Harmonic Inc (HLIT) 2011 Q3 法說會逐字稿

Good evening. My name is Vivian and I will be your conference operator today. At this time, I would like to welcome everyone to the Harmonic third quarter 2011 Earnings Conference Call.

(Operator Instructions). Thank you. I would now like to turn the call over to Miss Carolyn Aver. Ma'am, you may begin your conference.

Thank you, operator, and good afternoon, everyone. I'm Carolyn Aver, the CFO of Harmonic. With me at our headquarters 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 harmonicinc.com and clicking on the third quarter earnings call button in the event section on the home page. 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 in our most recent 10-Q report an the forward-looking statements section of today's earnings press release. 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 finance metrics we provide you on this call are determined on a non-GAAP and pro forma basis.

Revenues described as pro forma include Omneon as if they had been part of our for the period stated. These items together with corresponding GAAP numbers and a reconciliation to GAAP or 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 a recorded version of this call on our website. With that let me turn the call over to Patrick.

Thank you, Carolyn. And thank you everybody for joining us today. Turning now to our slide number three, today we reported third quarter revenue of approximately $139 million, up 7% from the same period last year and up 4% sequentially from the second quarter.

In the second quarter you will recall that we saw some delays in expected domestic business. In the third quarter, we were pleased to see our domestic business rebound, up 24% sequentially as we recognize revenue from several key projects. With these third quarter results, our year-to-date business in aggregate was up approximately 10% from the same period in 2010 on a pro forma basis. That is assuming a full contribution from Omneon last year. Third quarter bookings from approximately $141.4 million as we rewarded strategic deals and more generally as we continue to see strong competitive momentum across a growing base of global customers and media applications. We realize gross margins of 51% and delivered an improved operating margin of 12%. Our non-GAAP earnings were $0.11 per share and we generated approximately $6.6 million of cash during the period.

Turning now to slide four, let's look at the business dynamics that underlie these results. During the third quarter, the rebounded domestic demand was powered principally by a number of new video processing wins spanning high-definition television to mobile and web applications. As we noted last quarter, many of our US customers are still thoughtfully planning their next steps toward unifying the delivery of traditional video services with next-generation mobile and web services. However, the healthier demand during the third quarter is indicative that many media, cable, satellite, and telco customers are moving forward on a variety of new video initiatives, and that they are increasingly turning to Harmonic as a strategic partner.

As you know, International expansion is also a key strategic priority for us and we're very pleased to see our international business continue to deliver results. While not quite as robust in the third period, international revenue for the year-to-date 2011 was up 16% from the same period in 2010 again on a pro forma basis and our International bookings remained quite healthy. New International projects span a wide range of video applications from traditional Standard Definition TV production and origination in fast growing emerging to cutting-edge mobile video wins. Looking ahead, our International business outlook remains healthy across geographies, market segments, and product categories. However, as we discussed last quarter the consequence of our rapid international expansion and market share gains continues to be competitive pricing pressure and the associated impact on gross margins.

Turning now to slide five, another area of strategic focus is in our expanding customer base of media and broadcast companies. Year-to-date media and broadcast sales have generated 31% of our total revenue and have grown an impressive 19% year-to-date from the same period in 2010 on a pro forma basis. This success spans traditional video production and delivery as well as new media applications, driven by powerful new solutions built from a combination of historic Harmonic scopists and Omneon technologies.

Surveying market dynamics more broadly over the past three months, it's clear to us that our growing relationships with the world's leading media companies is a significant strategic advantage for Harmonic. While our Omneon acquisition has been a very successful catalyst of this strong overall growth with leading broadcasters and media companies, growth of our production and play out products from Omneon is progressing more modestly than anticipated. Production and play out product revenue was up 2% from the third quarter of 2010 and 5% from last quarter. However, we have made good progress and our new media storage products in particular are performing quite well.

Therefore, an example; we recently announced that BBC sport will use our MediaGrid active storage system to support its London 2012 Olympics games coverage. We also announced new MediaGrid deployments with Crawford Media Services here in the US, Dubai Media, London Studios, and Sichuan TV in China. During the quarter we also won our first significant multi-screen application project involving both MediaGrid and our new ProMedia products,indicative of the unique broader workforce solutions we're beginning to bring to the market. We expect to continue to make progress on realizing the full strategic synergies in our cross-selling efforts and in introducing such new, integrated solutions.

Turning now to slide six, our cable edge and access business remains strong with revenue in the third quarter up 10% from the third quarter of 2010. The continuing healthy demand for our edgeQAM solutions was driven by the continuing growth of Narrowcast services being delivered across cable networks, and Harmonic's industry-leading dense HectoQAM technology. We're also receiving very positive and collaborative customer response to our C-cab vision and development program which we believe solidifies our near-term market position and expands our longer-term opportunities.

Turning to our Video Processing business, as noted a couple moments ago, we continue to achieve strong growth worldwide with our video processing products, up 23% year-to-date from the first three quarters of 2010. Building on our market leadership position here, we introduced powerful new products during the quarter that will enable our global customers to move forward on a range of new mobile and web as well as traditional video services. We announced the new Electra 9000, a follow-on to our very successful Electra 8000 in the industry's first multi codec, multi-format video encoder and transcoder that simultaneously supports very high quality broadcast, mobile and web formats. And complementing the Electra 9000, we also introduced our new ProMedia family of software solutions, designed to run on Intel-based platforms and optimized for live and file-based transcoding, adaptive bit-rate packaging and origination for production and streaming of high quality video content to IP connected devices, all of which enabling us to play an increasingly vital role in our customers' multi-screen plans.

Turning to slide seven, let's delve into this multi-screen topic a little bit more deeply. Armed with this increasingly powerful portfolio of new processing toolings and our broader workflow solutions, we have continued to see our mult-screen business opportunities and customer activity grow. The biggest near-term opportunity we see in this area is in assisting our media and video service provider customers to deliver very high quality delivery by both managed networks and over-the-top to an expanding range of devices in the context of TV anywhere and video-on-demand business models.

While this is still a relatively nascent market characterized more by planning and smaller deals than large-scale initiatives, during the third quarter we did have several wins that spanned media companies delivering their own content over-the-top, service provider customers rolling out new services targeted at mobile devices and new Internet-only service providers offering growing libraries of On-Demand content. Harmonic's unique abilities to support both managed network delivery and internet delivery coupled with our unique ability to enable simultaneous and integrated delivery of super high quality 1080p high-definition television for widescreen living room television viewing together with pristine iPad video at amazingly low bit-rates are key differentiators in the market.

As this market continues to develop, we believe that both our existing and new customers will demand the exceptional video quality and underlying compression technology as well as the broader media management and storage solutions that are the hallmarks of Harmonic's capabilities. Consequently, we continue to invest strongly in this space, and we have a rich pipeline of exciting new products to fuel growth.

Turning now to slide eight, we continue to execute our key strategic imperatives. First, we're leveraging our increased scale, solution breadth and competitive strength to deepen our new relationships with leading media companies. As we expand our brand and deepen our existing customer relationships in developed markets, we're also continuing to work aggressively to capture greater market share in emerging economy markets.

Second, we're successfully extending our leadership position in new applications and customer verticals, namely high quality multi-screen and new Internet media services, dense edgeQAM and IP-over-cable delivery and video production and post-production work flows. Our objective is to continue to lead the market and in helping our customers deliver valuable new services, and I remain confident that our pipeline of new products and solutions will further differentiate Harmonic in the marketplace.

And finally, leveraging the value we're trading in the global market, we intend to continuously improve our operational execution and business model. With targeted R&D investments in the high growth areas of our business, and to continue to carefully manage our operating expenses with a focus on profitable growth. And on that note, Carolyn, I will turn the call back over to you to talk more about the results of the quarter and our financial outlook.

Thank you, Patrick. Turning to slide ten, as Patrick just said, our third quarter net revenue of $138.9 million was driven by particularly strong growth in the US. Total bookings in the third quarter were approximately $141.4 million, up 7% from last quarter. Unlike last quarter, we did receive new orders for a few large projects as well as recognized revenue on one significant project that was previously deferred.

Non-GAAP gross margins remained essentially flat at 51%, the same as the previous quarter and up 180 basis points from the third quarter of 2010. While we continue to focus on gross margin improvement, we do see pricing pressure both as we penetrate into certain new markets and occasionally in competitive situations. In addition, sales of our production and play-out products which tend to have the highest gross margins have grown slower than anticipated.

Operating expenses for Q3 from $52.7 million, comparable to the previous quarter. Non-GAAP operating margin was 12% for the third quarter of 2011, up from 11% in the previous quarter and comparable to the third quarter of 2010. Our non-GAAP net income per share for the third quarter was $0.11 per diluted share, up from $0.09 in the previous quarter and the third quarter of 2010.

Turning to slide 11, let's look at our revenue and backlog in more detail. As noted, total net revenue for the third quarter was $138.9 million. On a pro forma basis net revenue for the third quarter of 2011 was up 7% from the third quarter of 2010 and our year-to-date revenue is up 10% compared to the first nine months of 2010. Our backlog and deferred revenue at the end of Q3 2011 was $125.4 million, up 3% from the previous quarter reflecting an increase in backlog offset by a decrease in deferred revenue.

Moving to slide 12, we have continued to significantly diversify our revenue mix across different geographies, product categories, and markets. International revenue represented 51% of net revenues in the third quarter. During the third quarter we were pleased to see our domestic business rebound, up 24% from the previous quarter. On a year-to-date basis, however, international sales have grown 16% as we continue to show strength worldwide in both traditional and emerging markets.

Our largest customer was again Comcast, representing 12% of revenue in the third quarter. Our top ten customers represented 45% of revenue, reflecting the timing of a number of large deals. We saw continued strength in Q3 from our growing base of satellite and telco customers, which represented 25% of sales. For the third quarter our broadcast and media customers represented 30% of sales. Year-to-date broadcast and media revenue has grown 19% on a pro forma basis. Video processing revenues rebounded in the third quarter, representing 41% of our net revenues. Edge and access revenue also remained strong representing 28% of total. Our production and play out revenue represented 19% of total revenue, and services and support were 12%. Despite quarter to quarter fluctuations in overall revenue mix, our strategy of continuing diversification across different geographies and market is succeeding.

As you can see on slide 13, we continue to maintain a strong balance sheet. We ended the quarter with cash of $140.9 million, up 6.6% from the end of the prior quarter. Our receivables balance was $116.4 million and our DSOs decreased to 76 days. Our inventory was $65.2 million, up from the second quarter but reflecting increased sales activities in the second haft of the year. Our inventory turns were up slightly to $4.2 million. Finally, our capital spending was $3.5 million in the third quarter and we still expect our CapEx for the full year to be between $14 million and $16 million.

Moving to slide 14, we are encouraged by our bookings and the US customer demand in Q3. Additionally, Q4 is generally our strongest quarter and often includes year-end spending by some of our large customers. Having said that, the global economic environment warrants continued caution. We are also keeping our eyes on the floods in Thailand, and it's a fact on our global supply chain. There is an impact on one of our suppliers of optical components that we currently believe will have up to a $2 million adverse impact on our revenue in the fourth quarter. Taking all of this into consideration we expect net revenue for the fourth quarter of 2011 to be in the range of $135 million to $145 million.

We believe the floods in Thailand will also have an impact on the cost of disk drives which will adversely impact our gross margins in the fourth quarter. Non-GAAP gross margins are anticipated to be in the range of 49.5% to 51.5%. Product and geographic mix will continue to influence whether we are on the high or low end of that range of gross margin. Our target for non-GAAP operating expense for the fourth quarter is $51 million to $53 million.

We typically enjoy slightly lower operating costs in the fourth quarter due to an increase in vacation days and because of the timing of large trade shows. Our head count was 1136 employees at the end of the third quarter, down slightly from the end the previous quarter.

Finally, we currently anticipate our non-GAAP tax rate for 2011 will remain at approximately 25%. With that, I'll turn the call back over to Patrick for some closing comments.

Thank you, Carolyn. Before we open up to questions, let me just summarize a couple of the key points. First, Harmonic delivered a good quarter. Actually the highest revenue and bookings quarter ever for the Company. Our domestic business bounced back strongly after a slower second quarter and our international business continues to demonstrate strong growth. Our new product announcements make clear that we continue to be relentlessly focused on innovating and further strengthening our competitive position..

Particularly noteworthy this quarter are our newest video processing products, which position Harmonic even more strongly to lead in the colliding worlds of traditional and new media. And our broadening customer base continues to enhance our strategic position. While we were pleased to deliver 12% operating income during the quarter, we believe we can perform even better.

We remain focused on leveraging our expanding the customer relationships and product advancements to deliver even greater value to the marketplace and to further strengthen our financial performance. And with that, we will end the formal portion of the call, and Carol and I would now be pleased to open it up to any questions that you might have. Vivian?

(Operator Instructions). And your first question is from the line of Mark McKinney with ThinkEquity.

Congrats on a solid quarter in this macro environment. So a couple questions. Carolyn, can you comment on -- just general visibility going forward here into the fourth quarter relative to your guidance and kind of relative to the last couple quarters?

You know, I think frankly it's the same. We had a good bookings number, backlog increased, and so I think that we would say we have relatively the same visibility as we would any other quarter.

Okay. No change one way or the other. That's helpful. And then second is clearly I saw your deferred revenue came down, and I know your guidance range was upper end if you're able to recognize the one big deal, but could you give me a sense, was all that decline in the deferred revenue from the one announcement? So was it about $10 million that you got from this big deal or -- or is there any other factors in there that I should think about?

Yes, there is actually other factors, so thanks for asking that question. We did recognize one deal that actually wasn't the big deal. The other thing that happened is in the prior quarter, our prior quarter ended on July 1st, and so that quarter included in deferred revenue a month of maintenance billings because we bill on the first day of the month.

So last quarter's deferred revenue was inflated, if you will, not incorrectly, but last quarter's deferred maintenance -- deferred revenue had four months of billings in it instead of three, and one of those only had one day of revenue that was recognized. So about half of the decrease in deferred revenue comes from that one month of billings that goes away and the other half came from the recognition of a project.

Okay. Great. Thank you. One last question and I will let it back to the floor. Can you characterize how much multi-channel you did in the business or -- or what can you quantify on that in terms of maybe the number of deals, the sizes, and just the overall mix and multi-channel? Thanks.

The multi-channel business continues to increase. It's still a relatively small piece of our overall video processing business. But increasingly the worlds are becoming intertwined, and certainly with our new product announcements, we think we're playing a role in driving that for the industry. As I mentioned in the prepared remarks, we saw multi-screen activity spanning media companies, traditional service provider customers, as well as some new guys out there.

So it's relatively mode, still a lot of the experimentation, still a lot of thinking and planning going on, but it is growing, and it's becoming an increasingly important part of the strategic discussions we have with our customers. And with the new product announcements we made in the quarter, we feel even more strongly positioned to really be a strong leader here.

That's great. Thanks, guys.

Thank you.

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

Great. Thank you. Just a couple quick clarifications first. One is the interest and other income improved a bit, and I just want to see if there's anything one-timeish going on in there.

Yes. There's -- I think it was 250 -- about 150 was foreign currency impact that I wouldn't project going forward.

Okay. And in the third quarter, the gross margin was a little bit below the mid point and just a tad softer than we expected, and I just would like to get a sense of how much of that was an element of the product mix versus other factors. And maybe I'm wondering if the disappointment you mentioned in the play out business is part of the contributing factor. So I'm just trying to get a sense of kind of the levers here.

It's all three of the things I mentioned in this quarter. A little bit product mix, a little bit -- and maybe a little bit less this quarter international because we had more domestic this quarter, and a little bit of a deal that had some pricing pressure on it, if you will. So it's a combination, but certainly if we had more higher margin revenue that offset some of that, so really in each quarter this year, it's been some of each of those that impacts us.

Okay. And then the video processing business took a nice improvement this quarter on the back of last quarter's kind of surprise, and I guess I'm trying to figure out how much to think of this as lumpiness versus a recovery and maybe help me understand where we're going from this point on in terms of video processing.

Look, in broad strokes we clearly think we have carved out the leading position in the market, Simon, in video processing business, and as we grow our number of customers, we think the statistics around the growth of the business will become better and better or smoother and smoother. That being said, we still have some very large customers an we're still vulnerable to shifts on whether a deal gets done on, you know, July 28th, or -- I mean on June 28th or July 2nd, right?

So I think that still will be an aspect of the business, but if you have longer than a one quarter view on the business, I think you will certainly see continuing strength and growth out of video processing. We see more customers, more applications, and more geographies.

And just one last one on video processing. I think in the past, I have not differentiated really much between end coding and transcoding, and I think that was a mistake on my part. And I would like to see if you could kind of set some context for us in terms of the contributions from transcoding and where you see that going as a contributor to your business. Thanks.

I will take the response to that. We haven't done a good job breaking it out and I -- frankly, I'm not sure how much it is important. Over the last couple of years, an increasing portion of what we call our encoding business is actually transcoding. I mean, just indulge me for a moment. I mean, end coding is when you take video that is not compressed and you compress it into one format or another. Transcoding is when you're receiving video already compressed somewhere else and you're going to recompress it or put it into a new compression format. For example, most of our cable head end business over the past couple years is -- which we have characterize as encoding, I guess technically speaking is actually transcoding. HBO pitches something out in one resolution and M-PEG 4 and a cable head end gets it and it converts it to M-PEG 2 at a bit-rate that makes sense for that cable network and off they go. They're using our end coder there as a transcoder.

So whether there he is a pretty fuzzy line, all of our video processing, end coding, transcoding products increasingly support this capability. And I would say, though, as we go forward, an increasing number of those applications will be transcoding, that is, service providers receiving something that's already been end coded originally somewhere upstream and reformatting it. And this is particularly as we see more and more different devices, et cetera. Is that helpful?

It is. I appreciate it. I guess the one other thing -- and I don't know if you're able to even do it is just if there's some quantification and really where I'm going is the transcoding opportunity around multi-screen you talked about, I would like to kind of be able to size it.

Okay. So I break it apart into two separate things, Simon. So transcoding, as I said, is a big part of our encoding business even for video delivered to television sets, and I gave you a prime example of that.

Okay.

Certainly for smaller screen devices multi-screen devices, multi-screen devices, it's almost all of that is involved in transcoding. That is, you're taking something that was originally encoded for TV and now you're re formatting it for a smaller screen. So in aggregate today, I would say that over half of the business and the opportunity that we're doing and what we call the video processing space is actually associated with transcoding functions. Either for TVs or smaller devices.

Hence why you see us rolling out a product like the Electra 9000 that can do end coding or transcoding for big screens as well as little screens. But the other thing I would say is that video processing whether it be end coding or transcoding for big screens that are on live television still dominates very much the size of the business that's getting transacted for small screens.

Thank you. That's very helpful. Thanks.

Alright. Thanks.

And next question is from the line of Blair King with Avondale Partners.

I might follow up on that dove tail a little bit, Patrick, I think, with some of the comments that you had made in your prepared remarks. Given this sort of water shed announcements coming out of the Microsoft over the course of the quarter surrounding live HD video streaming through the X box, and there just seems to be so much activity around multi-screen these days or at least a lot of talk, and then just trying to figure out sort of how that filters through into Harmonic's business and perhaps you can talk a little bit about that. And then maybe it follows into the ProMedia software solution products that you've recently announced and what applications those actually serve, and then just the last piece of that question would be how the Electra 9000 actually helps address some of those applications. It's a lot.

Okay. So we'll -- I'll do my best, Blair. Right? So first you talked about the X box stuff. I think that that's quite interesting and quite exciting, and I think what it actually does is it helps emphasize a point that we've been trying to make, which is that we don't believe there is two separate universes out there: one of television viewing and one of iPad and iPhone viewing that are disparate markets. We, in fact, think that this is the same market. And in fact, I would actually broaden the definition of multi-screen to encompass a 52-inch HD viewing. I mean in a way HD was the original multi-screen as opposed to Standard Definition viewing.

So now we see a variety of different kind of media and service operator companies trying to deliver content to a whole range of devices from small Blackberry Apple screens all the way up to widescreens. They're trying to do that over managed networks if they own a managed network and/or over-the-top. Or if they don't own a managed network or to get to customers who are wandering off the managed network. And -- but certainly multi-screen no longer means just small screens. In your example, getting content over-the-top to an X box for example, well, that's very often feeding a widescreen television. And here from our perspective, the key thing is that particularly as you deal with a range of screens how efficiently you can compress that video, how do you deliver exceptional quality video with a minimum amount of bandwidth is a key factor in all of these networks , and so we really think that Harmonic's value shines.

Now, depending on different applications like most things, there's horses for courses in terms for different technology. In some cases, video processing that's software running on an Intel-based hardware platform, it offers some good advantages. You see a number of high tech products out there that run off Intel servers, and this is the market space that we're addressing with our ProMedia products. At the same time, really for the most intense video processing applications, particularly those that involve a lot of widescreen HDTV processing, solutions based on video application-specific processing platforms tends to be more prevalent in the market, and that's really the piece of the market that we're addressing with our Electra 9000 product.

You know, so just stepping out of our space, you look at a number of products run on Intel kind of servers. On the other hand you look at your iPad that's running on a processor that's designed specifically for those kind of applications. So very similarly in our world, we're addressing the market with both classes of products just because we see opportunities and customer inclination for both. Our goal is to cover the broader space from a screen point of view, from a managed network, as well as an over-the-top point of view and in this kind of broad approach to solving problems is resonating extremely well with our customers.

You thank you very much, Patrick.

Thank you, Blair.

And the next question is from the line of Larry Harris with CL King & Associates .

Yes. A few questions here. You mentioned that there was pricing pressure, I think, in international markets. Is the pricing pressure that you're seeing or the competitive pricing is that in the video processing area or is it in other segments of the business?

You know, it -- internationally -- so there's two things we said. One was international and there we mean the emerging markets, and in those cases, it's probably broadly across product lines. I also mentioned individual competitive situations and those depend -- they're situational. There aren't a lot of those. There's one a quarter or so, it's not a time and that just depends on what the engagement is, but that could be edge and access, it could be video processing, it could be in any area.

And I was wondering if you're seeing any changes here in terms of cable operator spending. It looks like your sales to cable and, of course, you're much more than cable, were down slightly sequentially in year-over-year. Motorola Mobility tonight reported that their home sales were down about 10% year-over-year. I assume a good portion of that was set-top related, but what are you seeing in terms of demand from cable operators?

You know, no real shift, Larry. Our business, I would characterize our business with cable is pretty good, and to the extent we see some slowdowns. Frankly, in our area, we think it's more to do with strategic planning and what comes next than any other issue. I mean, it's clear that cable operators have a great strategic opportunity.

I think that they're focused on innovating and investing to retain and then grow their customer base and that they're going to do that with innovative technology. I think they're trying to answer a lot of tough strategic problems that go beyond technology, contents rights, et cetera, and so as we noted last quarter, there is a fair amount of strategic thinking and working going on. And I think that that does perhaps -- has caused a little slower pace of activity than we had anticipated, but in general, we see a good know of activity from cable operators both domestically and internationally.

Finally, the Electra 9000 when can we expect initial shipments? Do you think it will have the same kind of impact to results that we saw over the past couple years with the Electra 8000?

We're very excited about that product. It's being trialed now and the first shipments will happen by -- or around the start of next year, but the customer dialogue, et cetera, is happening now, and we really think that this is a real breakthrough for the industry. We rolled that out at the recent IBC show in Amsterdam. It won a pretty prestigious new product award. It's really the right product at the right time in terms of the way operators are thinking about these colliding worlds of their traditional media services and their new video services.

All right. Great. Thank you.

Thank you, Larry.

And the next question is from the line of George Notter with Jefferies & Company.

It's actually James Christianer calling in for George. Thanks. Quickly a clarification on --

George?

Excuse me. Mr. Notter, your line is open.

Let's move on.

Your next question is from the line of William Stein with Credit Suisse. Mr. Stein, your line is open. Your next question is from the line of Mark Sue with RBC Capital Markets.

Are you sure your lines are working?

Mr. Sue?

Alright. Let's keep going.

Your next question is from the line of Paul McWilliams with Next Inning Technology Research.

Paul?

Yes. I'm here.

Well, good.

We're live. Really. I wasn't expecting that. Congratulations on a good quarter and getting the conference call back on.

Thank you, Paul.

I've got -- on Q4, I think that earlier in the year, we were kind of modeling Q4 to end up around 15% non-GAAP operating profit, weren't we?

We were. Yes.

Okay. Now, I understand that you've got a little pinch here from hard-to-strive prices at least anticipating that and I think that's good to do. How much impact is that?

We think it's maybe a half a percent.

Okay. I was guessing that by your gross profit margin, but that seemed awfully high. I just didn't realize that was such a big procurement item for you.

Well, it's included in the production and play out products.

Okay. So I've got a half a percent there, and I'm looking at when I model this out, you're at the mid point of guidance here at about 13.4% ; is that correct?

I'm -- you know, I think it depends on which parts of the guidance you're looking at, but you know we certainly model a view that gets us to 15%. So if you run down the middle, yes, it might be at 13.5% or 14%, and that is at that is tweaked a little bit by the gross margin impact of these parts.

Well, when I was running down the middle -- $140 million, 50.5% gross profit and then OpEx at $52 million?

Right.

Would that be correct?

Yep.

With $18.7 million in operating profit and then dividing that by 140, I came out to 13.4%,so I'm just wondering if I'm doing something wrong there.

No. I think down the middle that's probably right. I think it would certainly still be our goal to get to 15%. There is obviously in the last 48 hours this breaking news on the floods that have some impact, but I think our goal certainly is to be close to 15%.

Okay. Now, we were modeling next year growth range of 12% to 15% on top line. Is that still valid?

You know, as you can tell, we specifically didn't give next year direct guidance, and we're not really prepared to do that. I think we have for some time it's our target to grow. We have said 12%, not 15%, but it's our target to grow 12% given all of the things happening in the environment right now, you know, we're not prepared to put a 2012 number out specifically.

Okay. Do you think just by the state of the industry in looking at it, the state of your customers that they are prepared to take this next in spending or do you think that the macro economic environment could really slow that up? It just seems as though they're positioned to where that next step seems awfully logical for them.

It does, Paul, so I think you see it clearly in the way we see it which is we've got competing forces here. I think that there is a fair amount of uncertainty. You know, in our customers' minds and, consequently, in our minds. At the same time, there is -- it's a competitive market and I think that there is a strategic imperative for our customers to invest in the development of their products to retain and tag new customers. I think this will play out slightly differently in different part of the world.

We were a little bit surprised by the fact that overall the US market was a little bit slower than we anticipated this year, and so we have learned from that. At the same time, we were equally surprised by the fact that parts of our international markets. Europe, for example, was actually more robust than we had anticipated once some of the activity -- some of the challenges there came to light. So I -- you know, we don't have a clear -- none of us, as you know, have a clear crystal ball. I see competing forces out there and as we articulated a quarter ago when we kind of adopted, I would say, a somewhat more conservative stance on the market, we are waiting to see really how this whole thing play out. We remain convinced in the long-term strategic drivers that we do see a number of macro economic headwinds that we're uncertain as how they will play out.

Okay. I've got two more here, and I will keep them as brief as I can. Now, on this -- are there still more operating synergies that you expect to bring into the model during this oh, say six, nine, 12 months that you weren't able to get into it this year?

You know, I think there's two answers to that. You know, we targeted $8 million to $10 million of cost synergies specifically from bringing the companies together and we achieved that.

Mm-hmm.

On the other hand, as we continue to leverage our new size and the growth we have, I think there are opportunities to continue to do things more efficiently and thereby improve margin or free up spending for other areas. And that's in a number of areas both above and below the gross margin line. So I might not call them specific deal synergies any more, but I certainly think with our scale and as we grow, we have more operating leverage.

You're probably aware Cisco and Alcatel are doing a major, major installation in coastal China building an optical network, and from what I've read it's specifically to support IBTV. Do you see that as a hot bed of opportunity for you next year as they go ahead and put in the video equipment? I'm presuming they will next year. They did most of the install second half here at the base network.

Paul, we've been pleased with overall growth this year in emerging markets which certainly includes China, and we don't see that changing going into next year. Unlike other parts of the world, we just see a steady growth opportunity as more and more people move into the middle class, get televisions, more and more just kind of plain vanilla TV services rolled out. We see continuing good opportunity.

So I would say more broadly in the emerging markets and specifically yes, we're focused on China. It's one of the reasons why we have an office in Beijing as well as a separate office in Hong Kong, and we think our brand, our market reputation is extremely strong in mainland China. And we think we're positioned to take advantage of opportunities there and elsewhere in the emerging market world.

Excellent. Excellent. That sounds very similar to the drivers that Intel has talked about benefiting their business which is logical. Thank you, guys. I appreciate you taking so much time with me.

Sure, Paul. Thanks. Paul, if I go back to the question just for a minute back on operating margins. The other thing that's impacting our numbers, we talked about the gross margin piece but the other thing that's impacting the numbers is a potentially $2 million decrease in revenue, so if you drive that through that has another impact on the 15%. So both of those components may impact depending on where we end on that range.

Oh, absolutely.

Right.

Oh, on other income interest and such, how should I model that for Q4?

You know, of the other income line about $100,000 is interest and the rest was foreign gain. I would focus just on the interest component of that.

Okay. So just add a $100,000 in there and be on the operating profit?

Yes.

Thank you again.

Okay.

Thank you, Paul.

Your next we is from the line of George Notter with Jeffries & Company.

George?

Okay. And the next question is from the line of William Stein with Credit Suisse.

Well, there must be some -- alright. One more.

The next question is from the line of Mark Sue with RBC Capital Markets.

Mark? Yes. There must be something wrong on the call with those guys because they're telling us they're there. Do we have anybody else on the call?

Yes. We have a follow-up from Mark McKinney.

Okay. Can we take him and can you check on George, Will and Mark?

Judge yes, ma'am. Absolutely.

Thank you.

You're welcome.

So hopefully it works for me but it's not going to do too much because my question was asked and answered. So thanks.

Oh, alright. Thanks.

Okay. And we have Mr. William Stein with Credit Suisse.

Third time is a charm. Can you hear me?

We can.

Wow. Alright. So you're guiding Q4 up maybe half a percentage point? Or essentially flat. I think normal seasonality is for an increase sequentially, and I guess you talked about a potential shortfall in revenue from supply chain issues. I assume that's optics. Is that fair to say? And which product category would that affect?

Yes. The revenue shortfalls that we think we're not going to be able to plug is in the optical access area.

And so, that's your -- sorry. If I look at the -- at it on a product basis, it's --

Part of the edge and access group, so within edge and access we have some optical transmission products. The access piece of edge and access, and while that whole product line is certainly not run through Thailand, a couple of products rely on a couple of components that come from Fabrinet actually; and we don't think that we're going to be able to solve that problem in the quarter.

So do you have other source -- well, Fabrinet is the contract manufacturer so is there someone else who can make that product for your component supplier?

Well, in this case we're not getting a whole product. We are actually getting some small sub-assemblies and yes, we think over a longer term, it's possible to secure products from other suppliers. We just don't think that that will get done to cover all of the demand that we see in the fourth quarter. So look, we're not overstating this. I mean, it's a relatively modest impact that we're -- with our supply chain team is forecasting at this point, but we do see up to $2 million of impact, specifically on the revenue side.

And then you're also contemplating weakness related to the macro; is that right? Maybe if you didn't see that, how much do you think that's impacting the way you're guiding?

We wouldn't put dollars on it, but I would say that, you that we're certainly cautiously optimistic, so at the high end of the guidance range, we think that maybe we see some impact of budget dollars offset by a little bit of revenue impact from this problem. On the lower end, we see certainly more impact and less benefit from seasonality.

Okay. And then just so I understand, on the optical side you're assuming it's a supply chain impact to revenue, but from the perspective of disk drives, you're assuming you can pay more, it'll be a 50 basis point hit to gross?

Exactly.

But you can source what you need to?

Right. We feel, you know, given the situation, we feel comfortable with our sourcing there, but it's a cost issue.

Okay. The other questions were asked and answered so I will stop there. Thank you.

Thanks.

Your next question is from strong Notter with Jeffries & Company.

Now can you hear me?

We can.

Oh, my gosh. Okay. This is actually James Christianer calling in for George. Thank you for giving me a third shot. So the first question -- I just want to clarify a little bit on the guidance. I mean you mentioned that sometimes there's budget flush in Q4, but I wasn't really clear on what -- you know, what your guidance assumes for that. Is it completely out of the guidance or is it the end of the guidance, this budget flush? Or how do I think about the budget flush context to the guidance?

You know, all of these things are a range, of course, and there's no specifics. I think at the high end of guidance, especially given the fact that at the high end of guidance and with impact on revenue from the optical, that would assume some budget flush, not necessarily historic high budget flushes by any stretch of the imagination, but certainly would assume some orders came in. I would say at the low end of guidance I would assume, you know, the higher end impact on the product revenue and relatively little budget flush or budget flush but some impact internationally, some combination of that.

Okay. Perfect. So another question for you here. I guess I want to sort of understand. You know, last quarter you guys said that the cable operators kind of paused given the dramatic potential architectural changes that are coming down the pike and that all makes sense to me, but it's kind of -- and here we're just one quarter away. It feels like everything's just kind of better all of a sudden and I'm just wondering, is that because other customers have come in and filled the gap? Or is it because those sort of ambiguities about architectural choices have been cleared up, but can you just sort of help me understand the progression of that issue relative to your good results now?

So, James, we didn't at all intend to suggest that issue is all better or resolved. In particular, several of the deals that we had initially anticipated in Q2 transpired in Q3; thus, you know, contributing to a stronger third quarter. At the same time, a couple of other deals that we anticipated in the second quarter are still floating out there. So the overall perspective on what's happening in the market and in fact, the overall arch on our outlook of revenue for the second half of the year being down from what we saw earlier in the year is still very much impacted by that issue.

Okay.

We strive to say that it wasn't kind of one or the other. We said we see had this overarching slower pace of decisions and activity. That doesn't mean nothing is going to happen, but we just see a slower pace. So things that were initially anticipated in the second quarter, some transpired in the third quarter, maybe some are going to transpire in the fourth quarter. Some are actually going to get pushed to 2012, and that's still very much the way we see it. So I think there was a little bit of catch-up on stuff that actually did transpire in the third quarter, but in the end of the day our fourth quarter guidance is still lower than we anticipated if you go back to the spring.

Perfect.

Does that make sense?

Level of activity yes, it definitely does. That's very helpful. Just a couple quick ones and I will pass it on maybe to Mark if he is still there. So the -- I'm wondering what you guys are thinking about the east -- I'm sorry about the converged edge products that are coming out. You obviously had a competitor, but another one of your competitors on the edge here -- the deal and now they are going to have two offerings, and is this something that you're going to continue to chase? Are you going to be competitive here -- I mean, these guys just shipped their first product into a lab. Can you have any comment on the edge QAM space and where it would go in the context of that?

So, yes. We believe today, tomorrow, and in the further future, we are and will continue to be extremely competitive in this area. There's no doubt, James, that we're the edgeQAM leader in the market space today, and frankly, we think we have picked up market share in 2011. We're doing that through a combination of the technology we have and we're delivering to the market today as well as the road map and the vision we have for what comes next. As I mentioned in the prepared remarks, we're working closely with our large and key customers. They have a clear view into where we're headed technologically, and we're receiving very positive feedback from them.

So we expect to continue it do well with the current evolution progression of our products and technology, and we see longer-term growing opportunities in this space. The fact that two competitors have combined in our view is more positive than negative. Frankly, it's just one less competitor out there in the market. And I think it further emphasizes the importance of the video technology that we bring to the edge space.

Any thoughts on when you could actually ship a project, you know, announce a similar milestone? Ship your product to a customer?

You mean -- are you talking about -- I assume you're talking about a C-cap product? So as a mentioned earlier, we do have a C-cap development program. Our belief is that such products will only be deployed in volume out around -- not for several years, and we think we're going to be in position to develop a product at that time. Now, we think actually the industry kind of there evolved there, and we have a carefully thought out product evolution that we really think is going to work hand in hand with the way the operators are evolving their network towards that, and so it's not -- in our mind it's not a bright line, but it's an evolution.

Frankly, the very dense edgeQAM technology that we're delivering today is in our mind a key underpinning of this technology. It's where a lot of the cost and the operational efficiency comes from. A high number of QAMs in per port -- per RF port, and we think we are leading the market in that space today, and we think that this product and then what comes next and what comes next after that in our product evolution plan we think it's very much in line with what the operators are looking for and what they're actually going to deploy over the next couple of years as they move towards this full-fledged C-cap vision a couple years out.

Okay. Very helpful. Last yes-or-no question. Was this deal, that deal that you largely referenced, was that the multi-screen opportunity that you discussed earlier this year?

No.

Okay. That's it. Thanks a lot.

Alright. Let what's see if we can go three-for-three with Mark.

And the next question is from Mr. Mark Sue with RBC Capital Markets.

Carolyn, since I waited so patiently, do you think -- can you just -- can you just exceed 15% out for the margins for me next year?

Next year? (Laughs.) Let's talk next quarter.

I mean, but the business with the scale that you will have next year, what kind of long-term operating margins do you think the business can support?

I think back at the analyst meeting we said that our target for actually 2011 and 2012 was 14% to 16%, and again while we're not confirming or -- we don't want to give formal guidance for next year, I think that is a near-term goal next few years is still right, and I think over --we would strive to improve that on an annual basis. I think there's leverage in our business, and so we purposefully are trying to stay away from guidance for next year, but for sure, we want to make improvements.

Got it. That's helpful. Well, I think this concludes today's conference call. Thank you for your time are participation, everyone.

Okay. I guess it really did. Operator?

Yes, I'm here.

Okay. We thought we lost you. Listen, just before sign off, let me thank everybody for hanging with us, particularly through some of those technical difficulties. And we generally appreciate your continuing interest and support of the business.

I hope it comes across that while there are certainly challenges out there, we think the opportunities outweigh the challenges. We think the Company continues to be extremely well positioned. We like our competitive positioning. We're excited about our new products. We're excited about the business we're doing really in all corners of the globe, and we're very committed to pushing this business forward. Adhering to the strategic tenants as well as the finance goals that we have laid out and we're going to continue to work extremely hard and, we believe, deliver good results. So with that, Carol and I thank you all for joining us, and we'll look forward to talking to you soon. Bye bye.

And thank you for your participation in today's call. You may now disconnect.