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Video hardware

SA Sees an HD Year Ahead

Scientific Atlanta is looking for continued strong sales gains this year, thanks, in part, to consumer demand for high-definition video set-tops and services.

SA generated about $454 million in digital video product revenue for parent company Cisco Systems Inc. (Nasdaq: CSCO) in its fiscal second quarter and shipped 1.5 million set-tops around the world.

For the three months ended Jan. 27, SA produced $639 million in sales for Cisco, up 21 percent from the year-ago period and higher than most analysts projected. The new Cisco division, which will be renamed this year, accounted for about 7.5 percent of its parent's total sales for the quarter.

SA executives say demand for high-definition TV and digital video recording capabilities continue to boost equipment sales. Bob McIntyre, the company's CTO, recently estimated that HD-enabled boxes and DVR-enabled boxes each account for about half of the company's set-top sales already. (Most HD set-tops also have DVR capability.)

Scientific Atlanta's transmission networks unit, which makes encoders and cable headends, produced $185 million in revenues in the latest quarter, up more than 50 percent from $120 million in the year-earlier period.

"There's a tremendous amount of momentum going in HDTV, and, of course, that drives our customers to focus on either going to all-digital, to switching systems like switched digital video, or to upgrade their networks to 1 GHz," SA CEO James McDonald told analysts on Cisco's earnings call earlier this week. "So, the movement to HD obviously has a very big impact on our transmission business."

SA is also looking for at least a temporary pickup in sales from the cable's industry's pending transition to CableCARD-enabled digital set-tops. Under a mandate from the Federal Communications Commission (FCC) , cable operators must start using digital boxes equipped with CableCARDS -- removable security modules -- to provide conditional access to their TV programming in July.

Like Motorola Inc. (NYSE: MOT)'s broadband division, Scientific Atlanta is counting on orders from telco TV providers to lift its sales this year as well. The company reported shipping 100,000 IPTV set-tops to telco customers in the second quarter, posting its first solid numbers in that category.

Finally, SA executives see more business coming their way from outside North America, thanks to their company's integration with other Cisco divisions. Acquired by Cisco for $6.9 billion just about a year ago, Scientific Atlanta saw international sales account for more than 30 percent of its business for the first time in the year's last quarter.

"Our international business is now over 30 percent, and it's moving up quite well," McDonald told analysts. "We're shipping IPTV boxes, and these are, at this stage, all going into international markets."

While digital set-tops are flying out the doors now, analysts expressed concerns about whether that will continue. They noted that customer demand may fall once the CableCARD transition ends in the summer.

McDonald acknowledged that Scientific Atlanta, which recently hired more engineers and factory workers to increase set-top production, may face "some capacity issues" later this year. But he argued that rising demand from other market segments, including the international market, should take up much of the slack.

— Alan Breznick, Site Editor, Cable Digital News

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