Cable's push into video-on-demand, digital video recorders and HDTV is finally paying off for the industry's two leading set-top vendors, as exhibited in last week's strong earnings reports from Motorola Inc. and Scientific-Atlanta Inc.
Fourth-quarter sales at Motorola's Broadband Communications Sector — which includes the company's headend and transmission-equipment businesses, as well as set-tops and cable modems — reached $510 million in the fourth quarter of 2003, a 21% increase over the third quarter's $421 million and a 4% increase over the year-earlier quarterly figure of $489 million.
"We saw strong orders growth," said Motorola president and chief operating officer Mike Zafirovski.
Motorola said it shipped 1.6 million cable modems and 1.4 million set-tops in the quarter.
Leading the charge were set-top orders from Insight Communications Co., Comcast Corp. and Cox Communications Inc., he said.
"We began shipping increased volumes in the quarter," Zafirovski said. It was the first time the Broadband unit produced year over year sales growth in 10 quarters, dating back more than two and a half years.
The one hitch: the new set-tops generate lower profit margins. Operating earnings for the divisions dropped from $55 million in fourth-quarter 2002 to $35 million in fourth-quarter 2003. The operating margin dropped from 11.2% to 6.9%.
"Year-over-year operating earnings were down due to a mixed shift in digital set-tops (to new products which typically have lower margins at product inception)," Motorola said.
S-A said it faces the same margin pressures with respect to new boxes, but also said margins are improving. It reported second-quarter 2004 earnings of $51.1 million on sales of $416.6 million, compared with earnings of $15 million on net sales of $352 million in the year-earlier period.
Bookings were $460.5 million for the quarter, S-A added, up 38% from the second quarter of last year and 27% ahead of the previous quarter.
"We have launched in all the Time Warner Cable and Bright House [Networks] markets," said S-A president of subscriber networks Michael Harney. "Cox launched DVR in eight systems and Comcast reported strong consumer demand," with 4% of digital subscribers requesting DVRs in the first month of launch in Naples, Fla.
S-A said it shipped 260,000 Explorer 8000 set-tops in the quarter, including 10,000 Explorer 8000 HD set-tops. Overall, S-A said it shipped 101,000 HDTV set-tops in the quarter, including the 10,000 Explorer 8000 HD boxes.
S-A said it had a backlog of 1 million Explorer boxes, which include 350,000 Explorer 8000s. All told, more than half of S-A's set-top shipments were of units from its more advanced 4000 and 8000 series.
S-A showcased its multiroom DVR 8300 at the International Consumer Electronics Show in Las Vegas earlier this month, Harney said. The box should be available by June.
Set-top makers aren't the only technology vendors benefiting from MSO spending increases.
Harmonic Inc. reported net sales of $56.3 million in the quarter, an increase from $47.3 million in the previous quarter and $39.3 million in fourth-quarter 2002. For the full year, sales reached $182.3 million, compared to $186.6 million in 2002.
Net income according to generally accepted accounting principles (GAAP) was $1.4 million in the quarter, versus a net loss of $13.8 million in the year earlier period.
Harmonic Inc. executives said intensified competition with satellite-TV providers helped boost sales to cable operators.
Its digital headend division reported sales of $33.2 million in the quarter, up from $29 million in the previous quarter. The broadband access networks division also saw a rise in sequential revenue, from $18.3 million in third quarter to $23.1 million in the fourth quarter.
C-COR.net Corp. reported second-quarter net sales of $61.5 million, compared to $54 million in the same period last year — a 14% jump. Its net income rose to $29.7 million, from a net loss of $4.7 million in the year-earlier period.
The net-income figure was boosted by $21.1 million received from the sale of the company's trade claim against Adelphia Communications Corp. (see related story, page 1) and the collection of $1.6 million in delinquent accounts receivable.
Discounting those gains, C-COR.net still produced $7 million in net income in the quarter. The company expects its third quarter sales to fall between $58 million and $60 million.