Scientific-Atlanta Inc. Q1 2006 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Daryl Armstrong - Citigroup - Analyst : Hi, this is Daryl Armstrong from Citigroup. I have two quick questions. First one is relevant to Japan. Is there any update there? Are you guys still engaged with the customer there, and have you guys been presented with any deadlines to resolve the existing issues relative to the set-tops that you -- that you ship there?

Question: Daryl Armstrong - Citigroup - Analyst : Okay. That's helpful. And then second of all, what percentage of the backlog this quarter was for DVR?

Question: Daryl Armstrong - Citigroup - Analyst : Thank you very much.

Question: Ari Bensinger - Standard & Poors - Analyst : Standard and Poor's. Just looking at the breakdown of the Explorer set-top boxes, there seemed to be a sharp drop-off in the high-definition DVR's and -- sequentially, and I'm just wondering what your take is on the market there, and how you see it playing out throughout fiscal year '06?

Question: Ari Bensinger - Standard & Poors - Analyst : Thank you.

Question: Marcus Kupferschmidt - Lehman Brothers - Analyst : Hi, this is Betsy on behalf of Marcus. I'm on the call a little bit late, so I apologize if you already talked about this, but last quarter you gave some of your HDTV unit forecast for the U.S. market and you said seven million for the second half of '05, how many do you project in 2006 and 2007 in the U.S.?

Question: Marcus Kupferschmidt - Lehman Brothers - Analyst : Okay. Thank you.

Question: Marcus Kupferschmidt - Lehman Brothers - Analyst : Okay.

Question: Nikos Theodosopoulos. - UBS Warburg - Analyst : I had a couple of questions. I guess the first one on gross margin. Can you quantify the magnitude of the insurance payment?

Question: Nikos Theodosopoulos. - UBS Warburg - Analyst : $2 million. Okay. Second question I had was can you give some sense of the direction on the blended ASP for set-tops and cable modems sequentially? Did each go up, did they go down? Can you gi -- I'm assuming set-tops went down, but can you give us a sense of the direction of both of those?

Question: Nikos Theodosopoulos. - UBS Warburg - Analyst : Okay. My last question's on the spending patterns of your U.S. customers. You know, if you look at your results, you know, the year-over-year sequential, however you want to look at it, bookings, et cetera, from a U.S. cable perspective, that was probably your weakest performance. And, you know, this week Motorola and [Secore] kind of talked about tightening CapEx budgets in the U.S. when they gave guidance for the fourth quarter. And last year in your calendar--in the calendar fourth quarter, you experienced some deferrals and so forth. Do you think that the cable companies are -- are tightening their budgets going into the fourth quarter and will look to defer, you know, spending until they get into the first quarter, like what happened to you last year? Or do you not know--do you not have a good sense of that at this point? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Nikos Theodosopoulos. - UBS Warburg - Analyst : Okay. Thank you.

Question: Ehud Gelblum - JP Morgan - Analyst : Thanks. It's JP Morgan. Couple questions I have. First of all, the drop in high end set-top boxes that occurred this quarter that put a drag on the ASP, was that due to one customer in particular, or did you see that spread out over the entire customer base? The concept of a shift away from high end boxes?.

Question: Ehud Gelblum - JP Morgan - Analyst : Okay. Given that it's a fiscal first quarter and you expect it as well as most other people that the total box shipments would fall, was the total box numbers didn't necessarily fall out of line, it was so much the mix. Did that mix surprise you? And, if so, how did your customers explain it? Did they say it had something to do with the order patterns of their customers or more the orders of the different types of boxes in stock?.

Question: Ehud Gelblum - JP Morgan - Analyst : Jim, I thought you were talking more about drop off of high end boxes more so than the total --.

Question: Ehud Gelblum - JP Morgan - Analyst : Okay.

Question: Ehud Gelblum - JP Morgan - Analyst : Gross margin 37.5%, remains strong,stronger than most people, myself included, had thought, despite the lower ASP and the lower end boxes. How sustainable is that gross margin at that point? Is your gross margins somewhat invariance to the types of boxes you have now? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Ehud Gelblum - JP Morgan - Analyst : Okay. If I can fit two other things. International, you are 200,000 boxes again for the second straight quarter, in that range actually, at least. What happened internationally and how sustainable is that -- is the growth in international boxes? Or will that fall down?

Question: Ehud Gelblum - JP Morgan - Analyst : So that level is sustainable.

Question: Ehud Gelblum - JP Morgan - Analyst : Thanks. I'll let someone else ask some questions.

Question: Todd Koffman - Raymond James - Analyst : Raymond James. Specific to the DVR shipments, there's been no seasonality in this very successful product line in the last few years, despite the commentary about seasonal spending patterns. This has been an incredibly successful product for you and it has been up and to the right consistently the last couple of years. This is the first quarter we've seen a sequential decline and although you cited a pretty nice backlog, 453, a few quarters ago you had a backlog you reported almost 500,000 units of DVR. My question is what's going on with DVR product cycle, regardless of whether it's high definition DVR or standard definition DVR, are we sort of hitting, maybe, a penetration, maybe this thing won't be in 50% at all households, maybe it flattens out in 30% or something like that?

Question: Todd Koffman - Raymond James - Analyst : Could it be that maybe at this level or maybe slightly above this level is going to be sort of where the shipment levels just flatten out or do you still think this thing is on a pretty healthy upward ramp going forward?

Question: Todd Koffman - Raymond James - Analyst : Thank you. Very helpful. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Rob Sanderson - American Technology Research - Analyst : Hi, good afternoon. American Technology Research. I have a question for Michael. Maybe -- you gave us an illustration of DVR penetration. I think you said 17% of digital, overall, and 35% in top market. Could you give us--could you expand on that illustration, if you have the data? What's your estimate of digital penetration overall in Scientific-Atlanta systems and digital penetration in top market and maybe that'll be helpful in answering DVR-related questions?

Question: Rob Sanderson - American Technology Research - Analyst : That's all helpful but, Michael, I guess what I'm really trying to get at is, obviously, that top system 35%, that's not Cablevision, but is that an unusual system or is that more reflective of what the, you know, overall demand is there? What is a digital penetration in that system where you're at 35? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Rob Sanderson - American Technology Research - Analyst : So it's not really unusual from the overall market?

Question: Rob Sanderson - American Technology Research - Analyst : That answers it. Thanks a lot, guys.

Question: Anton Wahlman - Needham & Company - Analyst : It's Needham & Company. Michael, two issues that I haven't heard you talk about for a while. First of all, this whole overlay and replacement business, it's now between a year or two ago since you basically did the stuff in Houston and a few other places at Time Warner and some stuff going on in Tucson, Arizona. Is there--are we just waiting for the big Adelphia overlay swap-out, whatever you want to call it, and the repercussions of that merger happening, or is it -- do you expect that there will be other places as well where this will be occurring or is that an era that is now over?

Question: Anton Wahlman - Needham & Company - Analyst :

Question: Anton Wahlman - Needham & Company - Analyst : Okay. The other thing is -- another issue you haven't talked much about recently, I think last December. Time Warner announced first multi-room being launched in Minneapolis or something like that. Where do we stand with that now? Whether at that customer or the market more broadly? Has that moved forward and is there any shift in technology there, whether [t-moka] or some other in-home networking and multimedia technology that will essentially replace it and, therefore, people might have waited and can you fill us in on that?

Question: Anton Wahlman - Needham & Company - Analyst : Okay. Just a final item.

Question: Anton Wahlman - Needham & Company - Analyst : Hey, better for you, right?

Question: Anton Wahlman - Needham & Company - Analyst : Do you think the telephone companies get it as far as the DVR is concerned? Telephone companies have traditionally had a lot of centralized thinking there and tend to talk about network PVR, and if they can at all avoid putting a big expensive box in somebody's house, (inaudible) there. What is your sense of their thinking, not specifically to any one guy like SBC, but far more broader? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Anton Wahlman - Needham & Company - Analyst : Okey-dokey. Thank you.

Question: April Horace - HoeferArnett - Analyst : Hi, good afternoon. It's HoeferArnett. A couple quick, you know, housekeeping questions. One, who were your 10% customers? Two, with respect to J com, you said there is no deadline, but is it a question of when, and not if? And then I have a couple of other follow-ups.

Question: April Horace - HoeferArnett - Analyst : You talk about J com and and that there's no deadline. But is there any concern that it's more of an if versus a when?

Question: April Horace - HoeferArnett - Analyst : And then with respect to Echostar's introducing a new DVR to go, as well as (inaudible) Dish One, are you seeing any interest in the DVR to go kind of scenario from any other of your customers? And then can you give us on update your build-out for the plant capacity of going from 1.3 million set-tops?

Question: April Horace - HoeferArnett - Analyst : And then, last question, I know you said that you'll have this situation about cash and repurchasing stock done in the second this year. Can you give us any color as to what's holding it up?

Question: April Horace - HoeferArnett - Analyst : Okay. Thanks. Appreciate it.

Question: Bob Rysis - Bear Asset Management - Analyst : Hi, it's Bob Rysis from Bear Asset Management. I got some easy questions. Generally, you guys, I know you don't give guidance, per se, by numbers, but it's generally the recent quarter just happens, your weakest quarters, one of your weakest and you build on that. Is there any reason to expect seasonality would be different this time, either worse, better or what have you? Can you comment on that?

Question: Bob Rysis - Bear Asset Management - Analyst : Okay. So what I'm reading into is that I'm not asking you for a point number, but you would expect the current quarter, the December quarter to be better than the September quarter?

Question: Bob Rysis - Bear Asset Management - Analyst : Okay. Well, as much help as you can give shareholders is --

Question: Bob Rysis - Bear Asset Management - Analyst : Okay.

Question: Bob Rysis - Bear Asset Management - Analyst : Okay. The, the second thing I wanted to ask you, I understand what you said in the last paragraph regarding, you know, stock buy-back or using -- At one conference you guys said that buying back stock was the primary purpose -- what was the number one thing that you would do with your cash. Is that still reasonable expectation?

Question: Bob Rysis - Bear Asset Management - Analyst : Is there any kind of hub you can do, what you consider is a prudent amount of cash to have on the balance sheet?

Question: Bob Rysis - Bear Asset Management - Analyst : Okay. Can you give us any hand on that or is that--

Question: Bob Rysis - Bear Asset Management - Analyst : Okay. That's what I wanted. Thanks.

Question: Jason Ader - Thomas Weisel Partners - Analyst : Yes, Thomas Weisel Partners. Thanks. Just a few questions. First, Wally, just some housekeeping on the options expense. You said 8.3 million went into OpEx. Is that right? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Jason Ader - Thomas Weisel Partners - Analyst : Could you break that out for us into SG&A and R&D, just so we have historical comparisons on the organic R&D and SG&A?

Question: Jason Ader - Thomas Weisel Partners - Analyst : Okay, thanks. And then you said approximately 1.4 million included in cost of sales?

Question: Jason Ader - Thomas Weisel Partners - Analyst : Okay. So I guess technically if we wanted to show pro forma without options expense, then you would get some type of boost to the gross margin. Is that the right way to think about it?

Question: Jason Ader - Thomas Weisel Partners - Analyst : Okay. All right. I just -- with this options expensing it is making the numbers a little bit more hard to compare.

Question: Jason Ader - Thomas Weisel Partners - Analyst : Yes. All right. So the next question I had, and I think I don't want to beat a dead horse here, but it does seem like the business was down more than normal, sequentially. You know, to what would you attribute that? I know you've had declines over the last three years, I went back and checked. It is usually a few percent. If you take out SBC being an incremental driver here in the quarter, it would be down about 10%. So is there any explanation or anything you can help us to understand that, or is it just kind of a timing issue? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Jason Ader - Thomas Weisel Partners - Analyst : All right. And then the Time Warner order, that you talked about, I think you said 125 million. Is that -- you've already booked that in the quarter?

Question: Jason Ader - Thomas Weisel Partners - Analyst : Okay. Is that normal? I am trying to remember the history. Is that sort of a normal 6-month order for them?

Question: Jason Ader - Thomas Weisel Partners - Analyst : I know you've reported a year ago or year and a half ago in one of the calls you mentioned big call from Time Warner. I'm trying to remember the magnitude.

Question: Jason Ader - Thomas Weisel Partners - Analyst : Less than six months. Okay. So that's not--okay. I got you. Less than six months, more than three months. Okay. And then just, last point here, you've -- in the past you've given book-to-bill on DVRs and I guess I could probably figure that out, but--

Question: Jason Ader - Thomas Weisel Partners - Analyst : Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Larry Harris - Oppenheimer. - Analyst : Yes, Oppenheimer. Just a couple of quick questions. Capital expenditures in the quarter, was it about $9 million?

Question: Larry Harris - Oppenheimer. - Analyst : Okay. And with respect to the $17.7 million of follow-on booking for Project Lightspeed, is something that you think can be quickly turned into revenues or is this something we will see perhaps a little bit of lumpiness where it will be in stages and every couple of quarters or so we'll see some additional quarters recognized?

Question: Larry Harris - Oppenheimer. - Analyst : Understood. Okay, thank you.

Question: Scott Coleman - Morgan Stanley - Analyst : Sure, Morgan Stanley. Thanks. Just a quick question on working capital. Wally, I know DSOs tend to go up in the first quarter for you guys, but they went up a little more than I would have expected. Is there anything unusual going on there with a particular customer or was this just the normal course of business? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Scott Coleman - Morgan Stanley - Analyst : Okay.

Question: Scott Coleman - Morgan Stanley - Analyst : Okay. Does international also carry 30-day terms?

Question: Scott Coleman - Morgan Stanley - Analyst : Okay. And--

Question: Scott Coleman - Morgan Stanley - Analyst : Okay. And, you know, I know you guys don't like to give guidance, but in terms of options expense, is the amount you announced this quarter a reasonable quarterly expectation for the rest of this fiscal year?

Question: Scott Coleman - Morgan Stanley - Analyst : Fair enough. And then one last question. The last couple of quarters you've given us the number of multi-room boxes shipped. Michael addressed some of the fundamental issues around this box right now, but I'm wondering if you would be willing to give us a number for the quarter?

Question: Scott Coleman - Morgan Stanley - Analyst : Thanks, guys. Thanks for staying on so late.

Question: Chris Rowen - Robinson Humphrey - Analyst : Robinson Humphrey. Wally, just to clarify when you said the fourth quarter would be like past seasonality, were you referring to last year or your typical seasonality? And then my second question has to do with DVR. Just going on our local Comcast website here, and I realize it is not necessarily a SFA system, but the pricing to go from analog subscriber to get the digital and the DVR, you're now looking at a delta of $25 versus what in the past has been as low as 15. And I'm wondering are you seeing broadly across your MSOs and are they doing that for CapEx reasons or is it because their VOD offering is starting to get a little more competitive?

Question: Chris Rowen - Robinson Humphrey - Analyst : Okay. Thank you.

Question: Brian Coyne - Friedman Billings - Analyst : Hi, it's Friedman Billings. Just a couple of questions. First of all, I want to come back to set-top boxes for half a second and if you could talk about margins on boxes that use other conditional access, like Microsoft in the telco world or nds or [Delsky] or Europe. Just about the differences you see there and what it means to you?

Question: Brian Coyne - Friedman Billings - Analyst : Okay. Good, thanks. Quick question--

Question: Brian Coyne - Friedman Billings - Analyst : Right. Understood. Okay. One question for Dwight. On the SBC part of transmission, could you just describe a little bit, maybe give us a sense or feel about what's in the mix there, the transition, you know, between let's say optical and digital headends and encoders. Even sounded a little bit during the script that you said that some of the telco's were buying your HFC equipment, and was wondering if you could describe that too?

Question: Brian Coyne - Friedman Billings - Analyst : All right. Anything like--again, maybe I misinterpreted. Did you say anything about HFC or RF type equipment there, too, to telco's?

Question: Brian Coyne - Friedman Billings - Analyst : Okay, great. One final quick question. Wanted to ask about a number you provided on your, high-end boxes. Could you give us what percentage of your shipment are the high-end? You know, DVR's, High def, DOCSIS (inaudible), out of the total?

Question: Brian Coyne - Friedman Billings - Analyst : Not on the--that is excluding DOCSIS?

Question: Brian Coyne - Friedman Billings - Analyst : 78% with DOCSIS. Got it. Alright, wonderful. That is all I had. Thank you.

Question: Alan Bezoza - Friedman, Billings, Ramsey - Analyst : Hey, I guess I'm not dead yet, one of the last questions. I want to ask you on M&A, it's something that you kind of hinted towards before. You know, you look around the competitive landscape it is a lot of pluses and minuses in every quarter and lumpy for a lot of the smaller players. You know, as you look around and certainly have some distressed companies out there, are you willing to kind of, you know, grow the cable business, if you will, and maybe expand on certain areas within that?

Question: Alan Bezoza - Friedman, Billings, Ramsey - Analyst : So when you said earlier you're not going to making any large acquisitions, what do you mean by large acquisition? Obviously you're not buying Cisco, but what do you consider large, as you say?

Question: Alan Bezoza - Friedman, Billings, Ramsey - Analyst : That's fair. Great. Thanks guys, and good luck.