision for income taxes is expected to be in the range of $300,000 to $400,000. GAAP net loss is expected to range from $4.5 million to $6.5 million.

GAAP net loss per share is expected to range from $0.07 loss to $0.10 loss. Our non-GAAP guidance for Q2 2008 is as follows. The second quarter non-GAAP operating results will exclude stock-based compensation of approximately $3 million, amortization of intangibles of $143,000, restructuring expenses of $1.2 million and taxes of approximately $200,000. Non-GAAP gross margins are anticipated to be in the range of 53% to 56%. Again, this is a more normalized rate.

Non-GAAP operating expenses are expected to be approximately $24.5 million to $25 million. Non-GAAP operating loss is expected to be in the range of $1 million to $3 million. Our non-GAAP provision for income taxes is expected to be in the range of $200,000 to $300,000. Non-GAAP net loss is expected to range from breakeven to a loss of $2 million. Non-GAAP net loss per share is expected to range from a net loss of $0.03 per share to breakeven. Shares used to compute Q2 basic EPS will approximate 63.5 million shares. Shares used to compete Q2 diluted EPS will approximate 68.5 million.

Let me conclude by saying that we are pleased with our Q1 operating results and bullish about our future. We’ll continue to invest aggressively in product development in what we believe is an exciting market opportunity.

Thank you for listening. I'd now like to turn the call back over to Amir.

Amir Bassan-Eskenazi

Thank you, Moe. In closing, we're pleased with our result in Q1, and we'll continue to focus on executing to our business plan, leveraging our leading position to win new customer footprint to our platforms and continuing to refine our business model as a pure-play digital video Company. Our team has performed well in the quarter and I would like to thank our employees for their efforts and contributions. The combination of our recent execution, customer interaction and competitive position make us very excited about the longer-term opportunity.

With that, we will turn the call over to the operator for questions. Please go ahead.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Tal Liani with Merrill Lynch. Please go ahead.

Tal Liani – Merrill Lynch

Hi, guys. I've a few questions. First, if you don't mind to go over again the gross margin issue, obviously much better than expected. What is the reason behind it? I didn't get it. Second, the deferred revenue declined $4 million. Can you discuss it? And then a bigger question, Comcast seemed to start it slow with SDV, and this was mentioned by Harmonic and ARIS. And I'm wondering if you can provide us with some update on your position at Comcast and overall what do you see in the market? Are they unique versus the others, as much as you could discuss? Thank you.

Moe Castonguay

Hi, this is Moe. I'll take the first two questions and then I'll turn it over to Amir to speak about Comcast. Well, first of all, as I indicated, our gross margins were unusually high at 61%, and they benefited from the high concentration of software content in our product revenue, as well as an unusually high level of expansion orders in the quarter. This was both unusual and that it was so high, and if you look at our gross margins, they were considerably higher than we experienced last year, and as we look out into our guidance for Q2 and our visibility, we don't see that concentration of expansion orders or a high degree of software content in our orders. Hence the reason we are guiding to non-GAAP margins of 53% to 56%.

Tal Liani – Merrill Lynch

What is the software component? Is it the SDV server licenses?

Moe Castonguay

That's certainly one piece of it. And, as we indicated, it was one of those usual situations where we had some orders that we had visibility to in the beginning of the quarter, but quite frankly weren't certain when we were going to be able to recognize them, whether it would be Q1 or Q2, it just so happened that a number of them became recognizable in the first quarter and to some extent at the expense of Q2.

Tal Liani – Merrill Lynch

And was it something that was pushed out from current quarter, or was it just something – I'm just trying to understand the recurring element of the surprise. I'm trying to understand, is it just because you recognize now something that was pushed out for a few quarters, or that it's really just a matter of concentration of orders in one quarter and nothing more than that?

David Heard

Yes. I think what Moe is saying, it's a little bit of both. Each of the projects that we deploy customer by customer, region by region, are truly unique in their software integration capability, and we're levering our four years of leadership, especially in the switched digital category. To better understand what are the key elements to finishing those integrations. This happens to be one that came in sooner than expected and as Moe said, it changes the mix of when things are happening in Q1 versus Q2. So, it truly is one of product mix, together with timing of recognition of projects, which we’ll continue to gain visibility into quarter by quarter.

Tal Liani – Merrill Lynch

Okay.

Moe Castonguay

And your second question was related to deferred revenue, and we saw a very modest decline in deferred revenue in the quarter, nothing too significant with that. And I think your next question was regarding Comcast, and I'd like to ask Amir to comment on that.

Amir Bassan-Eskenazi

Yes, hi, Tal. This is Amir. Yes, when we talked about the six operators that we deployed and are in the process of deploying for the year and the quarter, it excluded Comcast, who is in the process of planning and running out the plan for SDV, and I think it's fair to say that Comcast is still in the process of doing so. And, in that regard, it's different than the six other operators that we're deploying with, but relative to your question about how that affects the rest of the market, as we discussed, SDV is very much a financial and technical success. We have added 2 million households pass to our count now to 40 million households that are deployed, we’ve switched or in the process of being deployed over a large number of operators. Our customers are happy with the deployment, as evident by the fact they come back and expand their initial deployments and use that for offering of more HD. So, I have every confidence that in the right time Comcast would be one of those operators deploying SDV and another opportunity to add value and capability to the network in doing so.

Tal Liani – Merrill Lynch

And, Amir, maybe I can just have one short follow up.

Amir Bassan-Eskenazi

Sure.

Tal Liani – Merrill Lynch

Two issues. First, Cisco, can you discuss – I know you cannot provide customer information, but can you discuss your position versus Cisco over the last three months? Have you won regions from Cisco or did you get any mandate to go after Cisco regions? Do you think you're still strong versus Cisco, etcetera? If you can discuss this one aspect and, second, when you speak about the six SDV networks, how many of them – again, if you can quantify as much as you can, how many of them you see repeat business where they come back to you and say we want to add more channels to SDV and we need more Edge QAMs. And I'm just wondering, have we stared to see repeat business or are we still in a phase of build-out throughout the U.S.?

Amir Bassan-Eskenazi

Okay. Great. So, first, just to correct one point. We have six operators. Each one of them have many networks.

Tal Liani – Merrill Lynch

Right, that's what I meant.

Amir Bassan-Eskenazi

Right. Okay, so, look, as the leader in SDV that invented this with our customers and deployed this over multiple years, we have I believe the charter to go after every network as we do, independently of what vendor is or is not engaged with getting SDV business in those places. So we have been able today to get several locations back from other vendors that were awarded the SDV business before us, and when the customer had experience with us and with them chose to take this business back to us based on functionality, uptime, features, services and other elements of our solution. That includes competition with Cisco, includes competition with Motorola. Those are the people that we typically run into out there in offering these industry-changing applications. Now, I've every confidence that we will continue and grow the business, which is very much like I said before, it is in the footprint growth timing. Right now, the 14 million households that we talk about are probably something in the single digit, may be 10% of what we believe the total terminal opportunity for SDV, based on our interaction with customers in different regions and different geographies. So it's very much about footprint grab. Some of them started to expand, and we believe that the expansion is very much going to be a must-have for all our customers that are deployed with our SDV and all those that are not yet deployed with any SDV because a typical cable system that we work on has probably 40 to 50 and maybe more than that high-definition channels. But I've no doubt that if you fast forward a couple of years, you're going to see a high double-digit, triple-digit number of high-definition programs, and we believe that SDV is a key element of getting there. So in the next two years we're going to continue 12 months to 18 months, I would say, we will continue in growing our footprint and we will see expansion coming in from time to time as different locations decide to up their HD channels, as Cablevision did in this quarter and I'm sure other people will do in the future. We do not know the timing and impact of this kind of expansion in the near future, and we think it's going to be more of the norm to focus – our business is going to be more driven by footprint grab than by expansion.

Tal Liani – Merrill Lynch

Great, thank you.

Amir Bassan-Eskenazi

Sure, thank you.

Operator

Thank you. Our next question is from Scott Coleman with Morgan Stanley. Please go ahead.

Scott Coleman – Morgan Stanley

Sure. Thanks, guys. In terms of the heavy software content this quarter, I'm wondering if that included any incremental applications in your Telco customers beyond the grooming application that you've been providing historically?

Moe Castonguay

Yes, we're not going to get in the habit of breaking down the product categories, but it was normal course of switch deployment in terms of software content that came across in this quarter's operating results.

Scott Coleman – Morgan Stanley

Okay, and then I guess second, Amir, in your comments you talked about the progress that you're making, that you're pleased with the progress that you've made in IPTV, but you didn't really offer much detail beyond that. Now, I know you've been in discussions with carriers globally for a while, but I'm wondering if there's anything you could share with us that supports that idea of progress being made?

Amir Bassan-Eskenazi

I did not detail, and the reason is we believe it's premature. The point I was making is we see IPTV as a large opportunity that's in front of us. It maps directly into our core competencies and what we do best, the same kinds of things that enable us to be the engine at the edge of the FiOS TV network for Verizon and be the leader in SDV. It solves the same kind of issues for the IPTV Telco providers worldwide that we offer those customers, namely overcoming their bandwidth limitations, their function limitation, their ability to scale video services and support the quality of experience subscribers are expecting. Other than that, I think at due time we would be happy to share this information with you. Penetrating this kind of opportunity the network takes its time we've done it before with Verizon and we saw how long it took and I expect the same thing to happen on the IPTV side, as well.

Scott Coleman – Morgan Stanley

Okay, fair enough, and then maybe if I could just shift back to Verizon again. Clearly, a shift to all digital going on at Verizon. They've been pretty public about this. You talked about Verizon being a meaningful customer for the foreseeable future, but at lower percentages. Can you give us an idea, maybe a range of what you would expect Verizon's contribution to be in 2008 for your business?

Amir Bassan-Eskenazi

Well, Scott, the fact is we don't really guide for 2008 and the reason for that is we really are using the visibility we have, which on the Verizon side is improving, but I think relative to what we went over the previous period, we're got to remain caution and guide one quarter at a time for now.

Scott Coleman – Morgan Stanley

Fair enough. Thanks, guys.

Operator

Thank you. Our next question is from Anton Wahlman with ThinkPanmure. Please go ahead.

Anton Wahlman – ThinkPanmure

Hi. I wanted to ask about the relationship between deferred revenue and the gross margin percentage. Clearly you started eating into the deferred revenue a little bit this quarter and that's to be expected, obviously, given how high it's been and as the product matures and you can go through and recognize this. From a gross margin perspective, though, is this something that is hitting the income statement at an above average gross margin percentage as you plow through the deferred revenue in coming quarters?

Moe Castonguay

Well, the reality is that our margins obviously were considerably higher than expected, but you only saw a very limited reduction on our deferreds, so I don't think there's any correlation between the two.

Anton Wahlman – ThinkPanmure

That was about $4 million or so reduction in this thing, a figure maybe just had any positive impact as part of the overall bundle there?

Moe Castonguay

I think really the issue to focus on was just the overall the high concentration of software in the product revenues and the fact that there were so many expansion orders in the quarter, that's really what drove the gross margin.

Anton Wahlman – ThinkPanmure

Amir, I think if I heard you right you said that you had had a competitive win against – in one carrier somewhere, where switched broadcast business had previously been awarded with one or more other vendors. Did I hear you right about that, and that that carrier had turned around and given you the business or part of the business subsequently?

Amir Bassan-Eskenazi

That is correct.

Anton Wahlman – ThinkPanmure

Okay, that's all I had.

Moe Castonguay

Thank you.

Amir Bassan-Eskenazi

Thank you.

Operator

Thank you. Our next question is from George Notter with Jefferies. Please go ahead.

George Notter – Jefferies & Co.

Hi, thanks a lot. Wanted to ask about the margin and the software question again. Was this release 5.0 of the product that occurred in the quarter that helped you on the margin side?

Moe Castonguay

So, what I'd tell you is that we did do release 5.0, yes, within the quarter. And as I mentioned, the software content associated with switched digital video was a significant contributor to that margin uplift, given the mix associated in Q1.

George Notter – Jefferies & Co.

And if you didn't ship release 5.0, what would the margin have looked like?

Moe Castonguay

It's a complicated question. We have to go back and take a look, and if we did – I'm trying to think of the hypothetical. The operating system required to run our customers out in terms of their deployments, immaterial. We would have shipped the software content with associated price. It wasn't the difference between 5.0 price and any prior price.

Amir Bassan-Eskenazi

The release 5.0 enabled us to work with different ecosystems that our customer required and realized the revenue. It did not, in fact that it was 5.0 did not materially change the gross margin itself.

George Notter – Jefferies & Co.

Fair enough. Okay. And I guess I want to also ask about this minor restructuring that you mentioned in the monologue it was in the press release. Can you talk about where you're reallocating the resources in the Company, what areas of the business are you taking headcount out of? Any more detail there would be great?

David Heard

This is David. I think as we look across the Company at the different functions and as we look to scale as a pure-play video provider, I think we looked at areas of consolidation functionally where we could operate more efficiently. And so we've pulled in areas of efficiency across the Company from sales to all the way through to operations and engineering to allow us to continue to invest in the growth areas that we see in front of us as a Company, to add more feature extensions to our platform and platform extensions, to take advantage of some of the exciting market opportunities that we addressed in the earnings call.

Amir Bassan-Eskenazi

In general, the theme and the business (inaudible) pretty much remains the same and it hit pretty much the same across the different departments and locations. So, I wouldn't read anything else into that.

George Notter – Jefferies & Co.

Got it, okay, and then just a housekeeping question. You mentioned that you took a reserve or reversed a reserve against CMTS inventory. I assume then you had some revenue for the data line flow-through here. How much was that?

Moe Castonguay

It was actually a little under $1 million.

George Notter – Jefferies & Co.

Okay. Great. Thanks very much.

Moe Castonguay

Thank you.

Amir Bassan-Eskenazi

Thank you.

Operator

Thank you. Our next question is from Simon Leopold with Morgan Keegan. Please go ahead.

Simon Leopold – Morgan Keegan

Great, thank you very much. I wanted to go back to the question around driving and your earlier commentary about the revenue coming down. Could you talk about the unit demand from Verizon and obviously, what I'm getting at is we're assuming there is some ASP compression. So if you could talk about the Verizon demand on a unit basis compared to last year?

Amir Bassan-Eskenazi

Yes, I'd say that like we discussed in the past, the deployment at Verizon is very much driven by the number of central offices that are being deployed. And without getting to too many details, I think it's fair to say that this thing is persisting pretty much on plan and in a pretty consistent manner. And I think I would leave it at that.

Simon Leopold – Morgan Keegan

So, I'm interpreting this as saying that the unit demand is very similar, that that's not what's driving the revenue down. Correct?

Amir Bassan-Eskenazi

The number of locations is the same, right.

Simon Leopold – Morgan Keegan

Okay, great. And I want to go back to the issue on switched digital video. It's so hard to understand what the market share is and who the real players are. So, clearly you guys are playing in this market and it does seem as if Cisco is playing in this market. Can you characterize some way of breaking down the switched digital video market share, your position and where the other folks are in this?

Amir Bassan-Eskenazi

It's hard to answer because the question is whether you count and when does the system – obviously, some systems have been awarded and then re-awarded based on performance and things like that. So, it's really a question of what is it that you count when you do that. We at this point see the main metric as the number of households through these different systems that are committed to SDV. It's obviously very, very far from saturation. There's a lot of growth ahead. And we obviously see ourselves as the undisputed leader by winning more systems, more households and getting systems that were previously awarded to other vendors given to us. So how much the percentage is really difficult to count here, as these things are still being shipped out.

Simon Leopold – Morgan Keegan

Are you seeing Motorola in terms of holding market share or is that you see it as you and Cisco?

Amir Bassan-Eskenazi

The majority of the places we run into Cisco. I think the on Motorola side, it's not as much of a – we don't run into them as much. Obviously, on the Comcast side and other locations that might emerge in the future, we might see them more. We're taking it very seriously. We feel very strong about our competitive positioning versus them, as well. They are over 1 million households passed on the Motorola networks that we mentioned previously, we have already put us in a similar leading position, if not even more so in market share in that regard. But we continue and raise the bar, take it very seriously and compete effectively in the market.

Simon Leopold – Morgan Keegan

One last item. The last item I had was you talked about the release 5.0 software addressing some previous gaps. I'm assuming that this is the ability to function properly with the Motorola set-top box. Is that correct?

Amir Bassan-Eskenazi

Not necessarily. I think the SDV is characterized as a solution because that's what that is. We drop our system on the network side and enable benefit across the bandwidth utilization and customer experience with whatever is deployed there already. In some cases, the clients, the guides and other things are shifting and we have to integrate with all of them. And one of the breakthroughs in 5.0 was enabling to work with even more ecosystems than were previously capable that gives us access to multiple types of environments, including the Motorola one. I wouldn't characterize the 5.0 as only getting us into Motorola.

David Heard

Yes, I'd say with us operating in both environments with six different clients, we continue to distance ourselves in terms of not only the experience of how to integrate the software associated with these systems. But I think the really big advantage we're beginning to bring to our customers is the experience in the channel lineup and what to put in the channel lineup in terms of HD and SD channel selection based on the tools that we've provided that further built on the network management tools that we announced this quarter. Let's not forget that that 5.0 release, one of its major things is as others go to do first integrations with customers on switched get into our fifth generation of the technology and release 5.0 actually doubled that capacity once again of the processing power of our solution. So, we're in scale and operational refining and tuning mode as others are having difficulty in the initial turnout phase.

Simon Leopold – Morgan Keegan

Great, thank you very much.

Amir Bassan-Eskenazi

Thank you.

Operator

Thank you. Our next question is from Eric Buck with Brean Murray. Please go ahead.

Eric Buck – Brean Murray

Good afternoon, guys. A couple of things. As you look at your 14 million homes that you say you have, how would that split between Telco and Cable?

Amir Bassan-Eskenazi

Sure. The 14 million households we related to are the numbers of switched digital video houses – houses that are passed by switched digital video solutions. They're all cable households that now through our system can get the content only when something is being viewed in the neighborhood, which enables carrying much more content, specifically much more HD content over the last mile.

Eric Buck – Brean Murray

So, you're not including Verizon in that 14 million count?

Amir Bassan-Eskenazi

No. That's the number that give an indication of the rapid growth of SDV on the cable side. On the Verizon side, we're pretty much substantially deployed in every central office that carries FiOS TV to the home, which based on their earnings call earlier in the month is something like 1.2 million households – million subscribers, sorry, at this time.

Eric Buck – Brean Murray

Right, but I think they're talking about 8 million or 7.9 million of actual homes passed with FiOS with TV capabilities, so would you be covering that 7.9?

David Heard

Yes, we're actually talking about the actual turned on FiOS TV subscribers. That's the difference in the two numbers, correct.

Eric Buck – Brean Murray

All right. And then if you look or so with the 14 million in the MSO arena, what is that as a percentage of those six operators total footprint?

Amir Bassan-Eskenazi

I don't have the number of the six operators, but we believe that this is very much in the beginning of its cycle, probably something like just over 10% of the total opportunity of households passed. If you count the large operators in North America and the operators in the rest of the world that we're talking to or are aware of that are likely to go with an SDV deployment in the next three to five years, I think you're looking at something like just over 10% of the potential.

Eric Buck – Brean Murray

Right, and I was trying to get a sense of the people that you've already established a footprint in, whether you're halfway through their existing footprints or –?

Amir Bassan-Eskenazi

Well, no, it's nothing close to half. If there is 113 million households in the U.S., I think the large majority of those would probably get switched over time. We believe that all the large operators and a lot of the next-tier operators are going to go to this technology as a way to scale their services, so it's very far from saturation.

Eric Buck – Brean Murray

Okay. Looking over on the QAM side, have you sold any of your Edge QAMs on a standalone basis without the switched solution?

Amir Bassan-Eskenazi

Yes, we have. We have deployed our QAMs in multiple applications, including video on demand, traditional broadcast application and M-CMTS for high-speed data.

Eric Buck – Brean Murray

Okay, and then help me a little bit on the expansion issue on the HD. Is that purely an issue of when Cablevision, for example, wants to go to HD they need to free up capacity for HD, or is there something specific about HD itself that drives additional demand for your product?

David Heard

Yes, so, obviously, the whole premise behind switched is the ability to offer more channel capacity to allow further richness of HD across the network. And so, yes, as operators go to scale HD, there's a demand for more switched digital capability and thus more QAMs to be able to carry that across the network. So when we look at a strong driver, like HD growth that's right up against switched digital, it's a nice systemic driver to our business in the expansionary needs for the future.

Eric Buck – Brean Murray

Okay, but freeing up bandwidth by going all digital would be an alternative method of accomplishing that, right?

Amir Bassan-Eskenazi

At the end, look, those two things are not really mutually exclusive. So we believe the endpoint is all digital, all switched. And if you do the math, in a world that we believe would go to carrying 200 to 300 or hundreds of high-definition programs, you really would need to be both switched and all digital. Some operators may take in some areas the first step and go all digital and then go to switched, either would do the opposite. As our numbers indicate, the number of operators and number of households, there's great benefit to going to switched first, and those benefits are the fact that it's less expensive, less capital that needs to be deployed on the front end and the way it's scaled, the way we demonstrated this quarter with Cablevision that first deployed us last year for standard definition programs, then added more programs, now adding HD to that. So this system scales more smoothly than going to an all digital. The benefits to the subscribers are being offered from day one, as opposed to having to give everything a subscriber in the digital before this bandwidth can be really reclaimed. And from net present value and the other financial aspects, it's just a better way to go. And, ultimately, switched is a step on the path to personalized television by carrying content that's specialized for the specific locations. Over time, you're going to see that going to switched unicast, which carries different streams to different people, ultimately putting addressable advertising as well. So we believe that for all those reasons, the majority of the operators are going to SDV first the way we described. But, at the end of the day, even the locations that will go all digital first would deploy this technology.

Eric Buck – Brean Murray

Okay, and then just finally, your sense of what the hesitation is for Comcast, given that this is – clearly we're going there and a lot of people have come to the conclusion to go now. What's the stumbling point for Comcast?

David Heard

Again, we don't like to speak to our customers deployment plans, because obviously we supply customers on both the Telco side of the world and the Cable side of the world and as we see the battle is fast and furious to add new content and new experience out to the network. However, again, I think as Amir said, I think there's a misperception in the marketplace that it's an and/or or it's an or with all digital or switched digital. And I even think if you talk to folks at the largest MSOs in the U.S., Comcast included, they would tell you that ultimately, over time that when you go to an all-digital world, you'll ultimately need switched digital to take care of the hundreds of channels of HD content, hundreds of streams, or thousands of streams, in their case of VOD, on-demand to be able to enable them into personalized TV. So, I think

Eric Buck – Brean Murray

I appreciate that. I'm just trying to get a sense what might be out there today that would prevent them from acting on that today, or what does it need to get some of the big operators that haven't gone forward without naming specific customers, to actually start to move?

David Heard

I think each of the operators started with switched digital and chose a number of initial partners to go with and are in different phases of finishing out their ecosystem of their network build. We started four years ago with somebody like Time Warner who actually worked with us hand in hand on partnering on the technology and thus the rollups and the learning curve are very different in that environment than they might be with another one of our major MSOs. So we have faith in our customers, our partners. Comcast is a current customer of ours of digital video technology and we intend and are working with them on a daily basis to help them roll out technologies to enable the kind of bandwidth they're going to need to be able to go to the kind of HD to compete.

Amir Bassan-Eskenazi

Yes, originally, I think Comcast spoke about going into SDV, and I wouldn't characterize them as hesitating. I think that just they have their own plan and pace and we're happy to help them in the timing and manner they choose.

Eric Buck – Brean Murray

Okay, great. Thanks.

David Heard

Thank you.

Operator

Thank you. Our next question comes from Blair King with Avondale Partners. Please go ahead.

Blair King – Avondale Partners

Hey, guys, how are you?

Amir Bassan-Eskenazi

How are you, Blair?

Blair King – Avondale Partners

Hi, just one quick question. I know the day is getting long and most of the good questions have been asked, but just a quick one in terms of a lot of focus on the software. Pretty curious about what the mix might be between the BMR and the BME. It sounds like most of the mix in the quarter was heavily weighted toward the Edge QAM. Is that a right assumption?

Amir Bassan-Eskenazi

So the honest answer is, actually, we don't break the revenues by the platform component that carries that. And, in fact, what we said our – the way we sell our solutions, there's varying numbers of BMRs, BMEs and other elements within that in a way that we don't even look at how those all split as carrying of revenue. What's important is that the solution that our customers deploy, which in many times is a combination of solutions of some traditional broadcast and SDV deployment at the same time, so we really would be hard-pressed to give you sets of numbers. What I can tell you is that QAM and the Edge elements of the solution are important elements and they are moving in a rapid pace, as we discussed in terms of the growth we see in the QAM piece year over year. But I really don't know how to break it for you numerically?

Blair King – Avondale Partners

Okay, well, is there a way to break out what the – a lot of people have asked questions about the software feature, but I guess what I'm trying to get at, is there a way to break out the mix on the software relative to the Edge QAM and the video server? Can you tell us where the –?

Amir Bassan-Eskenazi

I think the software to the Edge QAM is very much similar to the BMR in the Edge QAM. At the end of the day, we come in and we architect a solution that's based on how many programs they want to deploy, what's their specific network architecture and how many nodes and what's the size of each different node. And based on this we put software licenses, QAMs and other elements into the solution and there is no good way to break how this adds up for this quarter versus that quarter, really.

Blair King – Avondale Partners

Okay, all right. That answers my question I guess. Thanks, Amir.

Amir Bassan-Eskenazi

Thank you, Blair.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. This does conclude the BigBand Networks first quarter 2008 earnings conference call. You may now disconnect. Thank you for using ACT Conferencing.

Moe Castonguay

Thanks, everyone.

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