Harmonic Inc (HLIT) 0 Q0 法說會逐字稿

Good afternoon. My name is Jared, and I will be your conference operator today. At this time, I would like to welcome everyone to the Harmonic fourth-quarter and fiscal year-end 2011 earnings call. All lines have been place on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session.

(Operator Instructions)

Thank you, I will now turn the call over to Ms. Carolyn Aver, Chief Financial Officer. Ms. Aver, you may begin your conference.

Thank you, operator, and good afternoon, everyone. I am Carolyn Aver, the CFO at Harmonic. With me at our headquarters in San Jose is Patrick Harshman, our CEO. I'd like to point out that in addition to the audio portion of this call, we have also provided slides, which you can see by going to harmonicinc.com and clicking on the fourth quarter earnings call button in the Events section of the home page.

Turning to slide 2, let me remind you that during this call we will provide projections and other forward-looking statements regarding future events or the future financial performance of the Company. We must caution you that such statements are only current expectations, and that actual events or results may differ materially. We refer you to documents that Harmonic files with the SEC, including our most recent 10-Q report and the forward-looking statement 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 financial 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 results for the period stated. These items, together with corresponding GAAP numbers and a reconciliation to GAAP, are contained in today's earnings press release, which we have posted on our website and filed with the SEC on Form 8-K. We will also discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in the press release, and the remainder of the information will be available in a recorded version of this call on our website. With that, let me turn the call over to Patrick.

Thank you, Carolyn and thank everyone for joining us today. Turning now to our slide 3. Today we reported record fourth-quarter revenue of approximately $144 million, up 4% from the same period last year, and up 3% sequentially from the prior quarter. In the fourth quarter, we saw continued strong international growth, and continued broadening of our customer base. Our international revenue represented 57% of our total sales. Notably, no single customer was 10% of our total sales, and our top 10 customers represented only 34% of total revenue.

Fourth-quarter bookings were approximately $142 million, as we continue to see strong competitive momentum across the growing base of global customers, media applications, and markets. At the same time, the lack of budget flush we saw in the final period of the year seems to indicate some continued customer caution with respect to the global economic environment. Our operating performance has continued to improve. We realized gross margin of 51% and delivered an operating margin of 13%, and our non-GAAP earnings were $0.12 per share, and we generated approximately $21 million of cash during the period.

Let's now turn to slide 4 to take a look at our full-year results. We had record revenue of approximately $549 million, up 8% from 2010 on a pro forma basis. Our international revenue represented 55% of our total sales, and our top 10 customers represented only 35% of total revenue. We realized annual gross margins of 51%, and delivered an annual operating margin of 12%. Our non-GAAP earnings were $0.41 per share, and we generated approximately $41 million of cash during the year.

It's important to consider these results in the context of a year when growth in the US market and cable market, in particular, was challenging industry-wide. In this environment, we attributed our ability to grow to our strategic focus on leveraging our video strengths across an increasingly broad base of global customers.

More specifically, and turning now to slide 5, throughout the year we've highlighted three areas of strategic focus, instrumental to our evolution into a new kind of video Company. First, we've anticipated an expanding international market opportunity, and consequently we've been very focussed on strengthening our sales and marketing position overseas. Second, in the internet era, we see broadcast and media companies as well-positioned for significant growth. We've been working hard to strengthen our customer relationships and product offerings for this market. Third, particularly in developed markets, we see a new wave of video applications and services for both traditional video networks and over-the-top delivery, creating tremendous opportunities for innovative new products and solutions.

So let's take a look at how Harmonic performed in 2011, and its position to perform going forward in each of these areas. Turning to slide 6, international expansion has continued to be a key strategic priority for us, and our international business delivered strong results in 2011. Our international revenue for the year was up 14% on a pro forma basis, and international bookings remained strong through the fourth quarter.

Our international revenue represented well over half of our total business, encompassing a wide range of video applications, from traditional standard-definition TV production and origination in fast growing emerging markets, to cutting-edge mobile video wins, with a stronger and now fully integrated direct sales presence in more international locations than ever before, complemented by a strong network of local resellers, our international business outlook remains healthy across geographies, market verticals, and product categories. Specifically, we foresee continued expansion of high-definition content production and service delivery across all geographies. Demand for new, more personalized, and mobile video services, in particular in developed markets, and tremendous pay TV subscriber growth in emerging markets, such as Brazil, China, and India.

Turning to slide 7, another area of strategic focus is our expanding business with global media and broadcast companies. For 2011, Media and broadcast sales generated 32% of our total revenue, and grew 17% over 2010 on a pro forma basis. This success spans traditional video production and delivery, as well as new media applications, and was driven by powerful new solutions built from a combination of historic Harmonic, Scopus, and Omneon technologies. This success also leverages our historically strong Omneon customer relationships.

Based on our market activity in 2011, it's clear that our growing relationships with the world's leading media companies represent a significant strategic opportunity and advantage for Harmonic. Going forward, we see more opportunities in the broadcast and media area. These opportunities are driven by global proliferation of new media outlets and content being developed for multiple new platforms, together with the growing adoption of higher-performance products and solutions that span compelling new high-definition formats to more efficient internet protocol networking technologies.

Turning now to slide 8, we've also established Harmonic as a technology and market leader for a range of new applications and services within the context of traditional video delivery networks, as evidenced in part by the strong demand for our growing range of versatile video processing products, where we saw revenue up 17% for 2011. Within the context of traditional managed service video networks, high definition continued to be a key driver of new investment, and Harmonic's leadership position, delivering the highest-quality HD while requiring less network bandwidth than competitive solutions continue to provide us a critical competitive advantage across both geographies as well as customer types.

Our video processing growth was also bolstered by new IPTV projects won with telcos around the world. With our newest video stream processing products providing a compelling competitive advantage for IPTV applications. Beyond services targeted just for television sets, we also saw a trend toward multi-screen applications delivered over managed networks for in-home consumption on devices like PCs, iPads, and iPhones. We were pleased to win several such projects, including the largest in-home multi-screen service we're aware of, a 500-channel simulcast deployment.

We also continue to extend our leadership in EdgeQAMs, through our introduction of next-generation dense QAM technology, with applications expanding video-on-demand, network PVR, and modular CMTS. In a study published in December, Infinetics reports that Harmonic maintains a commanding market share leadership position, with approximately 40% of the EdgeQAM market. Beyond our outstanding technology, Harmonic is also increasingly considered by our customers to be a trusted partner, because we possess the expertise and practical experience to deploy and support even the most complex and demanding new video services. As a result, our service and support revenue grew 11% in 2011, and represented 13% of our total revenue.

Turning now to slide 9, 2011 was also the year we established Harmonic as a leading technology and solutions provider for the growing number of over-the-top video delivery players, as we won strategic projects with a number of leading media and service provider companies. Among these wins were transcoding projects for leading domestic and international internet movie and TV serial on-demand streaming services, and a cloud-based transcoding solution for a major Hollywood studio, and very high-quality live sports streaming services.

Looking ahead, the recent CES event in Las Vegas emphatically made the point that over-the-top services are increasingly evolving towards high-definition video consumed on wide-screen connected TVs, and increasingly high-resolution tablet devices. Ensuring delivery of high-quality, high-definition video over bandwidth-constrained networks is where Harmonic originally made its name, and we believe we're extremely well-positioned to lead as the over-the-top market moves more and more towards high-definition formats.

Our new Electra 9000 and ProMedia products are uniquely capable of enabling super-efficient HD for over-the-top applications, comprising what we think is a leading HD solution for both connected TV and mobile web services. Leveraging not just our Electra and ProMedia video processing products, but also our advanced MediaGrid storage solutions and professional services. We see tremendous opportunities to capture more over-the-top business and differentiate ourselves as this market grows.

Summarizing our thoughts on the over-the-top market, we believe the proliferation of video content in media outlets, combined with increasing demand for higher video quality in every format, including HD for widescreen connected TVs, and further combined with the internet and mobile networks that are increasingly bandwidth-constrained, a real sweet spot of opportunity for Harmonic's proven capabilities is really provided and emerging.

Looking ahead to 2012 and turning now to slide 10, we continue to execute our key strategic imperatives as we move into this year. First, we're leveraging our increased scale, solution breadth, and competitive strength to capture greater share in international markets. We're also continuing to work aggressively to expand our business with leading media companies. Of course, we remain very focused on expanding our relationships with leading cable, satellite, and Telco service providers worldwide.

Second, we're successfully extending our leadership position in new applications in high-performance technologies, namely with video production, post-production and content management, internet delivery of very high-quality video, and new integrated products with broader functionality that enable fundamental efficiency improvements for our customers.

Our objective is to continue to lead the market in helping our customers deliver value-creating services, and I remain confident that our pipeline of new products and solutions will further differentiate Harmonic in the marketplace. Finally, leveraging the value we're creating in the global market, we intend to improve our operational execution and business model with target R&D investments in the highest growth areas of our business, and to continue to carefully manage our operating expenses, with a focus on profitable growth. On that note, Carolyn, I'll turn the call back over to you to talk more about what happened during the quarter and the year, as well as our financial outlook.

Great, thank you, Patrick. Turning to slide 12, as Patrick has said, our record fourth-quarter net revenue was $143.6 million, up 4% from the same period in 2010, driven by strong growth across international regions, and particularly in the broadcast and media market. You will recall that the floods in Thailand affected our global supply chain, but ultimately had only about $0.5 million of adverse impact on our revenue in the fourth quarter. Total bookings in the fourth quarter were approximately $142 million, up 5% from the same period in 2010. As we move into 2012, we're pleased to see that our bookings included improving market demand for production and play-out products.

Non-GAAP gross margins remained at 51%, up just slightly from the previous quarter and last year. The floods in Thailand also had an impact on the cost of disk drives, which adversely impacted our gross margins in the fourth quarter by 20 basis points. We expect this impact to increase to 50 basis points and to continue for another quarter or two. We expect product cost improvements, as well as product mix, to modestly improve gross margins as we move through the year.

Operating expenses for Q4 of 2011 were $53.9 million, comparable to the previous quarter. While we did see the expected benefit of higher vacation time and no big trade shows, this benefit was offset in part by higher year-end sales costs. Non-GAAP operating margin was 13% for the fourth quarter of 2011, up from 12% in the previous quarter, and comparable to the fourth quarter of 2010. Our non-GAAP net income per share for the fourth quarter was $0.12 per diluted share, up from $0.11 in the previous quarter and the fourth quarter of 2010.

Turning to slide 13, let's look at our quarterly revenue and backlog in more detail. As noted, net revenue for the fourth quarter of 2011 was $143.6 million, up 4% from Q4 of 2010. Our backlog and deferred revenue at the end of Q4 2011 was $125 million, comparable to the previous quarter, and up 3% from the same period of last year. As Patrick mentioned, we had little or no benefit from year-end budget spending this year, compared to a relatively robust benefit in 2010.

Moving to slide 14, we're very pleased to have continued to significantly diversify our revenue mix across different geographies, product categories, and markets. Our international revenue represented 55% of total revenue in 2011, up from 53% in 2010. With the exception of Q3 of 2011, a period when our domestic revenue was quite strong, our international revenue has grown steadily in recent quarters, and we continue to show strength worldwide in both traditional and emerging markets.

During the fourth quarter, our international business was up 17% from the previous quarter. On an annual basis, international sales grew 14% in 2011. You could also see that our video processing revenues have rebounded strongly since the market's domestic spending pause in the second quarter of 2011, driven by interest in a wide range of applications, and increased market demand worldwide. For the year, video processing revenues grew 17%, and represented 43% of our total net revenues. Edge and Access revenue also remained strong, representing 26% of the total. Our production and play-out revenue represented 18% of total revenue, and service and support was 13%.

While our largest customer for the year was again Comcast, none of our customers were over 10% of revenue in the fourth quarter, and our top 10 customers in Q4 represented only 34% of revenue, reflecting the continued progress we've made in diversifying our business. We saw continued strength in 2011 from our growing customer base of satellite and telco customers, which represented 23% of sales, as well as from our cable customers worldwide, which represented 45% of our business.

In recent quarters, we've seen particularly strong growth in our broadcast and media customers, which represented 32% of sales in 2011. For the year, our broadcast and media revenue grew 17% on a pro forma basis. Despite quarter-to-quarter fluctuations in our overall revenue mix, our strategy of continued diversification across different geographies and markets is succeeding.

As you can see on slide 15, we continue to maintain a strong balance sheet. We ended the quarter with a cash balance of $161.8 million, up about $21 million from the end of the prior quarter and $41 million from the end of 2010. Our receivables balance was $109.9 million, and we're pleased to see our DSOs decrease to 70 days in Q4, down from 76 days in Q3. Our inventory was $70.6 million, up from the prior quarter, reflecting increased sales activity in the second half of the quarter and a build of disk drive inventory to offset disruptions caused by the floods in Thailand. As a result, our inventory turns were down slightly to 4. Finally, our capital spending was $4.9 million in the quarter and $17.3 million for the full year.

Moving to slide 16, based on Q4 bookings and worldwide customer demand moving into Q1, which is generally our slowest period of the year, we remain cautiously optimistic. We did not see a budget flush in Q4, which may reflect some level of continued caution by many of our customers regarding the global economic environment. Taking all this into consideration we expect net revenue for the first quarter of 2012 to be in the range of $132 million to $142 million.

We believe the impact of the Thailand floods on our gross margin will continue for the next couple quarters and have as much as a 50-basis point impact in each quarter. Non-GAAP gross margins in the first quarter are anticipated to be in the range of 50% to 52%, product and geographic mix will continue to influence, whether we are on the high or low end of that gross margin range.

Our target for non-GAAP operating expense for the first quarter is $55 million to $57 million, reflecting the timing of employee compensation expense, and our increased marketing activities this quarter. Our head count was 1,145 at the end of the fourth quarter, up 9 from the previous quarter, and 39 from the end of 2010. Finally, we currently anticipate our non-GAAP tax rate for 2012 will remain at approximately 25%, based on the fact that the R&D tax credit has not been extended. With that, I'll turn the call back over to Patrick for some closing comments.

Thanks, Carolyn. In summarizing, 2011 was a strong year for Harmonic. We delivered record revenue, and our video-centric strategy enabled us to leverage an increasingly broad and global customer base to deliver real growth. Our integration of Omneon extended our business into new markets, driving significant growth in our broadcast and media revenue.

While we delivered record revenue and 12% operating income in what was a tough year for many companies, we believe we can perform even better. We remain focused on leveraging our expanding customer relationships and product advancements to deliver even greater value to the marketplace, and to further strengthen our financial performance. We move into 2012 with good momentum and broad technological and market leadership, and proven expertise, enabling our global customers to produce and deliver compelling new high-definition, on-demand, and internet-based video services.

We believe the global proliferation of video content in media outlets, along with increasing demand for higher-quality video in every format, delivered over bandwidth-constrained networks plays into our core strengths. We're therefore quite excited about the future. And with that, we'll end the formal portion of the call, and Carol and I would like to open it up to any questions that you might have. Jared?

(Operator Instructions)

Mark Sue, RBC Capital Markets.

Thank you. As we start the year, have you given some thought on how we might be thinking about the revenue growth outlook for Harmonic in 2012, particularly as you make improvements to your international sales force and as we see more dynamic trends across a broader base of customers, can you just kind of help us frame the year, that would be great?

Well, Mark, I'm glad you highlighted international. As I said in the prepared remarks, we are pleased with the fact that we were able to grow our international business by 14% last year. That does stand in somewhat stark contrast to our domestic business growing only a couple of points. We continue to feel quite confident about our international business and opportunity for growth. Frankly, our visibility in turning international opportunities at this point in time, we feel, is greater than that into our domestic business.

So we feel, as Carolyn said, cautiously optimistic about our ability to continue to push forward with our international business. We have a little bit more of a question mark around the domestic market dynamics. Here we're not talking about our business specifically, but some of the more broad trends that we see in the communications and high-tech landscape.

Because of this uncertainty around the domestic business in particular, we've elected not to provide full-year guidance at this time, and we're just going to continue to do everything we can to execute. You can expect us to absolutely continue to press very hard on our international business, and we think we can in fact do even more there. We're confident that as spending rebounds in the US, we're extremely well-positioned to take advantage of it here at home, too.

Got it. Maybe for Carolyn, I think 15% operating margins were sort of the target last year, and I think I still have your IOU from 2011, so maybe if we could think about the moving parts, that sort of relates to operating margins this year, and what you might be thinking of in terms of a target for investors?

Sure. You're right, I think I've been pretty focused on that in my time here. I think that, again, as Patrick said, we're not yet giving full-year guidance. Having said that, I think our short- to mid-term target for operating margin definitely continues to be 15%. At this point I'm not sure I see that we will be there for the whole of the fiscal year. We certainly would hope, as -- if and as we expect to see revenue growth through the year, that we would hit that in the latter part of the year, but not sort of prepared to give exact guidance yet. Still definitely a target and working our way there.

Understood. Okay, thank you and good luck.

Thanks.

Mark McKechnie, ThinkEquity.

I'm sorry, my question has been asked and answered. Thanks.

Blair King, Avondale Partners.

Hi, guys, thanks for taking the question. Patrick, you had mentioned a fairly large multi-screen opportunity that I guess you closed in the most recent quarter. I was wondering if you could give us a little bit of color around that activity, and then more broadly around the sustainability of that kind of activity, both in the US as well as in the international markets. It would be really helpful to understand. Thanks.

Blair, it's still a very much an evolving market, and although we're actually impressed with the growth we delivered in that sub segment, it's still a smaller piece of our overall video processing pie, so I want to kind of frame that at the outset for you.

I highlighted in my prepared comments, I would say two distinct trends that we see in what is more generally called multi-screen. One is true multi-screen, which is going to appliances other than TVs. Here we see a pretty consistent trend of service providers, really with the US operators leading the way, in terms of securing the content rights, and offering their customers the ability to wirelessly get to their iPads, their iPhones, their PCs, inside the home, for their subscribers. I highlighted a win there, and actually we saw a couple of wins there. We see actually in some developed markets that being a trend that's beginning overseas as well. That was certainly one component of our multi-screen business.

At the same time I also spoke to pure over-the-top, which is not -- that is, the operator who owns the network is not the one necessarily delivering the service. Here we're also pretty excited by the activity that we saw, a number of wins spanning service providers, as well as content players, live things like sports and on-demand things like movies. I would just like to re-emphasize the point again that particularly coming out of CES, when we talked about multi-screen a year ago, it really was lower-resolution video to a small screen.

Now for over-the-top, the topic has really changed to how can you deliver really good-looking quality video that's coming through a Sony Blu-Ray player, or an Xbox, or what have you, to a Samsung or a Panasonic or Sharp widescreen device. This was on display just about everywhere you saw in Las Vegas recently. There, from our perspective, that's where it really gets exciting. HD video over a bandwidth-constrained, uncertain environment of the open Internet is a challenging problem, indeed. It's one where we think that the success that we've had in the back half of the year is really just the beginning. We're looking forward to this market moving forward and maturing, and we're looking forward to doing great things in it.

Super. One last follow-up, if I might. Carolyn, the order that you received for the tablet-driven order that you received in the first quarter of 2011, did that order achieve any revenue recognition in the quarter, or do you expect it to achieve revenue recognition in the first quarter?

It did, thanks. Yes, we recognized that whole order in the quarter, that's -- so that customer accepted that project went live and we recognized it.

Okay. Thank you very much.

Thank you, Blair.

Larry Harris, CL King & Associates.

Thank you. This is somewhat related to the multi-screen from a product perspective. What is the status of the Electra 9000, did that start shipping in the fourth quarter? Has it started shipping now? If you could provide some sort of sense as to where we are with respect to orders or sales for that particular product?

Well, I'm pleased to tell you we had one customer who just couldn't wait, so we actually shipped an early version of it for revenue in the fourth quarter. So that's pretty exciting. The 9000 will be formally released this quarter, as we said, and we will continue to add capabilities to it as we go forward. But we have -- it's generating a lot of interest. It's in a number of other customer labs, and we're pretty excited by the response that we're seeing from the marketplace.

Do you think it might have a similar ramp to the 8000 several years ago when people were focused just on HD?

I think over time, yes. I think it won't be as quick, Larry. Not as much because of the product, but because there is still a number of issues, business issues, network issues, et cetera, that circle around this whole topic of multi-screen. For all of our customers around HD it was kind of a slam-dunk. The set-top box and the TVs were out there and ready for it. They owned the rights, it wasn't a question of rights, so they were eager to grab our great technology and just kind of head to the race track.

It's a little bit more complicated, as you know, around multi-screen. But on the other hand I think time has been our friend. I think that the fact that people are starting -- it's starting to dawn on people that multi-screen is more than just small screens, it's actually HD video to these connected TV devices, really makes the case, I think is causing people who weren't previously thinking about this kind of technology, I think, to really pause and to reconsider. And so we're -- I don't anticipate maybe a rocket to the moon in the second quarter, but I think it's going to, over the course of the year, it's going to gain real momentum. I think it's going to be pretty fundamental in redefining the way people think about the technology to really take advantage of this market opportunity.

Great. You've spoken about international, the sales being up 14% year-over-year. Were there any specific geographic regions that were particularly strong or particularly soft, and was there any impact at all, because of some of the economic issues in Europe?

Well, I'll answer the last part first. No. We didn't see -- let me back up. Europe was quite strong for us. The truth is, the business in southern Europe was pretty slow. That was more than compensated, though, by a strength we saw out of northern Europe. Overall, Europe met and in fact exceeded our expectations for the year.

Beyond that, there was no real particular area of great strength. I think we would acknowledge that Asia turned out not to be as quite a fast a grower as we had hoped. We attribute that largely to the fact that Japan, an important market for Harmonic and a very important market for the historic Omneon business, was quite slow for obvious reasons last year, and that did cause a drag on our overall Asia Pacific numbers. But outside of that, Europe, both western and eastern Europe was strong. India was strong. We had a good year in Latin America. The strength was pretty robust, and other than slowness in certain specific southern European countries, kind of knock wood, but we've not seen any overall drag in Europe, yet.

All right. Thank you.

Thank you, Larry.

Simon Leopold, Morgan Keegan.

A couple things I wanted to clarify first. One was your service business was quite strong in the quarter, and I just want to see if there was anything particular, or we should think of it more as a seasonal pattern for services that made that one stand out.

Simon, it's -- I think as you know, we've been investing in professional services. We've always had kind of the maintenance support revenue, and we've been focussed quite a bit on professional services. The pop came from the professional services side of the business, and part of that is engagements we had under way, or the way in which those get recognized from time to time. I think that's an indication that we're starting to do a little more of that business, and a couple of those engagements happened to fall in the quarter. I think like other parts of our business that might be up and down a little bit, over quarters, because it isn't big enough yet to be predictable. But certainly a good indication that our customers are valuing the knowledge that we can bring to -- especially some of these new initiatives.

You mentioned Comcast fell out of the 10% customer ranks for the quarter, but was for the full year. What was the business with Comcast for the full year?

Because we're going to disclose that in our -- in our K, it was about $59 million.

You talked about that you gave us some guidance for the first quarter operating expenses, a little bit of a sequential increase. Based on what you're describing, it sounds like primarily that increase shows up in sales and marketing efforts. Did I hear you correctly?

Yes. NAV is this quarter, so that's going to come back up again. Then payroll taxes and those kinds of things across the board.

Great. Then more of maybe a longer-term question for Patrick. When we think about your four reporting segments, how do you rank them in terms of, let's say, a full-year outlook in terms of growth prospects, what do you see as the most promising on down?

You're talking about the different product categories?

Yes, your segments, video processing, production and play-out, edge and access, and services. I just want to get a sense of sort of the relative expectations you have for growth from each.

Okay. I think right now video processing was last year and continues to be at the top of the list. We had a slower year on the product front with production and play-out, but we remain very excited about those products. In fact, the fourth quarter was our strongest booking quarter yet for those products. So I would probably rank that second in the short term.

Near-term, we see more modest growth, as we've been saying, from our edge and access products, although we do think that that will accelerate with some industry trends. We've just talked about service and support. We see that perhaps -- maybe not quite as fast as the fastest-growing product, but it's up there. It's an area where we'll continue to be focused. Putting it all together, Simon, we feel very good about the portfolio of product lines that we have, and feel very good that there's substantial growth opportunities really right across them.

I appreciate that. Thank you.

Thank you, Simon.

William Stein, Credit Suisse.

First, the deferred revenue on the balance sheet came down quite a bit, especially year-over-year. Is that owing to the rev rec of that tablet order?

Yes.

Okay.

And I guess the other thing -- so it's that and the new accounting rules that we instituted this year cause us to defer less things. So what you've seen over the course of the year is a shift of deferred revenue going down, but backlog going up, so that what we call backlog, which is really backlog in deferred revenue, has stayed relatively flat or increased over the year. So we're having a shift of things coming out of deferred revenue and moving into a true data backlog, if you will.

Got it. The budget flush commentary, did that relate to any specific region or end market, i.e. cable, telco, satellite, media, or was that across the board in terms of markets and geos?

The statement was across the board. I will say that historically the effect has been strongest in the cable segment and strongest in US cable. That being said, we didn't see much of it there or anywhere else, Will.

Okay. Can you talk a little bit about the sales force integration with Omneon? This has been kind of a concerning issue, especially as you see the different product groupings, the revenue is maybe, as evidenced by one of the earlier questions, a little bit hard for us to predict, I think. Can you comment about how the sales force integration has been going and their ability to sell the full solution, the full slate of products?

Yes, we've continued to get better throughout the year. The fact that the video processing grew as much as it did last year, 17%, and if you kind of look at the numbers, you see a lot of that came through the medium broadcast space which meant a lot of that was actually happening, being driven by the Omneon sales force. That element of it has gone extremely well. I think we've acknowledged the cross-selling the other way hasn't progressed as much as we would like. So we're -- we've made progress. I think we've seen some real benefit, but we still think that there is some more benefit or execution to ring out of it, and we're just continuing to make steady progress.

Just stepping back from the fact that it's a couple of different companies come together, we do have the challenge of more products and more technology than we've ever had under our roof. So for us as our overall sales organization, just getting our arms around the capabilities that we have, this is complex stuff. We'll acknowledge that internal training and influencing literacy is a challenge that we are having to step up to as a Company. I think that we will continue to get better. But I give ourselves decent grades last year, as evidenced by the fact that we have been able to sell as much video processing into the broadcast market as we did.

Thanks for that. If I can just have one short follow-up. Carolyn, you talked about this 15% operating margin goal that may not be hit this year for the full year, and it's unclear what the revenue growth is. Do you have a view of what revenue growth you need to achieve in order to hit the 15% operating margin goal?

I think if we were -- I don't know that I want to -- I mean, it certainly has to be double-digit growth, I think, for us to be able to do that for a few quarters this year. I do think fourth quarter should be a strong quarter, It depends on what happens, how strong Q4 is. You could certainly get there without it, but I think really it's, we got to be up in the double-digit.

Got it. Okay, thank you, guys.

Thank you.

(Operator Instructions)

James Kisner, Jefferies and Company.

First question, I want to clarify on broadcast, media, and other, the strength there. I mean if I back out -- subtract out the production and play-out revenues the last couple of quarters, it looks like that segment excluding that is up quite a bit. I'm wondering, is that all video processing, or is the software and services component that's grown a lot sequentially that's also having an impact?

It is both, but principally video processing, James.

Okay. So, a broader question here on your outlook and your comments about domestic service providers being cautious. Could this be -- how do you know that it's just caution and not a cyclical downturn in investment in video processing? Could you make the argument that as great as multi-screen is, it's obviously not as big an investment wave as among domestic service providers as new HD channels were. HD channel accounts are getting pretty mature, and with the switch to digital video, how many more encoders do you need? Is that just an incorrect interpretation? How do you distinguish between just caution and just a cyclical downturn in this business in North America?

Part of our commentary was looking beyond our own Company and looking out what's happening in the broader space. Both companies that are working primarily with cable companies, as well as people who are working with carriers. You're probably looking at the same earnings announcements and projections that I am, and we've not seen a huge amount of tremendous growth there, and that's kind of across different technologies and applications. So I guess that's part of the broader commentary, or the context in which we look at what we're experiencing. That's one thing to say.

The second thing is that we view the competitive environment, and the pace of technological change, as having never been greater. There's both a tremendous opportunity as well as a tremendous threat for just about every service provider out there. This past week saw one cable operator announce decreased subscribers, and I think a telecom operator announced a big pickup in video subscribers. So we see a lot of very -- and that's nothing even to do with this over-the-top business.

There's an aggressive competitive environment, and we think -- we believe that retaining customers, rolling out new services that generate new revenue streams, is critical to our domestic, as well as international customers' futures, and we believe that the core services that will do this, are all one way or another intimately related to new video services. So we continue on a relative basis to be quite bullish about the opportunity for video, and what we see as the strategic importance of video-related initiatives on the strategic priorities of our large service provider customers.

Okay. That's helpful. I have more questions, I'll take them offline. Thanks a lot.

Okay. Thanks.

No further questions at this time.

Okay. It sounds as though we've got no more questions, and so we're going to grab the baton here and go. Thank you everybody for joining us very much. Let me reiterate that we're excited about the momentum that we see really around the globe with an expanding number of customers. We see tremendous opportunity to do new things, and we remain incredibly focused as a Company, not only to continue to lead from a technological point of view, but also to deliver great operating results. We're very focused, we're very committed to success, and we look forward to talking with you again in the near future. Thanks very much, everyone.

Thank you for participating. This concludes today's conference. You may disconnect.