Arris Group Management Discusses Q2 2012 Results - Earnings Call Transcript

| About: ARRIS International (ARRS)
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Arris Group (NASDAQ:ARRS) Q2 2012 Earnings Call July 25, 2012 5:00 PM ET

Executives

Robert Puccini - President of Telewire Supply

Robert J. Stanzione - Chairman and Chief Executive Officer

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

Bruce W. McClelland - Group President

Analysts

Mark Sue - RBC Capital Markets, LLC, Research Division

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

Jeffrey T. Kvaal - Barclays Capital, Research Division

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

Greg Mesniaeff - Maxim Group LLC, Research Division

Blair King - Avondale Partners, LLC, Research Division

Asiya Merchant

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Arris Group Earnings Conference Call. My name is Kim, and I will be your coordinator for today. [Operator Instructions] As a reminder, this call is being recorded. I would now like to call -- to turn the call over to your host for today, Mr. Bob Puccini with Investor Relations. Please proceed.

Robert Puccini

Thank you, Kim, and welcome to the Arris conference call with management. This afternoon, we will be discussing our second quarter 2012 financial results, which were released after the close of markets today. As usual, we will be using a series of slides during our webcast, which are also posted on the Arris website in the Investor Relations section.

With us here at Arris headquarters are Bob Stanzione, Arris' Chairman and CEO; Dave Potts, Executive Vice President and Chief Financial Officer; and Bruce McClelland, Group President.

There will be a replay of this entire call available several hours after the conclusion of the call, and a replay of the call and the slides will be available on our website for the next 12 months.

Before we begin, please go to Chart 2. During this call, we may be making forward-looking statements including our outlook and expectations for our industry in general, estimated revenue and earnings for the third quarter of 2012, certain financial operating metrics, the timing and the introduction of new products and technologies, anticipated spending patterns by some of our customers, and expected sales levels for various product categories. It is important to note that actual results may differ materially from those suggested by any forward-looking statements, which may be made during today's call. For further information in this regard, and for specific examples of risks that could cause actual results to differ materially from these forward-looking statements, please see our recent filings with the SEC.

Now, if you go on to Chart 3, Bob and Dave will provide their comments on the quarter results after which, we will open up for questions. Now, over to you, Bob.

Robert J. Stanzione

Thanks, Bob, and good afternoon, everyone. I'm very pleased to report outstanding June quarter results with record revenues at the high-end of our guidance and earnings above the high-end of our guidance as well as strong bookings, backlog and cash generation. Revenues were up 15% quarter-over-quarter at $349 million and up a remarkable 31% over the second quarter of 2011. Year-to-date, sales are up 22% over the first half of last year, and sequentially, sales are up in all segments and in all regions.

Non-GAAP earnings of $0.25 per share were above the upper end of our guidance, a 31% sequential improvement over the first quarter. Year-to-date, non-GAAP EPS is up 10% over last year in spite of the higher tax rates that we're paying. Both U.S. and international sales were up, with domestic sales representing 74% of the total, about the same mix as last quarter.

I'm really especially pleased with our working capital management and the effectiveness of our supply chain in turning out these results. While climbing the steep volume ramp, the teams managed to keep working capital roughly flat by increasing inventory turns to 8.9 from 5.8 a year ago and reducing DSO from 52 to 47. So just a great job by our operations team.

Cash generated from operating activities was at $31 million and we aggressively bought shares again in the quarter, purchasing 1.4 million shares at an average price of $11.21. Dave will provide more details in just a moment.

On to Chart 5. The worldwide demand for broadband access continues to be the primary growth driver in our business, and as you can see, the new product introductions that we've made over the past few years are really paying off. BCS revenues of $280 million were up significant, posting about 15% sequential and 39% year-over-year growth. Gross margin was down due to a mix shift toward more hardware sales in the network category and the strong growth of the CPE sales. More specifically, we had continued strong sales of CMTS equipment in Q2. However, the mix shifted within this category, with CMTS downstream ports shipped at -- decreasing to just under 76,000, offset by very strong demand for upstream ports as we increased shipments of our new 24U upstream cards.

Our E6000 next-generation Cable Edge Router program continues on track and is progressing well toward further lab and field trials in the second half of the year. In BigBand, which we now call Edge Media Processing, integration is done and we've had some sizable initial MSP QAM deployments in the quarter. The major highlight of the quarter was the shipments of CPE devices that were up significantly during the quarter at just under 2 million units. At the same time, ASPs in this category also increased, as almost 83% of the shipments were DOCSIS 3.0 capable and we continued to see a sharp increase in demand for a higher value Wi-Fi-enabled devices.

We anticipate strong CPE demand continuing throughout the year as operators extend the reach of their networks deep into subscribers' homes to ensure quality of experience across all devices.

We've made good progress with our Moxi video solution with the addition of several small operators and by adding features to meet emerging customer demands. However, sales in the quarter were lighter than we expected, primarily due to a slower-than-expected ramp of one customer.

Looking forward, we're moving aggressively ahead with several perspective larger customers who are interested in our Video Gateway architecture but want it customized to use their internally-developed or third-party software. These programs are gaining momentum and add to our optimism for substantial growth in the Video Gateway category.

Chart 6. ATS sales were up in the quarter and year-to-date. The business remains healthy and we expect year-over-year revenue growth in 2012. Access network traffic growth is spurring significant node split activity, driving demand for both optical nodes and head-end optics. And the deployment of Metro Wi-Fi services is increasing demand for the Ruckus Wireless Wi-Fi access points that we are distributing.

MCS sales were also up nicely in the quarter and several new deployments of advertising insertion, VOD and operation support system products, particularly in the international markets.

Now, let's turn to Chart 7 for a few words on the guidance. As you can see, our Q3 2012 revenue guidance calls for continued strong year-over-year growth. Compared with Q3 of last year, the center of our guidance would represent about 30% revenue growth. We entered the quarter with a strong backlog, which is up almost $100 million from a year ago and we have confidence in our supply chain stability to continue to deliver on this increasing demand.

Looking further to our Q3 earnings guidance of $0.19 to $0.23, you should note that we expect that mix will again favor CPE and CMTS hardware and we're also forecasting an increase of operating expenses primarily for the introduction of the E6000 with more customers. The bottom line is that there are solid reasons for us to maintain our optimistic outlook for the rest of the year. Our growth is clearly far in excess of the growth of CapEx in the industry and it reflects the investments we've made over the past few years in broadening our product portfolio and strengthening our sales coverage. We've worked hard for the past few years to align our products and our sales effort with today's market. And as a result, we're clearly winning the larger share of customers' capital expenditures. We have a great portfolio of products, we have an expanding addressable market, and external trends continue to drive our traffic growth.

So for those of you that like to know more about Arris, we'll be hosting an Analyst and Investor Conference at the NASDAQ headquarters in New York on August 8 and I hope to see you there. With that, I'll turn this over to Dave.

David B. Potts

Thanks, Bob, and thanks, everyone, for joining us this afternoon. So we posted an outstanding Q2, and let's get into some of the details starting with the financial highlights in Chart 9.

Sales were $349.3 million in the second quarter, up significantly from $265.8 million in the second quarter last year and $302.9 million in the first quarter of 2012. And I'll provide a breakdown by segment in just a moment.

Gross margin was 33.9% in the second quarter, and compares to 40.2% in the second quarter of last year, and 36% in the first quarter of 2012. Our adjusted non-GAAP EPS was $0.25 in the second quarter, which compares to $0.24 a year ago, and $0.19 in the first quarter of 2012.

And our second quarter 2012 GAAP EPS was $0.13 per share, and compares to the $0.13 per share in the same quarter last year.

Non-GAAP EBITDA was 14.5% in Q2, and GAAP EBITDA was 11.6%. And GAAP-to-GAAP -- non-GAAP reconciling items include purchase accounting impacts related to required deferred revenue, amortization of intangibles, equity compensation expense, long-term investment impairment, noncash interest on our convertible debt and restructuring and acquisition-related costs and certain non-discreet tax items. And as always, a reconciliation of our GAAP to non-GAAP earnings is attached to the press release and can also be found in our website.

Cash, short-term and long-term marketable securities were approximately $576 million at the end of the second quarter, and our cash generation continues to be strong. We generated approximately $30.6 million of cash from operating activities in the quarter.

I'll also highlight that we repurchased 1.4 million shares for approximately $15.2 million in the quarter. And year-over-year, our share count is down a net 8.6 million shares as a result of our repurchase efforts. And I'll touch more on the balance sheet and cash flow in just a few minutes.

With respect to orders, our order backlog was $251.9 million at the end of the second quarter and our book-to-bill ratio was 0.93 for the quarter.

Taxes. Our rate was just over 33% in the quarter. This is up approximately 6 points year-over-year, excluding discrete items. The difference is that it was the result of the loss of R&D tax credits. And this has a negative impact of just over $0.01 per share of quarter dilution on our non-GAAP earnings.

All right. Well, let's turn to Chart 10 and let's look at some of the sales details. First, let's focus on the sales by segment bar chart for the second quarter, comparing our reported sales by segment. And as Bob mentioned a moment ago, each of the segments were up sequentially in Q2.

BCS sales were strong at $280.6 million in the second quarter and compared to $201.8 million in the second quarter of 2011, and $244.5 million in the first quarter of 2012. The increase is primarily attributable to higher demand for our DOCSIS 3.0 CPE equipment, as well as the inclusion of sales associated with our late Q4 2011 acquisition of BigBand with respect to the year-over-year comparison.

ATS sales in Q2 were $52.2 million and compared to $46.9 million in the second quarter of 2011 and $44.1 million last quarter. Here, we're seeing a general strengthening, but in particular we're gaining some traction with the sale of Metro Wi-Fi wireless products.

MCS sales were $16.5 million in Q2 and compared to $17.1 million in the same period last year, and $14.3 million in the first quarter of 2012.

With respect to the geographic split, international sales were $91.6 million, up from both the second quarter of last year and the first quarter of 2012. And sales to Time Warner were $75 million in the quarter, and sales to Comcast were $96 million. And please note that these sales exclude approximately $700,000 of non-GAAP sales related to BigBand.

All right, let's turn to Chart 11, I should say, and look at gross margin.

Our second quarter overall gross margin was 33.9%, which compares to 40.2% in the second quarter of 2011 and 36% in the first quarter of 2012. Our gross margin percent for BCS was 34.3% in the second quarter of 2012 and compares to the 42.5% in the second quarter last year, and 36.6% in the first quarter of 2012. We had a higher mix of CPE equipment sales in the second quarter of 2012.

The gross margin percent for ATS was 21% as compared to 24.2% in Q2 2011, and 24.1% in the first quarter of 2012. And gross margin for MCS was 67.8% in the quarter, which compares to 57.1% in the second quarter of 2011 and 60.8% in the first quarter of 2012.

Let's turn to operating expenses in Chart 12. Total R&D and SG&A was $83.1 million in the second quarter, up from $72.5 million in the second quarter of 2011, and down slightly from $83.7 million in the first quarter of 2012. The year-over-year increase [inaudible] investment on BigBand and we've made very good progress in achieving our targeted expense reductions post-acquisition. In the second quarter 2012, we incurred further restructuring costs of about $1 million, and amortization and intangibles from the second quarter is lower year-over-year as a result of the write-off intangibles in the fourth quarter of last year, offset by new amortization resulting from the BigBand acquisition.

Okay, let's move to Slide 13 and look at some balance sheet and cash flow highlights.

We ended the quarter with $576 million of cash, short-term and long-term marketable securities as compared to the $592 million at the end of the second quarter in 2011, and the $567 million at the end of the first quarter in 2012. And we used about $15 million to repurchase 1.4 million shares in the quarter and year-to-date, we've repurchased 3.7 million shares for approximately $42 million. And as I mentioned earlier, our share count is about 8.6 million, down about 8.6 million shares year-over-year.

And we generated approximately $30.6 million of cash from operating activities in Q2. The elements of earnings which are cash-based were approximately $35 million and we used approximately $4 million of cash for working capital. I'm really pleased with our excellent working capital management, as is evident in our DSO and inventory turns, particularly in light of our sales increases. And CapEx was approximately $5.5 million in the quarter, which is in line with our plans.

So our balance sheet position continues to be very strong with a net cash position, including short-term and long-term investments, of approximately $344 million. And the net position includes $232 million of 2% convertible notes which are due late next year.

All right, let's turn to guidance on Chart 14, please. At this point, for the third quarter of 2012, we estimate that sales will be in a range of $348 million to $368 million and that non-GAAP EPS will be in a range of $0.19 to $0.23 per diluted share, and GAAP EPS will be in the range of $0.09 to $0.13 per diluted share.

I anticipate that R&D and SG&A will be in the range of $84 million to $86 million in Q3. As Bob mentioned, we are anticipating some increase in OpEx as a result of audit introduction costs. And we're anticipating a diluted share count of about 116.5 million shares and we're assuming a tax rate of about 33.5%.

And a reconciliation of GAAP to non-GAAP EPS can be found on Chart 15 and is also attached to the press release. And finally, we've included reconciliations of our GAAP to non-GAAP earnings per share and EBITDA on Charts 16 and 18.

Thanks, and over to you, Bob.

Robert J. Stanzione

Thanks, Dave. With that, we'd like to open the lines up for your questions. Kim, would you mind coming back on the line, letting our participants know how they can ask their questions?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Mark Sue from RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC, Research Division

Typically, with large cable deployments, there's a beginning, a middle and then a wind-down. We saw it in the past with your CMT deployments for DOCSIS 2.0 and 3.0. So the question is where do you think we are in the stages for your DOCSIS 3.0 CPE shipments? What sort of run rate do you see? And also, what sort of market share gains do you see? Because that strength seems like it can continue for some time?

Bruce W. McClelland

Mark, this is Bruce here. So, I think we're going to talk a little more about it at the analyst conference, but I think we try and paint the picture that this is a cyclical or a cycle of investment where there's a shift towards network-based capacity expansion which is followed by a technology upgrade cycle on the CPE, which then drives investment requirements back into the network as more capacity is needed. And that's kind of the shift that we're seeing right now where the investment in DOCSIS 3.0 is really accelerated on the CPE side. And these are devices that are able to now consume upwards of 300 megabits per second to the consumer. And what we see is that then turns around and drives an investment cycle again on the head-end to keep up with the capacity demand. So we're probably 25% to 30% of -- up the way into this technology upgrade cycle on the customer premise side. And the acceleration hereon, these wireless gateways, these more advanced gateways as operators try to move deeper and deeper into the home and really improve the overall quality they experience, that quality of that wireless network in the home.

Mark Sue - RBC Capital Markets, LLC, Research Division

I see, that's helpful. And I got a question for you, David. If we look at the OpEx ramp, I understand the incremental spending for the E6000 in the near-term. Is that a 1-quarter phenomenon and does OpEx sort of trail down after September? Just kind of how we might see longer-term operating margin improvements after your initial spend on product development?

David B. Potts

I think Q3 will be heavier than Q4. We may still have some more of what I would call prototypes of those introductions into Q4. Again, I think it's probably flat to down as we go forward.

Mark Sue - RBC Capital Markets, LLC, Research Division

Okay, that's great. And then the mix on gross margins, does that kind of revert or should we take some thoughts that the CPE trends continue, so the impact in the margins may continue in the fourth -- a couple of more quarters?

Robert J. Stanzione

Well then, you certainly don't go to the fourth quarter, but we do really see very strong demand for DOCSIS 3.0 product at this stage.

Operator

And your next question comes from the line of Simon Leopold.

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

I wanted to check out a couple of things and then get into some longer-term questions. First off, the operating expense guidance of $84 million to $86 million, is that on a pro forma basis? I assume and comparable to this quarter's $76 million?

David B. Potts

Well, this quarter was not $76 million. You're probably doing the taking stock comp out. I do not do that on those numbers.

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

So the $84 million to $86 million includes stock comp then?

David B. Potts

Yes, that's correct.

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

Okay, great. Then in terms of the trends on the Moxi, you mentioned that this quarter was a little bit disappointing. I just want to try to get some color on what the cause of that was and how you see the full year shaping up in light of the prior commentary of suggesting, I guess, a revenue level over $100 million for the full calendar year. I'm just wondering what you're thinking today about the full year outlook for the Moxi?

Robert J. Stanzione

Yes, so, you're right. The third quarter was in fact, the second -- I mean, the first and second quarters were a little bit lighter than we expected. I think at this point, it's going to be a stretch to reach $100 million with that product this year. Nevertheless, we did add, what, Bruce? Maybe, 4 or 5 new customers in the quarter. They tend to be smaller ones. And a lot of our attention is now focused on some big opportunities that will be based on our Video Gateway architecture, but will utilize software that's either internally developed by our customers, for instance, internally developed users' guides or third-party things, like we announced last quarter with NDS working with them on a project. So, yes, this gateway approach is really catching on. So we've gone from an EMTA business to one where we've got gateways that include router and Wi-Fi capability and we're going to more, even higher featured gateways that have video capability. So this thing is just -- is growing at a very healthy pace. But back to your initial question, I think it's going to be a stretch to reach $100 million of -- or 10% of our sales growth coming from that one product this year, Simon.

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

Okay. And you really sort of led into what my longer-term question was, just the idea of a Moxi box that would run either service provider software or third-party software, I assume that that detracts from the value. And so I'm just trying to get a sense of how that impacts your business model from a revenue and margin perspective.

Robert J. Stanzione

Well, it's a huge boost to our business outlook because we don't sell any of them now or we sell very few of them now. So again, instead of selling an EMTA for $60-or-so a piece, we're selling now more highly featured products that have Wi-Fi and router. When you add video, that jumps by a factor of 5, probably. So it has a very positive effect on our business as we get into it because we haven't been in the video piece of it before.

David B. Potts

And Bob, just to add to that. The integration of the third-party software expands our addressable market and allows us to sell into a variety of different solutions. And it has been part of the strategy from the beginning to be able to diversify and have a variety of different types of solutions, integrating third-party software and a more open architecture. And that's really where the industry is going here. I think over the next several years is you're going to see a lean towards a more open software architecture to provide more options to the operators and really accelerate the deployment.

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

So and the last thing I wanted to sort of home in on is, I think there's -- the attention paid to the mix and what it does to gross margin, but it looks like your operating margin, regardless of anything else, is coming in pretty much where we expected. And you've said this before, but I'd like to kind of get an update of how you think about your operating margin targets maybe over kind of the intermediate term where you think you're trending towards and what your objectives are from an operating margin perspective.

David B. Potts

So the high-teens non-GAAP EBITDA, it will depend upon again, as I've said before, with how much mix of these new products that we have and the variance of those new products. So in cycles where we have high sort of CMTS pieces, that should be quite achievable. In cycles that we have more and more of our CPE gear and certainly adding video to it, they'll be lower and probably somewhere into what we're seeing now. But at the end of the day, we're making money. And that's the thing. All of these things certainly add to the bottom line and add to our operating margin dollars. And the other piece is, I still think our operating expense base is something that we can leverage. We are adding lots of sales, without really adding much that OpEx and we don't really see the need unless there's a one-off thing that we just -- not in front of us, so I think we can leverage assets.

Operator

Your next question comes from the line of Jeff Kvaal with Barclays.

Jeffrey T. Kvaal - Barclays Capital, Research Division

Could you please put your book-to-bill and order backlog in context? I recognize that you had a great quarter and a first quarter. How much of that has worked down? And what does the sequentially weaker numbers suggest? Is there a carryover? How should we interpret that? And then, bigger picture, I'm wondering if you've seen a change in the competitive landscape at all. In my mind now, part of Google of course, has that changed anything and or is that an opportunity for you?

Robert J. Stanzione

So Jeff, I'll make a couple of comments and ask Dave to add to it. The bookings and backlog rhythm of the business would lead you to sort of believe that there's a seasonality to it. The first quarter and years gone by have always been our highest booking quarter. This year, we're entering the third quarter with far more backlog than we've had in the past. And so, the business, it feels very strong right now. Dave, you want to add to that?

David B. Potts

Yes, and as I've said in the last call and a few conferences in between, in the first quarter we get a good chunk of our services bookings as well with our annual maintenance contracts, so that's part of it but -- and we did indeed got some very good orders for CPE which were multiple quarter or multiple quarter orders. But I don't see anything different in the cadence of the business. In fact, if anything, given where we have our revenue guidance, it's up. So I'm not at all bothered or panicked by the change in the book-to-bill or the bookings rate.

Robert J. Stanzione

And with regard to market share, there are lots of ways of looking at market share. But as I mentioned in my prepared comments, cable CapEx is only up probably low single-digit percentages this year. Our sales are up 30% year-over-year. Take the acquisition out of that, and they'd still be up in the 20s. There are very few tech companies out there that have seen that kind of growth. I think that somehow, we're getting a much larger share of the CapEx expenditures of those companies. Now, clearly some of that CapEx has been shifted from other areas into areas where we've got strength and of course, that's what we've been trying to do for the past 3 years, is to align our products with where we thought the money was going to be spent. And evidently, that strategy has worked so far.

Operator

And your next question comes from the line of James Kisner with Jefferies & Company.

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

I guess the first question is housekeeping. I mean, what you said, what proportion of your CPE business was Wi-Fis, WiFi-enabled CPE?

Robert J. Stanzione

About 40% or 50%.

David B. Potts

We're just digging it out, James. Hold on a second.

Robert J. Stanzione

83% DOCSIS 3.0, and within that, I think probably half --

David B. Potts

40%, 45% I think. Is that the right number?

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

So it's still up somewhat significantly from around 0.5 million units the last quarter, I kind of recall?

David B. Potts

That's right, yes.

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

Okay, that's good. And then, I don't think you really sort of answered Simon's question really directly. I really just want to understand if you can answer why you think demand has been weaker. And I know there are installation bottlenecks but I'm just wondering was there another issue that perhaps customer uptick wasn't as fast as you thought or the market was poor, wasn't as fast as you thought. I mean it was a bit -- can you sort of give us a little bit of texture on why you think that the Moxi has been disappointing recently?

Robert J. Stanzione

Okay, sure. You're right, we didn't answer that directly. Go ahead, Bruce.

Bruce W. McClelland

I think we talked previously about some operational deployment challenges with the solution, which I think are behind us at this point. At this stage, we think we've attributed to this -- the solutions really positioned at the upper end of the tier or the marketing package that's a multiroom offer, and so it's priced that way as well as some service providers. I think the trick to getting increased piece of that share or deployment is to move into more of the mainstream part of the offering, and I think we have some ways to do that but it's just going to take some time to have that really effect the shipments and the deployments.

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

That's fair. Shifting to the CMTS business again, briefly. You said that the -- you've had a richer hardware mix, and it sounds like -- I got the impression that you meant that actually with the upstreams themselves, that were more -- that caused more hardware mix. I wanted to clarify if that was indeed the case, which would also I guess suggest that perhaps you used a lower mix of software-based downstream upgrades. And also, it would be really helpful perhaps if you could give us an upstream number?

David B. Potts

Yes, I think it's actually a combination of both things you just said. That in the quarter, we had less of these license upgrades and more of the downstream shipments were actually new hardware, which is a good thing. That's more footprint and a richer mix of upstream shipments. And that's a combination of 2 things, that shipping this new upstream card, this 24U card we talk about and that's going into new chassis and new deployment, new footprint, as well as going into existing chassis where the older card is removed and the new one is put in and they can double the capacity basically by doing that.

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

Okay. So is it a mix of the chassis increasing there sequentially? Is that fair to say, also?

Bruce W. McClelland

Yes. I think the number of chassis was fairly similar but the overall hardware mix was certainly up.

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

Okay, and the last one I'll try to sneak in there. BigBand, I mean can you give us any kind of feel for if it grew year-over-year? How or maybe in terms of absolute dollars, how much it's grown sequentially? Your comment around -- comments around that were very interesting and I'm just sort of curious about the size of that and where do you think it could go?

Robert J. Stanzione

Well, again, we don't want to set a precedent of giving individual product sales, James, but I was trying to let you know that, if you compare to the second quarter of last year, we're up something like $85 million. The vast majority of that is not BigBand. The BigBand business, as you know, was falling when we bought it, we think we're beginning to recover. In fact, I'm very pleased with what we've got in the second quarter with the initial implementations of large amounts of MSP QAMs. So it's going kind of as we planned. But the vast majority of the growth is organic growth, primarily in the DOCSIS CPE category.

Operator

Your next question comes from the line of Greg Mesniaeff with Maxim Group.

Greg Mesniaeff - Maxim Group LLC, Research Division

A couple of questions I have, regarding with the Moxi product, you mentioned the prospect of some wins with some larger operators. To what extent are those potential wins predicated on customization of the product? And to what extent are you willing to bend over backwards, so to speak, to make that happen?

Bruce W. McClelland

Yes, it's a good question, and I guess the answer is, everything is custom in this space to some extent. Whether it's using a full head-end solution from OSS or third-party middleware or anything else. It's a complicated space and you've got to fit into the existing back-office network and distribution networks. So pretty well every deployment has some nature of customization, some extensive, some not so much. And obviously what we're trying to do is have a fairly straightforward package that we can go up and stand up with a customer quickly, but then for larger opportunities, clearly, we're more than willing to make customizations to the product as well.

Greg Mesniaeff - Maxim Group LLC, Research Division

And a couple of months ago or maybe even more, you forged an alliance with NDS, so you're working with them. Now that NDS is moving into the domain of your competitor, on the hardware side, how does that change the landscape?

Bruce W. McClelland

Well, I guess we'll see, and time will tell, but from what we know at this stage, it doesn't really change it at all. The NDS business model from the beginning has been working with the hardware manufacturers and integration of multiple elements into a solution and their whole business is predicated on that. So we really don't see that changing substantially but time will tell.

Greg Mesniaeff - Maxim Group LLC, Research Division

Okay. Just one more quick one. With the book-to-bill arguably a little lower this time, is this fair to say that that's possibly a function of the CPE business, which is assuming a greater prominence being more turns-oriented?

Robert J. Stanzione

I think it's more seasonal. As Dave points out, we get a lot of service renewals in the first quarter and so, if you go back and look at the pattern over the past several years, it typically does dip a little bit in the second quarter booking.

Greg Mesniaeff - Maxim Group LLC, Research Division

Okay, got you. So it's really more of a seasonal function then?

Robert J. Stanzione

Right.

Operator

The next question comes from the line of Blair King.

Blair King - Avondale Partners, LLC, Research Division

Just a couple of questions. The first one has to do with the E6000 and the up ramp in the OpEx into the third quarter, and I'm just curious if you talk a lot about the IP home gateway and some interoperability with third-party vendors and the potential to work with even larger customers. I'm wondering if you could just sort of highlight what kind of trial activity is actually happening with the E6000, and sort of what the deployment plan at that product might look like as you move into 2013, just broadly?

Bruce W. McClelland

So obviously we're getting into kind of the heavy lifting at the final stages of product introduction. And so, some of the expenses we see in Q3 for our final validation as well as for some pretty extensive field trial work with lead customers. Having said that, what we do see is a pretty long extended overlap cycle between the C4 and the E6000, as the C4 is pretty well-suited for today's capacity requirements. In fact, it gets deployed without all the capacity used in some cases and gets used over time. And the E6000 really comes into its own as the operators move beyond the 300-megabit of capacity to a neighborhood and scale that to 600 and 1-gigabit per second or more channel bonding, if you will. So, I think what you're going to see over the next 12 months is an overlap as we start to ramp E6000 and generate sales off of that and continue with a pretty long tail on the C4.

Blair King - Avondale Partners, LLC, Research Division

So it's not really wise to think there might be a slowdown in CMTS sales ahead of the introduction of the E6000. It's a complementary product, that's I think what you're saying?

Bruce W. McClelland

Clearly, my job is to make sure that doesn't happen.

Blair King - Avondale Partners, LLC, Research Division

And the other question is given the CMTS markets sort of expected to grow by most accounts in the high single digits this year, it seems reasonable to think that the mix shift toward CMTS would increase as you kind of move through over the next few quarters. And that question kind of dovetails on your almost 1.2 million or almost -- I'm sorry, almost 2 million CPE units sold in the quarter. How much better can that get? And as a result, the margin in this quarter and guided in the next quarter, or implied in the next quarter, sort of troughing, if you will, from your perspective?

Bruce W. McClelland

Well so on the CPE demand, we see it going up still. So it's not like we think we peaked in the second quarter. So and I think as you see in the guidance, we've taken that into account.

Robert J. Stanzione

Also, Blair, we think of the Video Gateway as sort of the next step in the CPE business for us. And so, as that business grows, so will that category that we're calling CPE. Much higher ASPs, much bigger addressable market. And so, I don't see any let-up in the demand or the growth prospects in our CPE business.

David B. Potts

And obviously the great news is that then drives more demand on the head-end and these new gateway devices that are in development support 24 downstream channels. So guess what? You need something at the head-end that supports 24 downstream channels and that's where the network is going to evolve within the next couple of years here.

Operator

Your next question comes from the line of Rich Sabero [ph] with Needham & Company.

Unknown Analyst

Following up on the CPE question, I think in the response to a prior question, you said you thought you were about 25% to 30% through the 3.0 CPE upgrade cycle. Can you say what you're including as the base there? Is that sort of first quarter and second quarter of this year were -- what encompasses that 25% to 30%? I'm trying to get a sense of perhaps the duration of this cycle in terms of quarters or any other time frame you might care to talk about?

Bruce W. McClelland

It's really difficult to put an exact number on it and so one approximation is to take all of the 3.0 devices that have been shipped into the -- around the world today and divide that by the number of high-speed data broadband customers out there today. And that would give you kind of the best case penetration rate. Now, we all know that we ship a lot more product than actually gets deployed due to churn and returns and all those things. So it's probably less than that but that would give you an approximation. And I think, if you did the math, you'd be in that 30% range, but I need to triple check it. But it's in that range.

Unknown Analyst

And just to sort of follow up on that, and so if you've done 30% and that is multiple quarters, presumably of shipments. At current run rates, this is something presumably you feel will extend for several quarters at least, or do you have any sense of that?

Bruce W. McClelland

Yes. The minimum, it's -- I think it's longer than that. And I think we understate the percentage here probably because of churn and everything else and not to mention there's this constant upgrade cycle where we used to ship 3.0 devices that had 4 downstreams. We're now shipping 3.0 devices at 8 downstreams with wireless. The next phase will be 16- or 24-channel devices and it's an endless loop. I mean, it's just kind of a constant investment to upgrade these devices.

Unknown Analyst

Right. And then on note that you mentioned it sounds like a couple of significantly larger Moxi opportunities that you're engaged in. Do you have any sense of the timing of these? If you were successful with these things that would more than likely mostly effect 2013 or could they actually start having an impact within this calendar year?

Robert J. Stanzione

2013.

Unknown Analyst

And when you say larger than the opportunities you've had, can you give any sense, are we talking like an order of magnitude larger? Just any kind of sense on that will be helpful.

Robert J. Stanzione

Well, as we've reported a lot in the past, Rich, the deployments that we've done so far have been with second and third tier operators and we're talking to second and first tier operators about gateway projects with them. And so, it offers the prospect of a much, much larger business. Whether it's an order of magnitude that's 10x larger, I wouldn't jump there right away.

Bruce W. McClelland

Yes, there's a law of large numbers you get caught up in. If you think about the cable set-top business today around the world, I think it's about a $5.5 billion equipment market. But I'm not sure if that's the right number to use but that's what's being spent on video set-tops around the world today.

Unknown Analyst

Great. And one final one, if I could. You made a reference to strength in Wi-Fi in the Q to resell the Ruckus products. Do you have any sense of how significant that has been or is forecasted to be in the third quarter and presumably those are margins sort of below the corporate average. Can you give any sense of where those margins fall perhaps relative to the corporate average when you do sort of pass-through those products?

Robert J. Stanzione

Well, they're in the ATS category which you understand is a much smaller category to CMTS. So it's a subset of that segment. And indeed, the margins are below the corporate average. Because we just resell the product. We do some engineering and installation work, and we get some professional services revenue around it. But for the most part, it's a distribution contract.

Operator

[Operator Instructions] Your next question comes from the line of Matthew Dalton [ph] with Edmund Wright Partners [ph].

Unknown Analyst

This is Jonathan. Can you just talk a little bit about, I guess, your thought process about sequentially so obviously the guidance you've given, revenue should be up nicely sequentially but the profitability. And you're investing a lot in SG&A. I guess, I would assume there would've been more flow-through on incremental revenue that you got at the gross margin line. Can you help us understand, I guess, what you have to invest in in SG&A or below the gross margin line?

Robert J. Stanzione

Sure. What we are guiding to is $358 million plus or minus $10 million, right? $348 million to $368 million. We just did $349 million in the second quarter, so the center point there is up a couple -- 2%, 3%. The investment that we're talking about in operation, OpEx, is primarily related to the heavy product introduction expenses associated with the E6000 which is beginning to go out the door for lab and field trials in the second half of this year. So that is it. It's that -- that's the reason.

Unknown Analyst

And to follow-up on that, so when the E6000 goes out and it starts to ramp, let's just say you're successful, let's just assume that, and it's successful and does well. Help us understand the mix of that gross margin relative to your overall mix of gross margin. Because the other thing I would assume is that your gross margins would start to get better because I assume you're going to have software after this hardware deployment. Is that fair, or am I thinking about this wrong?

Robert J. Stanzione

Well it depends on which products grow the fastest. I mean, we just talked about the CPE category, which has lower-than-average, lower than the corporate average gross margin, are growing like gangbusters. I hope you noticed that our sales are up 30% year-over-year. Most of that growth has come in that category that carries the lower gross margins. So it's very mix-dependent. The E6000 has very will have high gross margins, higher than the corporate average as do our C4, CMTS and most of our other network-related products. It's a different type of business. It requires higher margins in order to make the heavy investments in product development support.

Unknown Analyst

And I wasn't trying to say you weren't doing a good job. I was just trying to understand, or leverage the model. The other question, the last question I have for you is with the 6000, will this expense that you have in the field trials primarily be in the September quarter or will it ramp again in December or will it flatten out? Just be -- I'm not asking for guidance because I know you only guide one quarter at a time, but I guess what I'm asking for is, is there more incremental expense on the 6000?

Robert J. Stanzione

I think that the fourth quarter will be lighter in that than the third quarter.

Operator

The next question comes from the line of Jim Suva.

Asiya Merchant

This is Asi on behalf of Jim. I'm just trying to model out sort of when can we expect EBITDA margins to kind of track to your high teens target that you laid out at the analyst day. I see obviously they're going to be a little bit lower again in the third quarter. But just circling back on these margins, when should we expect to see the mix, the sort of the target that's out there for high teens?

David B. Potts

Still very similar to, I think, our second question, that the mix is going to be a determinant in that. So as we get lots more DOCSIS 3.0 and we get lots more video product which we're going to have be at the lower margins, getting to those higher teen numbers is more challenging, but we're going to make more money. The operating expense base again, I just don't think changes much so we'll create operating leverage off of that. If we go through a cycle where there's CMTS spend versus the CPE, then we'll get to that. So, I guess what I'm trying to say is, we're going to make more money off of these products and there's going to be some variability in those operating margins that we ultimately get.

Operator

Your next question comes from the line of Simon Leopold.

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

I just wanted to just quickly double check, in terms of the outlook for the September quarter, it sounds like everything you said suggests a very similar mix and similar gross margins to the June quarter. I just wanted to confirm that that was correct assumption?

David B. Potts

I think we could see a bit more of our DOCSIS 3 CPE in the mix, Simon.

Operator

[Operator Instructions] I have no further questions at this time. I would like to turn the call over to Mr. Puccini for closing remarks.

Robert Puccini

Great. Thank you, Kim. Bob, any final words?

Robert J. Stanzione

No. I just hope that many of you show up at our analyst conference on August 8. We'll be able to delve into a number of these areas in a lot more depth. And you'll meet a number of the staff of the company that will be there.

Robert Puccini

Thank you, everyone. That concludes our call.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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