Harmonic Inc (HLIT) 2011 Q1 法說會逐字稿

Good afternoon, my name is David, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Harmonic first quarter 2011 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 would now like to turn the call over to Mr.

Carolyn Aver, Chief Financial Officer.

Ma'am you may begin your conference.

Thank you.

Hi, everyone.

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

I would like to point out that in addition to the audio portion of this call, we also have provided slides which you can see by going to the harmonicinc.com website and clicking on the First Quarter Earnings call button in the event section on the home page.

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 the documents that Harmonic files with the SEC, including our most recent 10 K.

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 have been part of our results for the periods stated.

These items, together with the 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 a 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 a recorded version of this call on our website.

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

Thank you, Carolyn.

Thank you, everyone for joining us today.

Turning now to slide four, we are very pleased with the way our business has continued to perform for the first quarter of 2011.

We have strong revenue of nearly $133 million, indicative of both a generally healthy market and our very positive business momentum.

Assuming a full contribution from Omneon last year, our consolidated pro forma revenue was 19% year-over-year.

Revenue from our Video Processing product area was particularly robust, up 64% from Q1 last year.

We're also pleased with our relatively strong first quarter bookings of $131.6 million., evidence that we continue to expand our market presence and capture market share across customer segments and geographies in what is typically a slower seasonal quarter.

We are also pleased with our continuing operational execution as we realized gross margins 51% and delivered an operating margin of 10%, in line with our expectations.

Our non-GAAP earnings were $0.09 per share, up from $0.06 in the first quarter of 2010.

Turning now to slide five, let's look at some of the business highlights that underlie these results.

Reviewing first the key drivers of our very strong Video Processing business.

The proliferation of high definition services worldwide continued to be a major growth driver as we won new customers and helped our long-standing customers upgrade their HD offerings.

Our HD driven business in North America continued to be quite strong close across customer segments, and we are particularly pleased to see the HD opportunity expanding internationally with our recently announced win in Kosovo being a good example with our expanded international footprint.

Enabling this continuing success, our Electra 8000 encoding platform continued to be the clear market leading solution for HD encoding, transcoding and format conversion.

I should also note that as we continue to roll up market share gains, in many cases, we shouldered a higher cost as to be penetrated new accounts.

We also saw instances, particularly overseas, where our displaced competitors did not go down without a fight, effectively putting pressure on pricing as we won new business and extended our global footprint.

Moving now to new media and multiscreen applications, I am also very pleased to report that our newest solutions for both service provider managed and over-the-top internet applications continue to gain momentum with both traditional and new customers.

In fact, our largest single order received during the first quarter was for a new tablet driven application.

Further strengthening our position, we recently released our newest ProStream 4000 transcoder product which incorporates a number of emerging system features required for these new multiscreen applications.

We're also beginning to leverage unique solution synergies between our live and file based streaming products and our new production and play out products, enabling our broadcast and media customers to streamline their new multiscreen workflows.

Another important contributor to our positive Video Processing activity was our contribution and distribution product.

The core of the product category came to us via our Scopus acquisition, completed approximately two years ago, and we are delighted to see the strongest revenue quarter yet for this product category.

A combination of compelling new products in this area and our stronger corporate focus on broadcast customers led to growing success in this area.

Summarizing the message of this slide, Harmonic is uniquely positioned with the best of class Video Processing product portfolio that spans HD to new media applications for service providers, content aggregators, broadcasters and media companies.

The greater than 60% year over year growth we saw in Video Processing sales is clearly indicative of our broadening industry leadership and the unique workflow and solution synergies we are able to leverage as our customers look to roll out innovative new video services.

Turning now to slide six.

Armed with this powerful product portfolio, we've continued to expand and diversify our global customer base.

Our top 10 customer in the quarter contributed only 35% of our total revenue, and our international sales represented 55% of revenue, with particularly strong momentum in emerging markets.

We continue to be bullish on growth opportunities overseas, and investments in further strengthening our international sales presence will remain an important element of our strategy.

We have also seen excellent momentum with our newer broadcast and media customers.

First-quarter broadcast and media pro forma revenue increased 38% from the same period last year.

Importantly, we are really just now beginning to leverage the cross-selling benefits of recently unified Harmonic Omneon sales teams worldwide, and we see significant opportunities to further strengthen our strategic position with leading broadcasters and media companies around the globe.

This week's Wall Street Journal article on growing demand for TV advertising time suggests a healthy ad sales environment for media companies, which is more positive news for this segment.

As you will see in a couple moments when Carolyn breaks down the numbers, cable also continues to be a key customer segment and a very important part of our strategy.

In fact, our largest customer segment.

We continue to be very well positioned with the leading cable operators and believe our cable business will continue to grow in 2011.

In this particular quarter, year-over-year revenue from cable was approximately flat as we saw lower cable spending on Edge and Access projects, offset by growth in Video Processing sales.

Across cable, media and other customer segments, as the complexity of new video applications has increased, we have been increasing our strategic focus on the support and professional services we can offer our customers, and we are very pleased with the 28% year-over-year revenue growth in this area, and you can expect us to continue to focus on expanding our support and service capabilities going forward.

Turning now to slide seven.

I want to update you on our progress in integrating and leveraging Omneon.

Revenue from our Production and Playout products in the first quarter was down modestly from the same period in 2010.

While we were targeting a better result, it is not unusual to see such a dip in results, given the significant integration issues we were working through during the quarter.

The good news is that the integration activity is going well, and our positive outlook for this business is fundamentally unchanged.

Over the past month, we have announced several significant new Omneon product releases including our new RAID based media grid video storage system, our media center video server and the next-generation video server I/O modules.

These new product releases have been extremely well received by our customers.

Both because of the operational and cost efficiencies they deliver and also because they offer clear evidence that the highly respected Omneon innovation and engineering capability is alive and well.

I'm also pleased to let you know that our integration of Omneon supply chain and manufacturing operations is on track, and we continue to expect to realize the associated cost benefits beginning this quarter and more fully in the latter half of the year.

Additionally, integration of our two sales organizations commenced during the first quarter and is now well underway.

As I mentioned just a moment ago, we have been seeing the beginning of cross-selling benefits, particularly in the broadcast and media space.

And on that note, I just returned from a large NAB show in Las Vegas, and I was very encouraged by the very positive response from both existing customers and potential customers to Harmonics' greatly expanded capabilities and market focus in this area.

This recent and strong positive customer response, our overall Company momentum with broadcast and media companies and our compelling new production and play out products, coupled with the increasingly healthy TV advertising market, lead us to remain confident in the growth prospects for our Omneon products and our broadcast and media business in general.

Turning to slide eight.

We are moving into the second quarter of 2011 as a leading video infrastructure company and uniquely positioned to capitalize on a very dynamic marketplace.

This fast-moving new video autonomy is being driven by consumer demand for more HDTV and multiscreen services.

By growing reach and strength of media companies and by new business opportunities, as well as intensifying competition among traditional and new video service providers.

We believe our customers, video service providers, global media companies and broadcasters are continuing to invest in order to advance their strategic positions in this fast-moving economy.

Our customers are looking for innovative technology and service enabling solutions, as well as fast-moving, focused and capable business partners like us.

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

Turning to slide nine.

We continue to execute on our four strategic imperatives in 2011.

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

Second, we expect to extend our leadership position in new applications and customer verticals, namely multiscreen, new media services over the internet and video production.

Third, our objective is to continue to lead the market in technology innovation, and I remain very excited about the pipeline of new products and solutions we have scheduled for release in the course of the year.

Finally, leveraging the value we are creating in the marketplace, we intend to continuously improve our operational execution and business model.

And on that note, I will now turn the call back over to you, Carolyn, to talk more about the quarter and our financial outlook.

Thanks, Patrick.

Turning to slide 11, while the first quarter is typically our slowest seasonal period, this was indeed a strong start to 2011.

Driven by market demand for our products and the continued expansion of our leadership in many markets worldwide, our net revenue grew 19% from the first quarter of 2010 on a pro forma basis, including the $2.1 million of Omneon deferred revenue carve out.

Note, this is the last quarter we will have a material carve out of deferred revenue.

Gross margin remained flat at 51%, the same as the previous quarter and the first quarter of 2010.

Factors impacting gross margin this quarter include the relative mix of products and a reduction in the Video Processing gross margin related to certain competitive wins recognized in the quarter.

Operating expenses for Q1 2011 were $54 million compared to $35 million for the same period last year, reflecting the inclusion of Omneon this year.

The increase from Q4 operating expenses of $52.3 million is primarily due to an increase in R&D resulting from increased headcount, as well as cost associated with new Production and Playout products and an increase in sales and marketing due to our Q1 kickoff events for our sales force and our partners.

These increases were partially offset by a decrease in G&A as we realized cost savings from our integration efforts.

Our operating margin was 10% for the first quarter of 2011 compared with 13% for the fourth quarter and 10% a year ago.

We recorded a one-time charge related to excess facility costs of $500,000.

This was a true up of an estimate we made in Q4 as a result of subleasing a facility that we exited last quarter.

As a result of integrating Omneon products into our international tax strategy, our non-GAAP tax rate was 25%, down from 30% last year.

Our reported non-GAAP net income per share for the first quarter was $0.09 per diluted share, up from $0.06 per diluted share for the same period of 2010.

Turning to slide 12, let's look at our revenue and backlog in more detail.

As noted, total net revenues for the quarter were $132.8 million, excluding the $2.1 million of deferred revenue carve out.

On a pro forma basis including the carve out, our revenues are up 19% compared to the prior year's first quarter.

Total bookings for the first quarter of 2011 were $131.6 million, reflecting the strongest Q4 to Q1 sequential trend in five years.

Moving to slide 13.

We have continued to significantly diversify our revenue mix across different geographies, products and markets.

International revenue made up 55% of net revenues in the first quarter showing our continued strength worldwide, including emerging markets in China, India, the Middle East, Eastern Europe and Latin America.

Our largest customer was again Comcast, representing 11% of revenue in the first quarter.

Our top 10 customers represented only 35% of the revenue, reflecting our continuing diversification across a worldwide customer base.

Cable customers accounted for 42% of revenue in the first quarter, satellite and telcos is 26% with a strong showing from the satellite sector and broadcast and media, 32%.

Video Processing revenues in the first quarter were exceptionally strong worldwide, representing 47% of our net revenues.

Production and Playout represented 17%.

Edge and Access products represented 23%, and sales -- and Service and Support, excuse me, represented 13%.

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

We entered the quarter with a cash balance of $117.3 million, down slightly from $120.4 million at the end of 2010.

This decrease was due to type timing of payments for income taxes and the annual payout under our bonus plan.

Our inventory was $58.8 million, up modestly from the fourth quarter, and our inventories-- inventory turns were down slightly to $4.4 million.

Our receivable balance increased to $111.9 million, and our DSO increased to 77 days.

The increase in both the receivable balance and our DSOs are due to an increase in deferred revenue and the non-linearity of invoicing in the quarter.

We do expect DSOs to decrease in Q2.

Finally, our capital spending was $3.2 million in the first quarter, and we expect our CapEx for the full year to be between $12 million and $16 million.

Turning to the outlook for next quarter on slide 15, the second quarter is typically up sequentially from the first as our customers begin to more fully execute their plans for the years.

We also expect to benefit from our strengthening competitive position.

Note that we will no longer have a material carve out of deferred revenue related to the Omneon acquisition.

As a result, the expect net revenue for the second quarter of 2011 to be in a range of $137 million to $141 million.

Non-GAAP gross margins for the second quarter of 2011 are anticipated to be in the range of 50.5% to 52.5%.

Product and geographic mix will continue to influence gross margins.

In addition, we expect to begin to see the benefit of consolidating Production and Playout manufacturing with our traditional Harmonic manufacturer.

As the year progresses, we expect the overall trend of gross margins to continue to increase gradually.

Our target for non-GAAP operating expenses for the second quarter is $54.5 million to $55.5 million.

Note that our headcount was 1,121 at the end of the first quarter ,up slightly from the end of the previous quarter, reflecting that we have begun selective hiring of new talent.

You will recall that we executed our international tax strategy on the Omneon IP in Q4.

This strategy has resulted in a lower non-GAAP tax rate for Q1 and the year.

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

Looking at slide 16, as Patrick discussed, we continue to see a number of encouraging signs.

Our business has excellent momentum, and we continue to expect 12% revenue growth for the year.

We also expect strong operating performance.

We should gradually see an improvement in gross margins in the second half of the year.

As expected, we had somewhat lower seasonal operating margins in Q1, but we anticipate improvement during the year.

Our target for non-GAAP operating margins for the year is approximately 15%.

Turning to slide 17, I want to be sure that you are aware of the Analyst Day we are holding on May 26, 2011 in New York City from 8.00 am to 12.00 pm Eastern time.

Key members of our senior management team will review in greater detail our vision of market dynamics, our solutions portfolio and technology road map and our go-to-market strategy.

Keep in mind that the event will be webcast.

If you are an analyst or an institutional investor, please, RSVP to hlit@stct.com.

Look forward to seeing you there.

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

Thank you, Carolyn.

In summary, we are very pleased with our strong start to the year.

During the first quarter, we clearly continued to expand Harmonic's leadership position in the marketplace.

Our success was driven by growing worldwide investment in video services, our increasingly strong product portfolio and our expanding go to market capabilities around the globe.

The ongoing integration of Omneon has further extended the breadth of our solutions, our global broadcast and media customer base and our international presence.

Going forward, 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, and you can expect us to continue to introduce innovative new technologies that enable this dynamic video marketplace.

We are very excited about the many opportunities ahead of us.

With that, we will end the formal portion of the call and Carolyn and I would now be happy to open it up to your questions.

(Operator Instructions).

The first question comes from the line of Mark Sue of RBC Capital Markets.

Thank you.

Good afternoon.

I was hoping if you could give us some sense of what's behind the ramp in the video processing strength that you saw and if that is something that we could extrapolate to the subsequent quarters?

We have been saying for quite a while, Mark that we believe that this video theme is big.

We see more video being produced, stored, repurposed and delivered around the globe by many different kinds of customers across different customer segments.

And we have been hard at work trying to not only strengthen our position within existing accounts but open up new accounts.

And that's new accounts in the traditional service provider market space that we've addressed, as well as in the new broadcast and media spaces that I've mentioned.

While I certainly am not predicting, and we would not predict, continued 60% year-over-year growth, we think that new video services to new devices is a powerful theme.

We think we are well-positioned, and we think that the growth of this kind of business is something we can take advantage of for quite some time.

Okay.

And then maybe if you just -- as we understand the increasing opportunities for the multi- formatted coding the we're seeing at the moment, help us understand your share gain opportunities that might help you grow fast in the market.

And then separately, you didn't reiterate your 15% operating margins, despite the near-term increase.

Maybe just trajectory of putting margin improvements for the balance of the year, thank you.

Okay, so I will take the first part in turn it back to you, Carolyn, to talk about the margins.

Look, the multi- screen and new media space is is still relatively new, it still feels a little bit like the wild west, and there's a lot of different players, and so I think it's a little bit early, at least we don't think about it as a market share gain paradigm per se.

But we just think about identifying new opportunities and trying to be on the spot with the right products and solutions.

Certainly we think we are well-positioned with our historic service provider customers, just about of whom, whether they're cable operators, satellite operators or telco operators, are developing their new media plans.

In fact, it is from our traditional customer base that we've started to see some larger size opportunities like the one I mentioned in my prepared remarks.

We have been investing quite a bit in this area.

We are very pleased to see continuing and growing success, and we certainly are not alone and focused on the space.

But we think if we continue doing what we're doing, leveraging the core strengths and know how the Company, we think we will be well served as this market continues to grow.

On your operating margin question, we only give guidance one quarter at a time and -- but having said that, certainly we would expect it to build over the year.

Q1 is always, both because it's typically sequentially down, as well as it is the highest employee cost, everybody's tax rates reset, we have taxes on bonuses and other things that happen, so it always ends up being higher cost, lowest margin.

And so we would always expect to see a build over the course of the year.

I think we saw that again.

If it is 15% for the year, it is probably somewhat under that for Q2, a little over that for Q3 and then building into Q4.

When a lot of those costs end up -- the employee cost end up going away.

I would just build it as you get through the year.

Okay, and just to be sure, it's 15% for the year, not exiting the year.

Correct, that is our target.

Okay.

Thank you, and good luck.

Thank you.

And your next question from the line of William Stein of Credit Suisse.

Thanks.

First, I would like to stick to the operating margin target for a second.

Carolyn, I think there's a higher goal for the longer-term.

Can you remind us of that and how long do you think it takes to get there?

We have not stated a higher goal for the longer-term.

So far, our target is 15%.

I think that, as you ask Patrick and I do we think there's room for gross margin to continue to improve over the next short -- few years, short-term years, whatever you want to -- however you want to frame that, I think the answer is yes.

We have grown over the last five years our gross margin pretty significantly, generally the higher growing areas we're in have higher gross margins, and so as we go year-over-year, we would expect that to continue.

And then we expect to become more efficient in operating expenses as our revenues continue to grow.

So, there's certainly an opportunity to do better than 15%.

We have not yet predicted what that is or at what timeframe that would be.

Especially when we continue to balance it with investment in the growth opportunity.

That is a decision we will make every year.

I think there certainly opportunity.

We have not committed to anything above 15%.

Understood.

Just must've been a bad note on my part.

Bad note taking.

(Laughter) Wishful thinking.

Perhaps.

Wasn't trying to push you there.

Okay.

Maybe we can dig into production and play out for a minute.

I think that is the Omneon business mostly, and that was done fairly significantly.

I'm wondering if that was -- whether you attribute that to sales force integration issues or product issues or manufacturing or component shortfalls, any color you can offer on that would be helpful.

Well, a couple of things.

As I said in my prepared remarks, I do think that to some extent the organization integration played a role.

We are excited about the year, and we went into the year quite excited about and in fact, increasingly excited about the synergy opportunities.

We made a decision right in the beginning of the year to move aggressively with the integration of our sales force.

As Carolyn mentioned, I think from a cost perspective, we pulled our whole worldwide sales force together for a -- for really an unprecedented meeting that involved a lot of planning and a lot of training.

We made a conscious decision to really focus in Q1 on reorganizing our sales force.

We consolidated under one senior manager doing the same thing with our service and support organization, and I think that that decision will bear fruit for us over the balance of the year, and certainly going into the future years.

I think inevitably though, it probably had an impact on the first quarter.

I also mentioned that we rolled out some pretty exciting new products, and the fact that these products were coming was not necessarily the best kept secret, and so we also think that there may have been some expectation or waiting for the newest products in this area.

You asked about manufacturing and components, no significant compromise on the business from that perspective.

Although that probably played even more into our linearity or non-linearity as we -- which then impacted the receivables.

But certainly not on the revenue side, I think, in any material way.

That is right.

If I look at the year-over-year number, it's down about $2 million.

While from a percentage basis, that may be large on a mid 20s kind of number, it's really not that big of a number from our perspective.

We don't feel as though we took a substantial step backward, and we think we've positioned ourselves to really move forward in an even stronger fashion going forward.

That is helpful.

If I can squeeze one more in quickly, the obligatory Japan question as it relates to component supply and demand.

Any effect from that?

So far we have seen nothing.

I wouldn't say that all the information is in, but right now, I will pay a tribute to our commodities and supply chain group, but so far, we have not been impacted in the supply side.

And it's really too early to say what, on the customer side, what the impact will be.

There's been no canceled orders, but I think we are still waiting to see how the dust is going to settle on the customer site in Japan.

Okay.

Thank you very much.

Thank you.

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

Thank you.

I wanted to see if we could go back to the trends of what is happening in the production and play out segment.

You, I think in the prepared remarks, made some mention of some pricing competition and pressure, I think that was a segment.

I'm just wondering if you could quantify what kind of pricing pressure you are having in terms of what effect that had.

And then given that this line of business was a bit lighter than we expected in the quarter, I am just wondering how things are trending coming off of this lower base in the March quarter from the production side of it.

Thanks.

Right across the product line, some amount of pricing pressures is just part of the market.

But actually, the comments in our prepared remarks were steered more towards the video processing business, Simon, where we think we have really been picking up good market share and I think understandably, running into some competitive resistance, particularly overseas.

It wasn't our intention to highlight, and in fact, we don't think that there was any particular unusual or extraordinary pricing pressure in the production and play out area.

And in fact, with our product line, we continue to feel very well situated from the competitive point of view, particularly with the newer products that I mentioned that were rolled out.

Look, we are still getting to know the business.

As I said, I have just come back from the NAB show in Las Vegas where I spent a lot of time with both domestic and international customers.

We continue to see a lot of good opportunity, a lot of good appreciation for the Omneon on brand, the Omneon products and a lot of excitement in the newer products.

At least for now, we are chalking up the first quarter to getting going integration kind of friction, and we remain quite optimistic about the balance of the year.

If I just want to focus on how the trend this in the June quarter, is it unrealistic to expect year-over-year growth with the Omneon business?

Our goal is certainly to deliver year-over-year growth for the Omneon business in the June quarter.

Okay.

That is very helpful.

And then I wanted to touch on a little bit around the edgeQAM business for you.

A number of companies have talked about building new form factors, chassis-based solutions, and I'm just wondering in terms of your portfolio, how you are thinking about that?

It is a competitive market, there's always a lot happening, and everyone is always looking for an angle, so that is definitely a fact.

We have the benefit and the challenge of being the clear market leader in edgeQAMs.

We lead the market with our latest (inaudible) product in density and actually in commercial flexibility with our licensing model that I think we really introduced to the industry.

We feel very good competitively about the product, as good as we have ever felt about our technology.

Competition and people kind of coming with new angles is nothing new to the space, Simon.

It is status quo from our perspective, and we continue to invest quite a quite a bit, and we continue to think we are well-positioned.

Thank you very much, that is all I had.

All right.

Thank you.

(Operator Instructions).

Your next question comes from George Notter of Jefferies.

Hi, this is James Kissner calling in for George.

I just wanted to touch on this large order for the tablet application.

I was wondering if you might be willing to dimentionalize, even in rough terms, how big that order was and how much of the revenue is recognized in this quarter, how we might roll out from here?

(Laughter) We hadn't planned to go there.

Look, less than 10, bigger than three.

Just to give you the kind of the rough breadbox.

The point is, is it's reasonable size compared to any decent sized encoder kind of deal.

And in fact, I guess as we have kind of long thought, operators getting into this market, it is really just provisioning additional encoding and video processing capability that in a lot of ways mirrors what they have done for television delivery services.

So, there is a rough breadbox.

I believe none of the revenue was actually recognized during the quarter.

As would be typical.

As would be typical.

And as you might expect, these are new kinds of systems and projects, and there's a fair amount of complexity, and it also goes to my point more generally about the opportunities we see around services and support in this area.

Our customers want to run fast, they want to do new things and are looking to us not only for great technology, but also systems expertise and knowledge.

And here I would point out that our IPTV expertise as a Company really developed in the context of a lot of the work we have done with telcos around the world is really valuable and informative.

Whether you are a cable, a satellite, a telco operator or a media company, these kind of applications actually look and feel a little bit more like IPTV kind of deployments.

I think we bring a lot to the party, and we are pleased to have won that deal, probably the largest one that we have seen so far.

As we said earlier, we are looking for more success in the area as we go forward.

Did you say whether this was a cable operator or content provider, did you say who it was?

I didn't.

What I said is I did not want to be any more specific.

You can appreciate --

I can.

-- these projects in particular have a lot of strategic sensitivity, let's say, and we are not going to be the ones to discuss.

We are going to leave it to the customers to discuss their plan.

Related to that, I won't push you that on that any more, thanks for the detail that you gave.

But do you think that there is sort of -- some folks now, there have been a chilling effect, given there's been a lot of contention around the various launches that we have seen already from the major operators?

Do you think that there's some wait for effect for people waiting for that to resolve?

And I'm also trying to wonder -- wondering what are the -- how many deals are out there?

There are a lot of other operators exploring this, or is it just couple of large ones right now and then there's probably going to be a respite for a while?

Can you give us a feel for the outlook for the opportunity?

I think it's a good question.

While we certainly have seen an increase in the number of real revenue projects, it's still -- this whole market is still very much in the formative period.

And while there has been a lot of press recently around some specific iPad applications, the more general issue of content rights and delivery to mobile device in general is not new to this space.

And I think we have said before publicly and in notifications that actually these content right issues are probably more than technology or a key kind of factor in the development of this marketplace.

By no means do we mean to suggest that the flood gates are open and that we are being hit with 100 RFPs for these kinds of things.

We continue to participate in and support a growing number of trials around the world and across customer segments and that I would say we are seeing a small percentage of those, also increasing, still small kind of turn to real projects.

And I still think that this market has a long way to go in terms of maturation.

And I regret the kind of weaving answer, but the honest truth is is we don't know.

We are surprised by how fast this tablet stuff is going.

If you would have asked me a year ago, I would not have told you it was be this far.

But the same time, there are, to your question, a lot of questions out there in the market and many of our customers are still trying to feel their way in terms of the business issues, in terms of their own strategy, the business model, et cetera.

Okay.

That is very helpful.

Thanks a lot.

Thank you.

Your next question comes from the line of Blair King of Avondale Partners.

Hi, I am just going to come back to the margin question that was asked a couple of times earlier and try to figure out if there is a way that you can help us gain a little bit more insight into the magnitude of what the step up function on the margin might have to be for you guys to get to 15% operating margin for the full year, implying pretty high teens in the second half.

Just wanted to make sure that I was thinking about that right.

Yes, I think that you obviously have to be at a 15% midpoint for the year, to get there on both sides.

The way I think about it is, Q1 in Q4 kind of averages 15% and Q2 and Q3 kind of average 15%.

Part of that, and I don't mean to be evasive, but part of that is why we give one quarter guidance because we are still working our way through that as well and we are balancing our OpEx investments with the gross margin expansion that we see.

We are working our way through it in the year sort of focusing on that at the 15% average margin as our guiding principle, if you will, as best we can.

But the way to think about it is the top -- you haven't moved off of the top line number of 12% revenue growth, you are pretty clear about that.

So, the balance to really be coming from margin improvement, right?

I think Carolyn, you've mentioned in the past that, I think you just did again, that you're going to balance gross mar -- OpEx investment and current margin improvements which would basically imply, I think if you look at 4Q OpEx (inaudible) 2Q at least to 4% gross margin improvement just to get back even with the OpEx ramp through the back half of this year.

I'm sorry that you lost me on that last part.

Sorry.

If you take the OpEx number and the second quarter and measure that up for the full fourth quarter -- the fourth quarter, which was the first full quarter of Omneon, that's about a 5.5% OpEx bump versus 1.5% gross margin bump over that same timeframe.

My guess is that you're in the process of catching up on gross margin to that OpEx investment.

Yes, there's that, and there is a revenue ramp of course, right?

I think that the slope of the line of OpEx growth in absolute dollars moderates in absolute dollars.

Revenues grow, part of that is a mix issue for gross margin to increase, and those things together get you to that blended operating margin.

Does that make sense?

Yes.

I appreciate that.

That helps a lot.

And then the last question, Patrick, you had mentioned in your remarks and there was another question about this as well, about the higher cost on the competitive replacement opportunity that obviously you had won.

Can you give us an impact or just give us a sense as to what impact that might have on your cost structure this quarter?

I was pointing to it more from a gross margin perspective.

When you move into a new customer environment, a typical scenario is we win a deal because the customer loves our HD video quality.

Very often, the incumbent is -- it's a system, and there's kind of an integration hooks, et cetera.

So, a customer will say, gee, I like your product and actually, I am willing to pay a premium for it, but come in and help me do some amount of customization and help me actually overcome the operational discontinuity of replacing the competitor with you.

I pointed to that kind of impact which has some OpEx impact, but also has some above the line support and service impact on us.

And then the other thing I pointed out from a gross margin perspective is, it is not atypical that the incumbent supplier will fight back with price.

I was frankly acknowledging that as we have really further expanded our market share, particularly overseas, that has been accomplished in a slightly lower gross margin than we are used to with our video processing product line.

I don't necessarily see that as a long-term or intrinsic trend of the market.

I think that is really part of us capturing market share and enforcing some fundamental shifts in terms of our position relative to some of our competitors overseas.

I was trying to give a little bit of qualitative color for you, but acknowledging really that those kinds of things were playing out and impacting our video process and gross margins as we continue to expand.

Is there any way to put some quantitative number around that instead of qualitatively in terms of what -- how many basis points that might have affected the margin this quarter?

You could think about it from your own model, but we are not in the practice of, and we are not going to break out gross margin by product areas.

I think in the past we have said that our video processing is 5 to 10 points above our corporate gross margin average, and select deals, this probably pulls that down closer to the corporate average.

The overall effect is to -- is one of the factors that Carolyn spoke to as we think about the overall gross margin mix.

Right, and I guess I would also say, with the lower production and play out revenue, we did not get all the uptick we thought we would get from the combination, so those things kind of offset each other a little bit.

Thank you very much.

The last thing, just on your OpEx question I was thinking about and looking at our numbers, the other thing is, as I even mentioned in my comments, Q4 OpEx is typically seasonally light.

Q1 OpEx is typically seasonally heavy because of all the cost.

Q4 has less tax cost, more vacation, and so you also get a little up.

Not only does that balance it in the growth of the year, but the reality is, there tend to be more heavy expenses in Q1, sales kickoff a lot of that, less travel in Q4 in the number of those things.

So, you get a little bit of an offset just naturally in OpEx in Q4 as well.

Thank you very much.

Sure.

Thanks, Blair.

(Operator Instructions) Your next question comes from Nikos Theodosopoulos of UBS.

Hi, this is Shubho Ghosh for Nikos.

Given Comcast down approximately $2 million quarter on quarter, can you give some more color on what is behind the sequential weakness in cable in general?

Is it a few select customer, or is it more broadband -- broad-based weakness in the sector?

And also, is this weakness more in the US or international?

As we think about cable we tend to think about it more on the product categories.

And as you see in our -- the table in our press release and as I mentioned in my comments, our Edge and access business is down year-over-year.

And frankly, we see -- we saw in for the first quarter less of those kinds of infrastructure and Edge build out products happening.

When the other hand, our video processing business right across cable was up just by about the same amount year-over-year.

Nothing particular on any one customer, and nothing that's surprising given our history with cable.

We have seen -- it's just that we've seen more focus on video processing and we saw what we think is a temporary slowdown in some of the Edge and access spending.

Got it.

Maybe if I could add to that.

A couple other things I would say it is one, it was -- we probably got more of the benefit in Q4 when we talked about budget availability and some of the upside we saw in Q4 in excess budget opportunity, that probably also came from those customers.

So one, that makes Q4 higher.

Two, that probably absorbs a little bit of Q1 demand as well, so there's some of that impact going.

And then I think generally, in the little bit I tried to talk about this in the telco and satellite numbers, I think historically, especially with more -- are more historic customers or traditional customers where there are larger orders, you might see in one quarter a big deal from the cable company so your revenues are up.

And then the next quarter it might be a satellite company and so that sector is up.

And that over the past has caused our revenue to be somewhat less predictable because those ups and downs have more of an impact on the overall revenue number.

One of the strong benefits we have of diversifying our revenue base is it's helping lessen the big impacts of a large order by one sector or another sector in a particular quarter.

I don't think we'd a lot of trend into it other than some ebbs and flows, I guess, in the product demand.

Got it, thank you.

And your next question comes from the line of Amir Rozwadowski of Barclays Capital.

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

Hi.

We are coming close upon a year since you announced the Omneon transaction.

And what I was wondering, obviously your holdings for that 12% growth -- top line growth numbers is steady, but I was wondering if you could give us a little bit more color in terms of whether or not you're starting to see some of the potential synergies for having both organizations under one roof and an integrated sales force from that perspective and if some of those are either emerging along the lines that you had expected them to be over having different conversations with different sets of customers?

Maybe a little bit of color there.

The answer is yes.

Frankly, I couldn't be more pleased with the way it's trending so far.

I mentioned in the prepared remarks, and you can see in the numbers that we published, that the over all business broadcast and media companies was quite strong and indicative of, really us gaining considerable more market share with our video processing product in that sector .

And Amir, you'll remember that one of the strategic tenets of the deal was gee, broadcast and media companies are going to be doing more and more video processing, delivery of multiscreen services themselves probably, and a great opportunity for Harmonic to penetrate with our historic traditional video processing product base.

And the focus on that started over a year ago and through the time up until we close the deal with Omneon, and we now actually see the discussions with the big media companies actually accelerating.

And again, I will go back to this NAB show.

For all of us, it was actually an extremely positive event in terms of it's really the first time.

Although we've started to see traction here or there, we really have the kind of wider ranging strategic conversations with large customers that really point to significant new opportunities.

Now these are new -- these opportunities I'm talking about are things that again play out as we develop and deepen a relationship over multiple quarters.

But nonetheless, that is where we wanted to go strategically.

We are very pleased with the way things are evolving commercially.

We are also starting to see some technical synergies.

First it is our file based and it is our streaming transcoding products in particular brought back, married up with the Omneon products and particularly in the context of broadcast and media companies.

But we are also talking with customers across our base about storage opportunities now.

Reproduction opportunities and our engineering team are collaborating more and more around the new ideas about things we can do middle to longer-term strategically from a technology perspective.

We see kind of synergies wide across the board.

Everything and more at this point in time from a commercial and customer relationship and market penetration perspective.

Good early evidence of solutions putting our products together in new bundles and some very encouraging signs in terms of some longer range new product category R&D kind of stuff.

Strategically, we're quite pleased.

w e are quite

Great.

Thank you very much, Patrick for the incremental color.

All right, well, thank you very much, Amir.

And with no further -- I'm sorry.

Go ahead.

There are no further questions in the queue at this time.

Okay.

Well then, we'll wrap it up.

I very much appreciate everybody's participation today and in closing, let me say on behalf of Carolyn, me and our entire Company that we couldn't be more pleased with the way we started the year.

We think we've clearly, in leveraging our leadership position we're expanding it, we're very excited about the new product pipeline that we have and the way it is coming together in the marketplace and about the opportunities we see ahead of us.

We appreciate all of your support and interest, and we look forward to continuing to talk to you as we continue to execute in the marketplace.

Thank you very much, everyone.

Thanks, we will see you in New York on May 26.

Ladies and gentlemen, this does conclude today's conference call.

Thank you for your participation.

You may now disconnect.