Scientific-Atlanta posts record revenues

Scientific-Atlanta, which makes cable and satellite equipment, reported record earnings and revenue yesterday based on a continued push by cable operators to upgrade their networks with digital equipment.

Scientific-Atlanta reported record revenue for the third quarter of fiscal year 1999 ended April 2. Revenue totaled $320 million compared to $288.7 million, an 11 percent increase over the prior year's results.

Net earnings set a quarterly record as well, reaching $20.8 million, or 27 cents per diluted share, compared to 22 cents per share the same period a year ago.

Shares in Scientific-Atlanta were up sharply today on the news. In late afternoon trading, the stock rose to 31.9375, an increase of over 12 percent from the previous day's close.

Earnings included one-time gains of 2 cents per share based on sales of securities in communications chipmaker Broadcom. Even excluding one-time gains, the company still beat consensus estimates of 19 cents per share, according to First Call.

Scientific said it experienced a 29 percent increase in North American sales of broadband equipment to cable television operators as those firms move to upgrade their networks to handle digital signals and two-way data traffic.

This digital infrastructure is needed before cable companies can offer enhanced services such as Internet access, email, and video-on-demand. The company said 28 digital systems are up and running, representing between 4 and 5 million potential customers, with commitments to install equipment that could serve up to 25 million customers.

Sales of the company's Explorer 2000 digital set-top boxes fell in line with expectations, reaching 150,000 units at an average selling price of $350. Time Warner was the largest customer of the set-tops, representing 38 percent of sales.

Because the products are in the early phases of production, Scientific said gross margins were down to 28.6 percent over the same period a year ago. Profit margins are expected to increase as volume production cranks up, executives said.

While cable companies have been slow to upgrade their networks, deployment of advanced interactive networks is finally gathering momentum, said chief executive James F. McDonald.

"When you consider the value these networks provide to [cable operators], our prospects are compelling," he said in a conference call with analysts. Scientific is also poised to benefit from further deployments as the cable industry consolidates because new capital is being infused into the industry.

"As our momentum builds, we are turning our attention to interactive applications," McDonald noted. Indeed, the company today announced that an email application for the Explorer set-top will be available to cable operators in May, and indicated that Time Warner cable is looking to roll out video-on-demand services by next calendar quarter.

Further down the road, McDonald noted that Scientific is in talks with AT&T about building cable networks that can accommodate IP telephony, but the architecture of such systems has yet to be settled upon and talks are in the early stages.

The company said fourth quarter earnings would show gains of 26 cents per share based on sales of its remaining 1 million shares in Broadcom and other holdings.