Harmonic Inc (HLIT) 2010 Q4 法說會逐字稿

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  • Operator

  • Good afternoon.

  • My name is Latasha and I will be your conference operator today.

  • At this time, I would like to welcome everyone to the Harmonic fourth quarter 2010 earnings conference call.

  • All lines have been placed on mute to prevent any background noise.

  • After the speakers' remarks there will be a question-and-answer session.

  • (Operator Instructions)Thank you, I will now like to turn the call over to Ms.

  • Carolyn Aver, Chief Financial Officer.

  • Ma'am, you may begin.

  • Carolyn Aver - CFO

  • Thank you so much.

  • Good afternoon, everyone.

  • This is Carolyn Aver.

  • With me at headquarters in San Jose, California is Patrick Harshman, our CEO.

  • I'd like to point out that in addition to the audio portion of this call, we have also provided slides, which you can see by going to the HarmonicInc.com website and clicking on the fourth quarter earnings call button in the Event section on the front page.

  • Now turning to slide two.

  • Let me remind you that during this call we will provide projections and other forward-looking statements regarding future events or the future financial performance of the Company.

  • We must caution you that such statements are only current expectations and that actual events or results may differ materially.

  • We refer you to documents that Harmonic files with the SEC, including our most recent 10-K and 10-Q reports.

  • These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

  • Please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP or pro forma basis.

  • Revenues described as pro forma include Omneon as if they had been part of our results for the period stated.

  • These items, together with corresponding GAAP numbers and a reconciliation to GAAP are contained in today's earnings press release, which we have posted on our website and filed with the SEC on Form 8-K.

  • We will also discuss historical financial and other statistical information regarding our business and operations.

  • Some of this information is included in the press release, and the remainder of the information will be available in the recorded version of this call on our website.

  • With that, let me turn the call over to Patrick.

  • Dr. Patrick Harshman - President and CEO

  • Thank you very much, Carolyn.

  • And thank you, everyone, for joining us today.

  • Turning now to slide four.

  • Let me begin by saying we're extremely pleased with the way our business is performing.

  • We had record quarterly revenue of over $138 million, with Omneon contributing about $31 million to the quarter.

  • Excluding Omneon's contribution, we still had record quarterly revenue of just over $107 million, up 24% year-over-year.

  • We also had very strong bookings during the fourth quarter of $134.8 million, underscoring that we captured both market share and end of year spending among our growing global customer base.

  • In addition to growing our revenue in bookings, we've continued to improve our operating performance with gross margins of 51% and an operating margin of 13%, as we execute our long-term strategic plan and focus on higher margin products and profitable growth.

  • Our non-GAAP earnings were $0.11 per share, up from $0.07 in the fourth quarter of 2009.

  • Turning now to slide five.

  • Let's look at the full year and we can see that 2010 was really an excellent year.

  • We delivered strong growth across the range of markets and geographies we address.

  • Excluding Omneon's contribution, our 2010 standalone revenue was up 21% year-over-year.

  • We believe that our continued organic investments in R&D, sales and service are really paying off for us.

  • We also successfully completed the acquisition of Omneon during the year, which extends our leadership as the trusted and innovative video technology partner to global broadcast and media companies.

  • For the full year, Omneon generated revenue of $122.2 million, up 16% year-over-year.

  • Moving into 2011, our business integration of Omneon is nicely on track, and our customers and sales channel partners around the globe continue to be very excited about the combination.

  • Through both our organic execution and the addition of a strong and complementary Omneon business, we've significantly expanded our industry leadership and market position.

  • Our powerful portfolio of solutions now spans production of high quality HD programming through the delivery of new mission critical internet and TV-anywhere services, positioning Harmonic as the premier technology partner to the world's media and communications companies.

  • And just as importantly, through our substantially increased global sales and support presence, we've positioned our Company as a strong business partner to a fast-growing base of diverse global customers.

  • I've spent some time in both Asia and Europe over the past month and I can tell you our international position has never been stronger.

  • Moving now to slide six.

  • Let's take a closer look at some of the specific business highlights that underlie our strengthening market position and expanding opportunities.

  • We continue to have great success enabling all manner of new high definition services and applications, spanning reception, playout and coding, transcoding, encryption, edge processing, and distribution of both live and on-demand HD content.

  • And we continue to see success across the customer categories we address, including broadcasters, cable operators, satellite operators, Telcos, and now video production houses.

  • Our video processing product revenue, which includes our industry leading electro encoders, was up 25% year-over-year.

  • Our spectrum playout server business continues to benefit from growing upgrades of broadcast facilities to support high definition, as well as the addition of new HD channels.

  • Recently announced international HD playout deals include SWR, a leading broadcaster in Germany; the NRJ Group in France and ARENA SPORT in Serbia; and it's great to see HD starting to really take hold overseas.

  • We also delivered a record number of EdgeQAMs to the market in 2010 as growing HD on-demand content libraries drove more VOD consumption and consequently more and more EdgeQAM capacity.

  • We also saw the continuing growth of live HD programming drive several of our cable customers to invest in EdgeQAMs for bandwidth savings switch digital video applications.

  • Our ground breaking new HectoQAM product is shipping in volume and is being very well received by the market.

  • We see good opportunities to gain further EdgeQAM market share in 2011.

  • More generally across product categories, we have a very strong pipeline of new products and new licensable software functionality for already deployed products that will allow us to continue to benefit from the ongoing global transition to high definition.

  • Our new media solutions for both service provider managed and over the top applications are beginning to gain some serious momentum.

  • We delivered record gross at transcoding revenue in the fourth quarter and for the year.

  • Over the course of the year, we also won over 10 new multi screen projects that collectively, span live and on-demand applications delivered both over the top and over service provider managed networks.

  • Following the recent CES show, it is also clear that video capable tablets are now coming in force, and we're quite encouraged by several tablet driven trials currently underway with key customers.

  • Complementing our expanding portfolio of leading technologies, we have also been increasing our strategic focus on the support and professional services we can offer our customers.

  • We're very pleased with the 24% year-over-year revenue growth in this area, and you can expect us to continue to focus on expanding our support and service capabilities in business going forward.

  • Turning now to slide seven.

  • Our strategy of expanding our global customer base also continues to bear fruit and drive growth.

  • Our international business represented 54% to fourth quarter revenue, and revenue in 2010 from emerging markets, which include Brazil and Latin America, Russia and former CIS countries, India and China, grew approximately 40% year-over-year.

  • We're also very pleased to see that in 2010 we had over 50% year-over-year growth in bookings in our Telco IPTV business.

  • Enabling this growth was not only our powerful video processing products, but also our deep IPTV deployment experience and our growing sales presence addressing both domestic Telcos and international markets.

  • In particular, we had several wins with prominent emerging market Telcos securing strategically valuable new customer relationships.

  • Beyond expanding our Telco customer base, we see our continuing leadership in IPTV as strategically significant for our business with cable operators.

  • Worldwide, we see cable operators increasingly focused on IPTV technology as an enabler of new mission critical multi screen services.

  • I mentioned last quarter that we received our first major IPTV order from a US cable operator.

  • I'm pleased to report that project is going well, and we're now looking forward to growing opportunities to leverage our deep IPTV expertise and help our cable customers advance their strategic plans.

  • Another key customer base expansion target is the video production space.

  • The key to our success in this space is our exciting media grid video optimized storage product, and we're very pleased to see record media grid revenue in the fourth quarter.

  • We have a very strong pipeline of new storage and associated media management product releases coming, and leveraging these new products to further expand our position in video production environments is a key strategic focus for us going forward.

  • Turning now to slide eight.

  • We're moving that 2011 as the leading infrastructure Company for video and uniquely positioned to capitalize on a very dynamic marketplace.

  • You don't have to look further than the recent CES show to see that there is a fast moving new video economy that is being driven by consumer demand for more HDTV and multi screen services by growing reach and strength of content owners and by new business opportunities, as well as intensifying competition among traditional and new video service providers.

  • We believe our customers, the video service providers, global media companies and broadcasters are prepared to invest in 2011 to continue to advance their strategic position in this fast moving video economy.

  • And we think our customers are looking for both innovative technology and solutions and fast moving focused and capable business partners like us.

  • Consequently, we see great opportunity for Harmonic to build on our strengths and recent success and help our customers do even more.

  • Turning to slide nine.

  • For 2011 we've adopted four strategic imperatives to take advantage of these opportunities in our strong market position.

  • First, we intend to leverage our increased scale, solution breadth and competitive strength to expand our brand and deepen our customer relationships in both developed markets, while also continuing to work aggressively to capture greater market share in emerging economy markets.

  • Second, we intend to extend our leadership position in new applications in customer verticals; namely multi screen, new internet media services, and video production.

  • Third, our objective is to continue to lead the market in technology innovation and deliver on the exciting pipeline of new products and solutions we have scheduled for release over the course of the year.

  • And, finally, we intend to continue to enhance our operational execution.

  • And on that note, I'll now turn the call back over to you, Carolyn, to talk more about our fourth quarter and year end results and our financial outlook.

  • Carolyn?

  • Carolyn Aver - CFO

  • Thank you, Patrick.

  • Turning to slide 11.

  • As Patrick highlighted, this was another strong quarter for Harmonic and a nice ending to a very good year.

  • Driven by market demand for our products and the benefits of year-end spending by some of our customers, net revenues grew 21% from the fourth quarter of 2009 on a pro forma basis, including $800,000 of Omneon deferred revenue that was carved out.

  • Gross margin increased to 51%, compared to 49% in the previous quarter, and 48% for the fourth quarter of 2009.

  • The increase -- this increase is due to the inclusion of Omneon for the entire quarter.

  • Excluding Omneon's contribution, our gross margin remained relatively flat with the third quarter reflecting a mix of higher margin products, offset by an increase in charges for various inventory provisions.

  • Operating expenses were $52.2 million, again, reflecting the inclusion of Omneon for the full quarter.

  • Our operating margin was 13%, up from 12% last quarter, and 11% a year ago.

  • During the fourth quarter, we integrated the Omneon operations organization and moved its manufacturing lines to Harmonic's contract manufacturer in Malaysia.

  • We integrated the G&A teams and migrated the ERP process to our Oracle system.

  • And we physically moved the Omneon folks into our offices in San Jose and the UK.

  • As a result of these activities, we recorded one-time charges related to severance and excess facility costs.

  • Our non-GAAP tax rate remained at 30% in the quarter.

  • This is a result of an increase in our tax rate related to the Omneon business, which was offset by the effect of the extension of the R&D tax credit.

  • Our GAAP tax rate was quite high this quarter due in part to the buy-on of the Omneon IP by our international operations.

  • Our reported non-GAAP net income per share for the fourth quarter was $0.11 per diluted share up from $0.07 per diluted share for the same period of 2009.

  • Turning to slide 12.

  • Let's look at our revenue and backlog in more detail.

  • As noted, total revenue for the fourth quarter of 2010 was $138.2 million.

  • On a pro forma basis fourth quarter net revenue was up 21% compared to fourth quarter of 2009.

  • 2010 pro forma revenue was up 20% over 2009, and Harmonic net revenue excluding Omneon was up 21%, 2010 over 2009.

  • Total bookings for the fourth quarter were approximately $134.8 million, again, reflecting the strong demand and the benefit of some of the year-end spending by our customers.

  • Our backlog at the end of the quarter was $121.9 million, down slightly from the third quarter, and reflecting higher shipments in the quarter, as well as higher bookings.

  • Moving to slide 13.

  • We have significantly diversified our revenue mix across different geographies, products, and markets during 2010.

  • International revenue made up 54% of net revenue in the fourth quarter, showing our continued strength worldwide including emerging markets in China, the Middle East, Eastern Europe, and Latin America.

  • Our largest customer was, again, Comcast, representing 12% of our revenue in the fourth quarter, and 17% for the year.

  • Cable customers accounted for 47% of our revenue in the fourth quarter; satellite and Telco, 21%; and broadcast and media, 32%.

  • Video processing revenue in the fourth quarter was 45% of our net revenue; video -- production and playout, 20%; Edge and Access products, 22%; and service and support, 13%.

  • We have once again provided all four quarters of 2009 and 2010 in this revenue mix format for Harmonic, Omneon, and both combined.

  • Now that we've integrated our sales organization for 2011, we'll be providing this information going forward only on a combined basis.

  • As you can see on slide 14, we continue to maintain a strong balance sheet.

  • We generated over $10 million in cash for the quarter, resulting in an ending cash balance of $120.4 million.

  • Our inventory was $51.8 million, effectively flat with the third quarter, and inventory turns improved slightly to 4.7.

  • Our receivables balance increased to $101.7 million reflecting the growth in our quarterly revenues.

  • Our DSOs were 67 days, up from 64 days in the previous period.

  • The increase is due to an increase in deferred revenue, reflecting shipments invoiced but not recognized as revenue in the period.

  • Finally, our capital spending was $2.4 million in the fourth quarter.

  • Turning to outlook on slide 15.

  • The first quarter is typically sequentially down for Harmonic, particularly when we benefit from year-end spending as we did in this recent fourth quarter.

  • As a result, we expect that revenue for the first quarter of 2011 to be in a range of $129 million to $132 million.

  • This excludes approximately $2 million of certain deferred revenue that would otherwise have been recognized by Omneon had the acquisition not occurred.

  • Non-GAAP gross margins for the first quarter of 2011 are anticipated to be in the range of 50% to 52%.

  • This reflects our expectation of increased shipments of new products, which initially have a larger component of hardware; and therefore, somewhat lower gross margins, as well as the impact of the Omneon-deferred revenue carve-out.

  • Our target for non-GAAP operating expenses for the first quarter is $53 million to $54 million.

  • Note that our head count was 1,106 at the end of the fourth quarter, down slightly from the end of the previous quarter, reflecting the integration and restructuring that we executed during the quarter.

  • We executed our international tax strategy on the Omneon IP in Q4.

  • This strategy will result in a lower non-GAAP tax rate for 2011.

  • We currently anticipate our non-GAAP tax rate for 2011 will be approximately 25%.

  • As we look out into 2011 on slide 16, we see a number of encouraging signs.

  • Our combined business has excellent momentum.

  • We continue to expect over 12% revenue growth for the year.

  • We also expect strong combined operating performance.

  • With the relocation of Omneon manufacturing, we should gradually see an improvement in gross margins in the second half of the year.

  • We anticipate the combined non-GAAP operating margins for the year to be in the 15% range, with margins improving during the year.

  • With that, I'll turn the call back over to Patrick for some closing comments.

  • Dr. Patrick Harshman - President and CEO

  • Thanks very much, Carolyn.

  • In summary, we believe that our growth and progress during the year significantly expanded Harmonic's leadership position in enabling the video economy.

  • Our success was driven by growing world wide investment in video services, as well by our strong competitive position and expanding international sales presence.

  • The acquisition of Omneon has further expanded the breadth of our solutions, our growth -- excuse me, our global broadcast and media customer base, and our international presence.

  • On a more personal note, I want to take this opportunity to acknowledge the extraordinary support of our customers and business partners around the globe.

  • I also want to acknowledge the tremendous effort Harmonic employees around the world have made to deliver these results.

  • I believe our employees are the best in the industry and their talent, dedication to supporting our customers, and commitment to our business is nothing short of remarkable.

  • Moving into 2011, we expect broadcasters, media companies and video service providers around the globe to continue to invest in producing and delivering high value video programming and services.

  • You can expect us to continue to introduce innovative new technologies that enable this dynamic video marketplace to proceed.

  • We're excited about our expanding opportunities for growth in 2011 and beyond.

  • And with that, we'll end the formal portion of the call, and Carolyn and I would now be pleased to answer any questions that you have.

  • Operator?

  • Operator

  • (Operator Instructions) And your first question comes from the line of Mark Sue from RBC Capital Markets.

  • Carolyn Aver - CFO

  • Hi, Mark.

  • Mark Sue - Analyst

  • Maybe if we can just kind of think of your parameters for top line growth in 2011, how you're seeing the upgrade with some of your traditional customers and how that's providing visibility; and whether or not the Omneon business might see some further acceleration in the back half of this year?

  • Dr. Patrick Harshman - President and CEO

  • Mark, could you repeat the first part of the question for us?

  • Mark Sue - Analyst

  • Sure.

  • In terms of the prospects for increasing your top line growth rate this year versus last year, and how you're seeing the stability of your base customers in terms of upgrading your -- upgrading a lot of the encoding products, and whether -- and how we should see the Omneon business further accelerate.

  • Carolyn Aver - CFO

  • Sure, let me just start with one point.

  • We're thrilled that we grew 20% plus in more or less in any way you cut the numbers last year.

  • Our target is to grow 12%.

  • So our growth rate will decline.

  • Obviously, we're still very pleased with the growth in front of us.

  • But we don't expect to grow 20% at this point this year.

  • I think I'll turn it over to Patrick to talk about how we feel about the encoding business, the HD wave, visibility, and maybe the impact of Omneon.

  • Dr. Patrick Harshman - President and CEO

  • Yes, Mark, we did see a good rebound off of what it was, a pretty dry 2009.

  • The key thing is I think we took advantage of that to really gain some market share.

  • We continue to push on the product front deploying our sales force world wide.

  • We think we're very well positioned.

  • I don't see the tremendous year-over-year change in capital spending that we saw from 2009 to '10, but we do think our customers are going to continue to spend really right across the board in almost every category that we address in cable, in satellite, in Telco, in broadcasting media, we see the television advertising business back in strength.

  • That was a little bit slower to recover.

  • And we're pretty optimistic about our international business, as well as our domestic business.

  • As I mentioned earlier, I've just come back from a trip overseas and I see a lot of activity overseas.

  • So we're looking forward to really getting going on this year and we're excited.

  • But I think that at this time, I think we'll stand pat on the growth forecast we've given.

  • Mark Sue - Analyst

  • Okay, lastly, Patrick, just your thoughts on just cable, the moving dynamics there if you see any change in planning for spending for this year, any qualitative comments would be great on cable.

  • Thank you.

  • Dr. Patrick Harshman - President and CEO

  • Mark, we stay very close to our large cable customers, and we've not seen or heard anything that causes us to be surprised, frankly.

  • I think we're still, as we always are at this time of year, waiting for final capital budgets to get resolved.

  • But, look, we think that there is a lot of bandwidth pressure in the network so whether it is Swiss digital video, whether it's greater compression, whether it's more HSC in the network, we see that as being a key theme and we definitely think responding to the competitive pressures that are out there.

  • I think that we're going to continue to see even more HD programming to be competitive with satellite from cable.

  • We're seeing a very heavy push behind on-demand, and a lot of that content -- not all of that content has got to move to being HD.

  • And then, of course, we see the multi screen opportunities.

  • I think the iPad and what it can do as both a navigation device and as a video reception and consumption device, has certainly captured the imagination of a number of our cable customers.

  • And the fact that we're really well positioned and already running in that area as we are in IPTV technology, which is going to be used to enable that, we think puts us in a great position.

  • Mark Sue - Analyst

  • That's helpful.

  • Thank you, and good luck.

  • Dr. Patrick Harshman - President and CEO

  • All right.

  • Thanks a lot.

  • Operator

  • And your next question comes from Amir Rozwadowski from Barclays Capital.

  • Amir Rozwadowski - Analyst

  • Thank you very much and good afternoon, Patrick and Carolyn.

  • Dr. Patrick Harshman - President and CEO

  • Hi, Amir.

  • Carolyn Aver - CFO

  • Hi, Amir.

  • Amir Rozwadowski - Analyst

  • Carolyn, I was wondering, taking a look at your first quarter guidance.

  • If my math is correct, we're looking at just over double-digit operating margins, I was wondering if you could talk us through sort of how you get to sort of that mid-teens range on an operating margin basis for the full year.

  • I mean, are there still cost reduction efforts?

  • Is it the gradual gross margin improvement, or what are the factors there that we should be considering?

  • Carolyn Aver - CFO

  • Yes, I think it is a combination of gross margin improvement and a managed investment of OpEx.

  • And so we look at those two things a little bit hand in hand because we have a firm target on operating margin.

  • So as we continue to expand gross margin, we'll balance that between improving operating margins and taking advantage of the growth Patrick was just talking about.

  • So it will come from both of those.

  • Amir Rozwadowski - Analyst

  • From an OpEx perspective, do you think that this is sort of a base level that you folks will be stable at, or is there some additional synergies there?

  • I'm just trying to understand.

  • Carolyn Aver - CFO

  • Yes.

  • No, I don't think it is going to come down from here on an OpEx level.

  • I think that -- I think it's going to be stable and, frankly, could grow slightly over the course of the year as we -- you know depending on how we see gross margin build.

  • Amir Rozwadowski - Analyst

  • Okay.

  • That's very helpful.

  • And then, Patrick, just on a bigger picture in terms of your revenue growth, I mean, certainly strong revenue growth rounding out the year, and it seems as though there is a number of initiatives that you folks are benefiting from.

  • I'm just trying to understand sort of the HD wave here.

  • I mean, you had mentioned that internationally there has been some opportunities.

  • And sort of if you can give us a little bit more color in terms of the investment cycle that's going on from that perspective, do you feel we're at the tail end of that in the US, versus growth internationally, or how we should understand the different ways of investment?

  • Dr. Patrick Harshman - President and CEO

  • From a global perspective, US and international all in, we still think we're relatively early innings, Amir.

  • Although I have to say that we don't see HD as a one-time event.

  • Even within the US, you talk to customers -- so US is by far and away the most mature market.

  • Satellite operators from a national channel perspective have deployed towards 200 channels.

  • Cable operators still have a way to go to get there.

  • But that is in the live programming.

  • I mentioned, for instance, we still see a big move of on-demand content.

  • And as we see more and more on-demand traffic, all of that being HD is going to ripple right through the network having implications for the Edge and the access of stream processing business, et cetera.

  • Overseas, it's still relatively early days.

  • We're -- we think the vast majority of Omneon's installed base of broadcast servers with broadcasters around the planet are all still standard definition.

  • So there is a massive upgrade cycle that needs to happen, particularly overseas, to move to HD.

  • And then there's the next generation of the formats.

  • We're still mostly at 720p, 1080i formats.

  • There's 1080p coming.

  • And if you talk to the consumer electronics manufacturers at the CES show and elsewhere, you will hear from about new 2k and 4k formats that are coming.

  • So HD is a broad umbrella for a lot of different products and services offered by our customers.

  • And for us it is a broad umbrella driving investments in really a broad range of our products and technologies.

  • So we continue to see it as probably the single largest theme powering our business at least until the next couple of years, Amir.

  • Amir Rozwadowski - Analyst

  • Great.

  • Thank you very much for the incremental color.

  • Dr. Patrick Harshman - President and CEO

  • Thank you.

  • Operator

  • And your next question comes from the line of Simon Leopold from Morgan Keegan.

  • Simon Leopold - Analyst

  • Thank you.

  • I got a couple of things.

  • First, I want to see if we could get a little bit of clarification around the customer segment definitions.

  • The cable, satellite, broadcast media.

  • I'm just sort of doing a comparison to the previous year and it looks like the Telco got split up a little bit.

  • Could you give us a little bit of more detail on how you made the new definitions?

  • Carolyn Aver - CFO

  • Sure, if you -- do you have the chart where you see the two years comparison in the new model?

  • Simon Leopold - Analyst

  • I think that was on the streaming webcast so it's gone by.

  • Carolyn Aver - CFO

  • Okay.

  • It's also attached to the press release.

  • Simon Leopold - Analyst

  • Okay.

  • Carolyn Aver - CFO

  • So the last page of the press release with all the schedules have that as well.

  • And so there you can have it -- you'll have a by quarter, two-year view of everything, with and without Omneon.

  • Simon Leopold - Analyst

  • Great.

  • I'll have to go through it.

  • But is there some sort of color behind how you redefined it?

  • Dr. Patrick Harshman - President and CEO

  • So let me give you more qualitatively, Simon.

  • I mean, we called it Telco and Other, so previously before we got together with Omneon, we had cable, satellite, and then Telco and everything else.

  • The biggest thing in Other was actually broadcast and media.

  • So we've gone back to our numbers and we've taken apart what was the previous Telco category and we've taken Telco, meaning business just with global telecom companies.

  • And we've taken that out and we've kind of put that in the service provider business.

  • Then we've taken the media and the broadcast and we've kind of put that together from a customer segment point of view with the Omneon business.

  • So, in other words, if a year ago we did business with Deutsche Telecom and NBC, for example, that would be lumped together in Telco and Other.

  • In our categories going forward, the Deutsche Telecom business moves to the service provider together with satellite -- Telco and satellite.

  • And then the NBC business would go as part of our Broadcast and Media and Other.

  • Simon Leopold - Analyst

  • Okay.

  • Yes, I guess it was just I did not appreciate just how much was coming out of broadcasters previously.

  • I think that's what is surprising.

  • Dr. Patrick Harshman - President and CEO

  • I see.

  • Simon Leopold - Analyst

  • Just moving to my next question then.

  • There was particular strength this quarter in the video processing, and you talked a little bit about the drivers, and I think one of the other aspects is a product cycle around the Electra 8000.

  • I don't know that you can quantify it.

  • But I would like to try to see if there is some way to think about how much of the strength is related to industry demand, and how much is related to the availability of the Electra 8000 as an upgrade?

  • Dr. Patrick Harshman - President and CEO

  • Can you reword the second part of the question, availability as an up?

  • Simon Leopold - Analyst

  • Well, yes, it seems like there would be two drivers to make that video processing business strong.

  • One, is just general proliferation of HD channels.

  • But the other aspect, which I would assume is Company-specific, is you have a relatively new product out of the Electra 8000, and so that would stimulate demand as upgrades not necessarily driven by the HD content but, say, higher density.

  • Dr. Patrick Harshman - President and CEO

  • Yes, okay.

  • Well, it's hard to parse that apart.

  • Simon Leopold - Analyst

  • Yes.

  • Dr. Patrick Harshman - President and CEO

  • You're right, I mean, both are in play.

  • And really even more than that.

  • Particularly with the Electra 8000, we really developed a platform that supports a variety and a growing number of features.

  • I said in my prepared remarks and I mentioned new software functionality, and that's certainly a big part of our push on new products and technologies is to get more mileage out of this platform.

  • Interestingly, in the past year we sold almost as many standard definition encoders as we did high definition encoders.

  • Now, I don't know if this is what you are getting to at the back end of your question, but why is that?

  • Well, we've continued to significantly improve compression of standard definition.

  • So even if you're not increasing the number of standard definition channels, you would like to conserve bandwidth and you'd like to compress those better.

  • And to your point, we now in this platform can do that not only with better video quality or less bandwidth consumption, but also with less space and power requirements.

  • And a huge operational benefit to being used in the same platform for operators both standard definition and high definition.

  • So it's a little bit of all of the above.

  • It is a little bit more HD, raw content.

  • We also saw our first wave, though, of HD upgrades.

  • We've now improved video quality and bandwidth efficiency so much relative to the first HD channels that were put out there three years ago, that people are actually upgrading that product, or upgrading existing standard definition product.

  • And along the way, we've not only capturing Greenfield or new channel ads, we do think that we've gained pretty substantial market share.

  • As people make some of these upgrade decisions, we're pretty pleased with our success rate at displacing competitors.

  • Simon Leopold - Analyst

  • Great, that's really what I was getting at, and I'm sorry I didn't ask it more succinctly, was the market share gains.

  • Just one last question that I'd like to ask that is maybe a little bit long term, is your perspective on the initiatives around the C-map architecture, what it could mean for you in terms of maybe EdgeQAM products and how you think about the timing and opportunity there?

  • Dr. Patrick Harshman - President and CEO

  • Yes, so for anyone who is listening who isn't aware, there is some ideas in the industry out there about next generation data, as well as QAM architectures, and there's several different ideas being bandied about, about how these might come together.

  • Look, we see it as opportunity.

  • We think we have a clear market leadership position in Edge QAM technology, we've got a huge deploy base, we have tremendous customer good will.

  • And as you know, our Edge QAMs are deployed not only in video applications, but also, although it is a minority of the instances, where Edge QAMs have been employed in high speed data, it's predominately Harmonic Edge QAMs as well.

  • So as these architectures evolve and as Edge QAMs or some kind of hybrid device or architecture may come into existence, we think it creates expanded opportunity for our technology, our platforms to handle even more of the traffic on the network.

  • I would also have to acknowledge that to some extent you could view any time the new architecture comes as a disruption, so I would acknowledge also, I suppose, that there is risk.

  • But this Company has a history of really being on top of these kind of developments and we look at these discussions where the cable architectures are going as more of an opportunity than a risk.

  • In terms of time frame, Simon, I don't know.

  • I -- it's hard to imagine anything happens within the next year, but two to three to four years may be the window.

  • But I think it would be premature for me to speculate and perhaps our customers would be a better source of estimate for when they might move to some new architectures.

  • Simon Leopold - Analyst

  • Well, just to clarify that timing question, are you doing any product development work at this point, or it's too early even to think about that?

  • Dr. Patrick Harshman - President and CEO

  • I'd like to leave it at the fact that we're quite involved.

  • This is a space we're very interested in and to the extent there is an opportunity, we plan to be all over it.

  • Simon Leopold - Analyst

  • Thank you.

  • Dr. Patrick Harshman - President and CEO

  • Thank you, Simon.

  • Operator

  • And your next question comes from the line of Blair King from Avondale Partners.

  • Blair King - Analyst

  • Hi, thanks for asking the question.

  • I wanted to follow up on I think one of Amir's questions and first on the gross margin side, if you don't mind.

  • It sounded like, as a standalone Company, gross margins in this quarter would have -- or in, I'm sorry, the fourth quarter would have been flat, and the excess came from Omneon, but then looking into the first quarter, there's some new product introduction that's happening.

  • I'm wondering if you can give us a feel for what the hit to gross margin might be as a result of that in the first quarter, and then how you see the gross margins trending out after that throughout 2010?

  • Carolyn Aver - CFO

  • Sure, so effectively my gross -- hi, by the way -- effectively my gross margin guidance is sort of implied flattish, same range as Q4.

  • And it depends on how much of the product we ship as to whether it is mid, high or low of that range.

  • But roughly it -- consider it somewhat flattish, if you will, with the range.

  • And then I guess the other thing I'm pointing out, though, is another dampening impact is that we have this deferred revenue carve-out, which we thought we would take in Q4, but rolled into Q1, and that has a negative impact on gross margins of 100 basis points.

  • So you could -- you can interpret it as my guidance actually went up 100 basis points, but for this deferred revenue piece, which is a one-time event, which kind of says we're moving up, but now I have this deferred carve-out piece, this keeping it down in Q1.

  • And then where it sits in that range is really based on how much of this new product we ship.

  • We actually -- there could be a significant amount of it, which would have some impact.

  • I think then modest increase over the year is what we're targeting there.

  • Blair King - Analyst

  • Okay.

  • And then the follow-up to that is on the OpEx side which Amir touched on as well.

  • But if you could give us some indication as to where the investment might be, I suppose it's sales and marketing?

  • Carolyn Aver - CFO

  • Yes.

  • Blair King - Analyst

  • Then, if it is sales and marketing, what should we expect on the top line above and beyond what you've communicated in terms of 12% top line growth if anything?

  • Carolyn Aver - CFO

  • Yes, so my guidance was 12%, so that didn't change.

  • And as you know, you don't hire sales resources today and have them affect this quarter.

  • Yes, I mean I think the two principal areas -- but, certainly, if you look at our objectives, as Patrick laid them out for the year, we see opportunity in a number of markets across a number of segments, and we're leaning into that a little bit by investing in sales and marketing.

  • Behind that will be R&D to continue the innovation up, and we're targeting it at continuing to be efficient on the G&A side.

  • Again, those are going to be balanced by the growth in gross margin because what we're committed to is operating margin improvement and a 15% operating margin for the year.

  • So we're balancing those two and committed to the operating margin line.

  • Blair King - Analyst

  • Okay.

  • One last question, if you don't mind, Patrick, on the IPTV deployment that you had with the cable operator, you mentioned that in your prepared remarks.

  • I'm wondering if you could give a little bit more color around that.

  • Is that a kind of a one-off, or can you talk to us about what that trend looks like in 2011?

  • Dr. Patrick Harshman - President and CEO

  • Well, we don't think it is a one-off.

  • We think that stepping back from the enabling technology, we think a key strategic priority of cable operators is really to extend their business, their reach beyond the television set in the living room or in the bedroom.

  • And that really means connecting to more IP-connected, internet-connected devices.

  • Initially that is within the home, pads, tablets, et cetera.

  • And then eventually that's outside of the home.

  • IPTV technology lends itself much more to these kinds of architectures.

  • And, in fact, the initial deployment that I mentioned is not to replace the infrastructure with delivering video to television, but it is actually in parallel with that to allow this cable operator to extend their reach to IP connected devices.

  • So we think that that's a key trend for the industry.

  • You can look at it as both offense and defense, frankly.

  • And really, IPTV architecture is to support multi screen, multi device services, are really top of mind for all the CTOs that I talk to.

  • And as I mentioned, our deep experience, expertise, the products that we have, that work natively in IP environments video-over IP, all come together to put us in a great position, we think, to take advantage of this trend.

  • Blair King - Analyst

  • All right.

  • That's great.

  • Congratulations on a great quarter, thank you.

  • Dr. Patrick Harshman - President and CEO

  • Thanks very much, Blair.

  • Carolyn Aver - CFO

  • Thanks.

  • Operator

  • Your next question comes from the line of Larry Harris from C.L.

  • King.

  • Larry Harris - Analyst

  • Yes, thank you.

  • If I could add my congratulations for the quarter.

  • Couple of questions with respect to switch digital video, and I know you can't -- or it's difficult to talk about particular customers, but one vendor in the market said that they saw perhaps some challenges in the first quarter.

  • I believe you indicated you saw an opportunity to grow share.

  • What are you seeing among, say, the cable operators in North America relative to switch digital video over the next few quarters?

  • Dr. Patrick Harshman - President and CEO

  • So there is a couple things, Larry.

  • First, let's remember that switch digital video is merely a technology to save bandwidth.

  • And we've always said that different operators have a different kind of approach to that.

  • And we as a Company, we offer a number of technologies to help manage bandwidth.

  • Edge QAMs for switch digital video is one way; better compression of both standard definition and high definition video is another way.

  • Putting more bandwidth into the access network with our new multi-wavelength transmission technologies is yet a third way.

  • So it's always been our impression that it's a little bit horses for courses and we're very close to all of our customers, and we haven't really seen any significant change.

  • The comment that I made that you refer to, is really on our ability to capture more Edge QAM market share, and I also want to emphasize that while Edge QAM certainly supports switch digital video, by far and away, the number one application for Edge QAMs is around managing video-on-demand content.

  • And here we just see a lot of growth opportunity.

  • We see more on-demand consumption, that's a key priority of cable operators to enrich their on-demand libraries and to make those libraries support high definition content; and we think all of that is going to drive a lot more Edge capacity and we think we were very well positioned to take advantage of that.

  • Larry Harris - Analyst

  • Great.

  • And with respect to the software opportunity, the transcoding software opportunity, as more of these videos become available on iPads and other tablets, I think you were previously talking around 5% of revenues in 2010 or perhaps growing to 10% or so in 2011, are we still talking about the same sort of parameters, or has the opportunity increased over the past few months?

  • Dr. Patrick Harshman - President and CEO

  • I think we still see a -- probably multi screen was about 5% of revenue, roughly.

  • We don't break it out, but we're very encouraged by the strategic winch that we had, a broad range of those technologies.

  • And our outlook on the growth has not changed.

  • We see it as a significant middle to long-term opportunity.

  • Admittedly, many of the deployments we're doing are still relatively small in scope.

  • A lot of our customers are still experimenting with the business model, not only the technology.

  • So, Larry, we think we're very well positioned, but at this point, we don't have any really new meaningful update for you in terms of any financial modeling around that part of the business.

  • Carolyn Aver - CFO

  • No, I think that it is probably indicative of the growth we saw.

  • We talked about it more at the beginning of the year.

  • We had more wins at the end of the year.

  • Some of that it's bookings, it's not revenues, so the revenue of that rolls into next year.

  • So I think the momentum we hear is evidenced in deals we see, but it's still something that grows over time.

  • And with our revenue base, it's pretty big right now, so it takes a while for that to make up a meaningful part.

  • But we're starting to see the discussions convert into wins, convert into deployments.

  • Right?

  • So I think we're on the right path.

  • Larry Harris - Analyst

  • All right.

  • Well, thank you.

  • Dr. Patrick Harshman - President and CEO

  • Thank you.

  • Operator

  • And your next question comes from the line of George Notter from Jefferies.

  • George Notter - Analyst

  • Hi, there, guys, I wanted to ask about your experience in integrating Omneon, and I heard the comments in the monologue, but I guess I'm interested in your synergy target.

  • I think coming into the deal, you were looking at an $8 million to $10 million synergy target for the full year 2011.

  • I'd love to get an update from Carol on what you think of that target, and is that what's implied in the 15% operating margin guidance?

  • And then also do you see any potential to generate more synergies than that original guidance?

  • Thanks.

  • Carolyn Aver - CFO

  • Sure, George.

  • So, we think that the three things we executed on in Q4, moving manufacturing, moving -- combining facilities, and the reorganization in the back office, those three things together will deliver the $10 million of synergies over the course of the year.

  • And that's even partly what gets us to 13% margins in Q4, and will continue to drive both gross margin as well as operating margin going forward.

  • So, those -- that's a piece of the Omneon's margins were mid-single-digits, and so when you add that on combined and you get the improvements that Harmonic was having, you get to 15%.

  • In terms -- so we feel -- we haven't realized it all in our numbers yet, but we've made all the actions that will allow for those now to flow through our P&L.

  • I think the second wave of integration and synergy is really sales and service, and we kick that off at the beginning of this year.

  • We closed the year out really with the sales forces independent and we feel really good about how we ended the year, and then we started the new year before sales kick-off with the announcement that Mark Harrington would be our combined sales leader and really driving to a combined sales force.

  • Now, there it is less about saving OpEx dollars because, as I think you can probably tell, we're reasonably bullish on our market opportunity, but it's around optimizing the resources we have to take advantage of the opportunity.

  • And so there the hope is that synergy is going to result in more cross-selling, more combined revenue, better opportunity, and ultimately higher growth rate on the sales side.

  • That takes some time.

  • You have to cross-train people and everything.

  • But that's kind of Phase II for us, and integration and that kicked off the second week of January.

  • George Notter - Analyst

  • Okay.

  • And then potential for upside in synergies relative to that $8 million to $10 million number, actually, now $10 million number, do you feel like there's other aspects, could it be $12 million, could it be $13 million, $14 million, $15 million, any sense for it?

  • Carolyn Aver - CFO

  • I think that, again, I mean, I think that we're focused on -- sure, there could be a few more million, but at the same time we're focused on investing in sales and service to drive revenue.

  • So it is more likely that is going to get redeployed in sales to drive top line revenue.

  • George Notter - Analyst

  • All right.

  • Thank you very much.

  • Dr. Patrick Harshman - President and CEO

  • Thank you, George.

  • Operator

  • And your next question comes from the line of (inaudible) from UBS.

  • Unidentified Participant

  • This is (inaudible) for Nikos Theodosopoulos.

  • Just wondering, could you give us more on color on Scopus revenues as a percentage of sales, and how that has been trending?

  • Dr. Patrick Harshman - President and CEO

  • We don't break that out, but I would certainly point to our strength internationally, particularly in emerging markets.

  • I commented in our prepared remarks, that if you look at kind of the brick and closely related countries last year, our year-over-year revenue growth was about 40%.

  • And I attribute that a lot to actually the Scopus sales channels' relationships and actually the sales leadership that came in.

  • Additionally, although there has been a lot of discussion in the Q&A here on encoding and certainly that is the cornerstone of our video processing, the Scopus products, particularly contribution encoders and receivers are also an important part of the video processing product line; and we're pleased with the way those products are being accepted by the market.

  • And certainly, that is part of the overall strength that we have and it's part of the scale that we're taking advantage of in the video processing area.

  • So, it's -- we're pretty pleased that we're meeting our strategic objectives from the Scopus deal, which is now nearly two years behind us.

  • Unidentified Participant

  • Great.

  • Thank you.

  • Dr. Patrick Harshman - President and CEO

  • Thank you.

  • Carolyn Aver - CFO

  • All right.

  • Operator, we probably have time for one more question.

  • Operator

  • And your next question comes from the line of Richard Kramer from Arete.

  • Richard Kramer - Analyst

  • Hi, folks.

  • Couple of quick questions.

  • Patrick, a number of your larger competitors have been kind of on the side lines for the past year, whether it be Technicolor with its own issues, Motorola with the separation, and a few others, whether it's Cisco or Ericsson, they seem to have lost some focus in the area.

  • Is this something that you expect will return in a fiercer, competitive environment next year, and is that somehow playing into your thoughts about sales growth?

  • And also another question apropos of the tablet comments you made before, are you currently seeing any material sales related to video delivery over mobile networks, or is it still just a drop in the ocean relative to traditional video distribution?

  • Or could that be another sort of a leg of growth for you?

  • And then I have one quick question for Carolyn.

  • Dr. Patrick Harshman - President and CEO

  • Yes, so, Richard, first on the competitive landscape, no, we're not counting on any material change.

  • I mean, I will acknowledge truth in what you said.

  • We do think that several of our customers have been somewhat distracted and challenged and -- competitors, excuse me.

  • And we've taken good (multiple speakers) --

  • Richard Kramer - Analyst

  • Customers, too.

  • Dr. Patrick Harshman - President and CEO

  • -- advantage of that.

  • Yes.

  • (laughter) Right.

  • But, look, we have some excellent competitors, and we take nothing for granted and we certainly don't assume -- we don't assume that they stay defocused forever.

  • I mean, we -- and -- but I would tell you that we think a lot of our success is really based on the excellence of our products and technology.

  • So we're very aware of our competitors.

  • We take nothing for granted.

  • And our growth assumptions for the year do not envision any dramatic change in the competitive environment one way or the other.

  • On the iPad mobile question, it is still modest.

  • A little bit earlier, I offered the estimate previously; and I think it is still relatively true, as we finished out the year, that probably broadly in the whole kind of multi screen, new media area that was -- it was single-digits, nominally 5%.

  • But -- so it is more than a drop in the ocean, Richard, but it's -- I wouldn't anticipate that it is over 10% in this coming year.

  • So we still look at it as mostly strategic groundwork we're laying for the years to come.

  • But I also have to emphasize that our ability to offer those kind of solutions have a positive kind of halo effect back on the standard product.

  • Someone is going to look at building a new video head end for television sets today, certainly the fact that our technology, our products, our Company knows how to support these multi screen services, well, that's an added benefit if you're making a standard definition or HD investment today.

  • So, it's -- I think it's becoming an increasingly important part of the way we position ourselves strategically with our customers.

  • Richard Kramer - Analyst

  • Okay.

  • And one other question for Carolyn on the cash.

  • Post-Omneon, which is obviously a big move for Harmonic, can we rest easy that Harmonic will see a year in 2011 of largely organic growth?

  • Can you say whether you have any thoughts by the end of 2011 that you might be looking at returning some cash to shareholders through some form?

  • Carolyn Aver - CFO

  • I think we certainly are always looking at managing our balance sheet appropriately and thinking about our capital structure.

  • We wouldn't -- if we were going to do it at the end of the year, we probably wouldn't talk about it now.

  • But I think you should know that we think about those things regularly, and at $120 million I don't feel like I'm swimming in cash yet, but it is certainly something I'm mindful of.

  • Richard Kramer - Analyst

  • And likewise after Omneon, can we assume there's not another big acquisition coming any time on the horizon?

  • Dr. Patrick Harshman - President and CEO

  • Richard, long-term acquisitions are part of our strategy with the bulk of our growth being driven by -- organically.

  • So I wouldn't want to rule anything out.

  • That being said, I will acknowledge and I will tell you that, I mean, we feel like we have more capability, more tools in our hands with the combination of Harmonic products, Omneon products, and the things we can do together than we've ever had before.

  • And certainly my focus is on taking advantage of all that we have currently at our disposal.

  • We think we've got the right products, the right people in front of our customers, the right opportunity, and I and the management team are extremely focused on taking advantage of that in 2011.

  • Richard Kramer - Analyst

  • Okay.

  • Thanks a lot, guys.

  • Dr. Patrick Harshman - President and CEO

  • All right.

  • Thank you.

  • And with that, we'll wrap the call up.

  • I want to thank you again all for joining us.

  • I want to reiterate again our appreciation for the support you've given us over the past year.

  • We're genuinely excited about our business, the progress that we've made.

  • We think we're extremely well positioned in the market and we're looking forward to a great 2011.

  • We look forward to talking with you again.

  • Thanks very much.

  • Carolyn Aver - CFO

  • Thank you.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.