Scientific-Atlanta Inc. 2005 Financial Analysts & Institutional Investors Meeting - Session #3 - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

TOM ROBEY, VP, INVESTOR RELATIONS, SCIENTIFIC-ATLANTA: OK, welcome back everyone. Thank you for helping us stay on schedule all day today. I think it's worked out very well. The last segment we have today is questions and answers. So this is truly going to be your time. We have 2 people with portable microphones. If you'd raise your hand, so people can see who you are wandering around. And if you would just raise your hand, we will get your questions answered. And all these execs are in the back of the room at this point. Who'll be first? Dale (ph)?

UNIDENTIFIED AUDIENCE MEMBER: OK. You guys talked about additional overlay opportunities. But you didn't give any timing terms of who do you think the MSOs would actually step up outside of Time Warner. Could you talk about some of the remaining objections that they still have before they'll quote on quote signing dotted line?

And then second of all, relative to the IP boxes that you sell to the regional belts. Could you give us a sense in terms of whether or not you would think that the initial margins there would be fairly low? I think Wally talked about 20% type margins for your products or given the similarity to your existing product portfolio that the margins would be able to get there. Thanks.

JIM MCDONALD, CHAIRMAN, CEO, SCIENTIFIC-ATLANTA: Is this thing working? I'm looking right at my General Counsel, and he's going to tell me that you can't talk about customer relationships. You don't announce to the general public in any way shape or form. I don't know what to talk about. But it traces back to us.

But obviously we can't announce, we can't talk about anything that's not publicly announced. Obviously both of those questions were went that way.

Were we chasing overlays? Obviously, the answer is yes. We can't go by customer. And quote products on set-tops to telephone companies, since we haven't announced anything regarding telephone companies that deal difficult to quote margins. But we can't go down that road. Yes.

UNIDENTIFIED AUDIENCE MEMBER: Jim, one of your slides said, one of your objectives for '05 is to capitalize on potential NGNA opportunities. Could you be a little more specific what that would entail or mean?

JIM MCDONALD: Well, Michael why don't want to answer that question.

MICHAEL HARNEY, PRESIDENT, SUBSCRIBER NETWORKS, SCIENTIFIC-ATLANTA: You should been -- you should have been at class yesterday. I had this well worked out where Jim wouldn't have to get the question so I wouldn't have to get.

On the overlays, I think we've mentioned before, we have taken customers to use them. And their first issue is, does it work? And what I would tell you is, we're batting at 1,000 on that. As a matter of fact, we're surprise because the customer in Houston basically is very clear, I did not hire any more people. I did not get any more warehouse space. I did not get any more phone calls that I would have expected launching any new products. And so we've gotten the customers who've gone there over that.

The next issue they go OK, so now why would I do this? And turns out that the next generation activities coupled into this very well because part of next generation is putting a overlay system in, in order to run an incumbent conditional access system and an NGNA conditional access system, which allows you to support the installed base, but also allows you to start to introduce NGNA products.

And their interest is very keen about, OK SA you obviously want some more business out of us. What can you do for me?" And their answer is, "We can use overlay to facilitate getting to the next generation, the replacement cycle."

JIM MCDONALD: Is that OK?

Security, left is a barrier to entry a number of years ago. And people just never realized it. You know, you can basically overlay security systems. You can use the multitude to do the security systems. And it hasn't really been a leverage in our business in a number of years. And we did have the design around them years ago.

So I think when you look at it, people say well if you didn't have the proprietary security, you'd have a vulnerable business model. Well, the answer is you didn't really have that leverage years ago. In Cablevision we had no leverage on the security. We had to do options, we had to support the multiple ones.

So our deal is that there is a real reason why we went down on the securities that ruled the cable card. I mean, as you go and try to add other devices it's just much more efficient way of doing it. So I think that it's something that customers clearly don't want to do. And we're seeing them downside, they're doing it.

UNIDENTIFIED AUDIENCE MEMBER: I had a couple of questions about digital Simulcast. One, there are a couple of slides that showed estimates for digital penetration. going forward. And I recognize that, I think they were taken from the sell side analysts book. They look to be -- and let's not say they're wrong. But they looked at sort of just the trend line from what we've had recently. And I'm wondering, wouldn't it digital -- as we move to digital Simulcast, wouldn't that accelerate sort of digital penetration, one.

And then two, when you think about the issues that the MSOs face with digital Simulcasts, you know the number of analog boxes out there and things of that nature, can you talk about the potential opportunity for Scientific-Atlanta to sell those set-tops that are going to be needed for digital simulcast?

JIM MCDONALD: I think I'd look at it kind of, a sequence of things. One of the reasons to do digital Simulcast obviously is to get the analog channels and digital synergy so that you have an all-digital service. So first step is, when you sell someone a digital service, sell them an all-digital service.

The next thing is to be able to get, I think and drive new functionality to the segment of the customer base that hasn't taken digital. And if you look at it B Scotby (ph) in Europe what you'll find is they've driven a lot of pretty innovative digital IPTV kinds of applications to the digital world. And it may be gaming. It could be information thing. It could be a variety of these applications.

Well, to some extent the customer is going to have to find a way to deliver more value to that segment of the market because they are highly dependent upon that segment of the market to absorb price increases to provide the growth. So they know they're going to be facing a number of applications from DirecTV capitalizing on the fact they have a digital base. But focused on more of I'd say the mid and the lower tier customers.

So next focus of this thing is to be able to drive digital service lower. And I think that's what probably drives the digital volumes. Is to try to get more functionality down to this segment of the market, which isn't taking the digital products today. Because you just can't let it sit there. I mean historically the enhancement is you added more channels and you raise the price for the value. And you got the additional advertising dollars.

Well, first, we haven't added an analog channel in years. But the price increases, they kept coming. And of course what's happened is, you look at the pricing differential that's out in the market between the satellite guys and the cable guys, you got, you're charging the pricing premium with no pricing value. And I think, they all realize that. That's probably what drives the volumes. Yes, Larry.

UNIDENTIFIED AUDIENCE MEMBER: I'd be interested in your current use in terms of retail strategy. I assume that Cox perhaps had a mixed experience in Phoenix with (inaudible). But as you come out with products like the DVD burner and Media centre type products, any thoughts about entering the retail space?

JIM MCDONALD: I think a lot of us would just take directions from the customers. The obvious problem that occurs, if you look at the subscriber acquisition cost for satellite, and you can't afford to put a $1,000 per home passed in the network and pay that to capture subscriber on top of it. So, you can't afford a subscriber acquisition cost.

Now, all of our previous discussions with retail guys is they would like to make the same money off the cable that they make off of satellite. But, if that's the going in strategy, you can say that set of economics won't work. …