Harmonic Inc (HLIT) 2012 Q2 法說會逐字稿

Welcome to the Q2 2012 Harmonic earnings conference call.

My name is Monica, and I will be your operator for today's call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question and answer session.

Please note that this conference is being recorded.

I will now turn the call over to Carolyn Aver, Chief Financial Officer.

Miss Aver, you may begin.

Thanks, Monica.

Hello, everybody.

With me in 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 have also provided slides, which you can see by going to www.Harmonicinc.com and clicking on the Second Quarter Earnings Call button on the Events section of our homepage.

Now, 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 expectation, and 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 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 financial metrics we provide you on this call are determined on a non-GAAP basis.

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 you, everyone, for joining us.

Turning now to our slide 3, today we reported our results for the second quarter 2012, which were broadly in line with our guidance issued a quarter ago.

Reflecting healthy US demand and our overall strong competitive position, our bookings were $139.5 million, up 6% from the second quarter of last year and in line with our expectations.

Through the first half of the year, bookings outside of Europe have grown 11%, our orders from Europe were down 5% year-over-year.

The key driver of our strong order book across most geographies has been an increasing number of IP video project wins, underscoring healthy IP video trends, success of our newest video delivery products and momentum leveraging our systems expertise to offer high value professional services as part of these project wins.

Revenue was $132.6 million, driven by 10% year-over-year growth of our business in the US, which slowed by 9% year-over-year decline in our international business with Europe being our principal challenge.

As with new bookings, year-over-year revenue performance was strongest for our video processing product line in our services business.

One of the consequences of a stronger systems and project-based order book is a move to more multi-period revenue recognition.

Consequently, our book-to-bill ratio was again greater than 1, and we have a record backlog of $146 million.

Turning to operating performance, our gross margins were 48%, above the first quarter but slightly lower than forecast due to both product mix and a continually competitive pricing environment.

Operating expenses were approximately $54 million in the quarter, and non-GAAP earnings were $0.06 per share, up from last quarter's $0.03.

We also had robust cash performance, generating approximately $20 million cash from operations during the quarter, resulting in a cash balance increase of approximately $9 million after using $7 million for our share repurchase program.

Carolyn will provide additional details on these operating results and our repurchase activity just a few minutes.

Turning now to slide 4, to provide context for these results and our opportunities going forward, I'd like to review three important topics.

Our strategic priorities and focus, our key new product initiatives and important changes and additions we've recently made to our corporate leadership team.

Let's turn to slide 5 to begin with an update on our strategic priorities.

At the beginning of the year, I laid out three areas of strategic focus for 2012.

Continuing to broaden our global customer base, extending our product leadership position, and driving continuous improvement of our operational execution.

We've remained very focused on these initiatives, and despite market place challenges, namely in Europe, we're making meaningful progress in each of these areas.

Broadening our global customer base has been a key strategic priority to which we remain committed despite current European headlines.

While we don't control macroeconomic conditions, and our revenues are lower than we were aiming for, we do control our competitive positioning.

And our strong bookings growth outside of Europe demonstrates our solid competitive momentum worldwide.

Specifically during the quarter, we gained market share by expanding our footprint within a number of existing accounts by adding new customers across geographies, including here in the US, in Latin America, in other emerging economy markets and even within Europe.

Although we continue to have a relatively large exposure to Europe, our growing customer base and other geographies has enabled us to mitigate the risks, and of course we're confident that we're well positioned to participate in the European rebound when it occurs.

Harmonic is known for its engineering accument and refreshing and extending our product leadership is also core to our strategy.

One key area of focus is the industry move to IP and Internet delivered video.

As we will discuss in more detail in just a moment, we are seeing very positive market response to our newest IP video products and solutions, and increasing competitive wins in this area.

We are similarly focused on the next generation of converged cable edge technology.

In a couple moments, we will also update you on our very encouraging progress in this area.

A third key highlight of the quarter is the continuing growth of our service and support revenue, up 13% from the second quarter of 2011.

Next to our customers, we know their networks better than anyone else.

The fact that our customers are increasingly turning to us not only for technology, but also for systems expertise, is very strategically significant.

On the operational front, we're making good progress in a number of various, but we also have work to do.

Our bookings momentum and record backlog speaks to sales execution and success of our global customer expansion initiative.

Our strong cash generation speaks to our attention to collections and DSR management.

We're closely managing operating expenses, focusing our investment on highest return opportunities.

However, we're not satisfied with our gross margin performance.

We're driving several initiatives to improve our performance in this area.

Turning now to slide 6, IP and multi screen video represents a key growth opportunity for the Company.

For global spending in IP video technology is so much less than on traditional television delivery.

We're seeing more customer investment in IP and OTT delivery and more success for our newest products addressing this area.

During the quarter, we had over 25 new over-the-top wins that span both existing and new customers across cable, media, satellite and telco markets.

We're pleased to be able to announce key wins with Alpha, a Belgian telco operator rolling out a converged IP TV to television and over-the-top to mobile devices platform, Now TV, the leading telco and video player in Hong Kong and with Zone, the leading cable operator and also a satellite player in Portugal, which is using our new products to roll out its new Zone Online service.

Enabling these wins, as well as a longer list of tier 1 wins during the quarter we're not yet able to publicly announce, but the fact that Harmonic is uniquely differentiated in offering both new IP, multi screen systems and systems which are multi screen capable yet deployed in more conventional applications today.

For example, we also saw several new IP TV wins during the quarter with the initial deployment of provisions traditional television delivery only.

Over the plan for a phase 2 extension of the platform to encompass second-screen, internet delivered services to mobile devices.

We believe such converged systems will represent a large part of this market as it matures.

The combination of our deployed base and newest technology puts us in a strong position to capitalize on this convergence.

One final comment on IP delivered video, is that we think the mid to longer term market in technology trends very much played to our core strengths.

It has the ability to optimize bandwidth while providing exceptionally high video quality.

For in-home widescreen viewing the marketplace is starting to look ahead to new 2K and 4K screens that represent what comes next after HD.

And for mobile delivery, the growing tension between increasingly high resolution screens and video oriented tablet devices and wireless bandwidth constraints has the industry looking to a next-generation codec called HEBC, which we believe will spur an industry investment cycle at least as big as the industry move to MPEG-4 AVC technology that began several years ago.

Harmonic is very focused on these new initiatives, and we see tremendous opportunity as they become embraced by the industry.

Turning now to slide 7, cable edge is also an area of significant opportunity and strategic focus for Harmonic.

During the second quarter, our Edge and Access revenue was 25% of total revenue, driven in large part by investments in our industry leading dense EdgeQAM technology, a rapidly growing high-definition video on demand, network PVR applications.

As well as by continuing switch digital video and modular CMTS deployments.

As cable services become more personalized and on demand, the cable delivery model is moving to an increasing percentage of Unicast traffic, which drives the need for more and more capacity in QAM ports at the edge of the cable network.

We are very pleased to see both existing customers and new customers adopt our new HectoQAM technology as they evolve their networks to support this growth in the Unicast video traffic.

Looking at little further ahead, we're also making a substantial investment in our closely related strategic CCAP initiative.

We are receiving very positive customer response to our innovative CCAP architecture.

In summary, this new architecture, which is also being championed by several strong edge router partners, enables cable operators to scale converged IP services much more flexibly and efficiently.

During the past quarter, we have been revealing the details of our program to an increasing number of key customers, and the response has been overwhelmingly positive.

Over the past year, we have scaled up our development team, adding a number of skilled Docsis experts, and have made amazing development progress.

While we still have important work to do, we're increasingly confident in our ability to hit our projected platform delivery in the first half of next year.

There's certainly execution risk ahead, but the reward upside of addressing a substantially expanded market opportunity, one Infonetics believes to be an approximately $2 billion opportunity by 2015.

It is very compelling and we're committed to success in this area.

With that focus on success in mind, and moving out of slide 9, we have made some important changes and additions to our corporate leadership team.

Many of you know Nimrod Ben-Natan, who has been our senior vice president of product management, solutions and strategy, and in the industry, he's known as one of the thought leaders in the Edge and Access space.

Given the tremendous potential and strategic importance of the CCAP Initiative, Nimrod is changing roles to be solely focused on leading our Edge and Access business and will play a direct role in driving the success of our CCAP program.

With Nimrod moving to his new position, we took the opportunity to expand our leadership team and add experience in both marketing and video product leadership.

So I'm also very pleased to announce that Krishnan Padmanabhan has joined Harmonic as senior vice president of video products.

Kris comes to us from NetApp, where he most recently served as vice president and general manager of the manageability and ecosystem integration business.

Prior to NetApp, Kris held key positions with Phillips and McKinsey.

I'm excited have Kris join as he brings his vision, management and analytical skill set and deep product experience, which will further sharpen our ability to move aggressively and efficiently as we scale our video business.

I'm also excited about the addition of Peter Alexander as our Chief Marketing Officer.

Peter joins Harmonic with more than three decades of experience in sales, marketing and engineering hardware and software solutions for the telecommunications industry.

Having spent 15 years with Cisco Systems, where he served most recently as vice president of worldwide field marketing, Peter's a proven marketing executive with broad experience managing multi billion dollar product lines as well as executing global marketing strategies.

As we look to extend and further leverage our brand and our products, and to strengthen our go-to-market capabilities, I believe Peter is going to have a very significant positive impact on our business.

Finally, we are also pleased to announce that Mitzi Reaugh, Senior Vice President of strategy and business development to Miramax has joined our Board of Directors.

Having previously held leadership roles with NBCU and Nielsen, Mitzi brings a wealth of media and entertainment industry perspective and expertise to our board, and we are very pleased to welcome her.

So in summary, through these changes and additions, we've further enhanced our focus on our key growth initiatives.

We've added tremendous new talent and experience to our leadership team.

On that note, I'll now turn the call back over to you, Carolyn, to talk more about the results of the quarter and our financial outlook.

Then I'll wrap things up with some final thoughts.

Thanks, Patrick.

Moving to slide 9, our net revenue for the second quarter was $132.6 million, an increase of 4% from the first quarter and relatively flat with last year.

However, our bookings on a year-over-year basis showed continued strength and were $139.5 million in the second quarter, up 6% from the same period in 2011.

As Patrick mentioned, excluding Europe, our bookings are up 11% for the first half of 2012.

Non-GAAP gross margin improved 100 basis points from Q1 to 48%, but are still below last year's gross margin of 51%.

The decrease in gross margin is largely due to product mix issues as well as competitive pricing pressures, particularly in emerging markets.

Operating expenses for the second quarter of 2012 were $53.9 million, a sequential decrease of 4% from the previous quarter and flat from a year ago.

Our headcount was 1147 at the end of the second quarter, down 17 from the end of the previous quarter and up 3 from the end of Q2 of 2011.

Non-GAAP net income for the second quarter of 2012 was $7.2 million or $0.06 per diluted share compared to $3.2 million or $0.03 per diluted share in the prior quarter and $10.5 million or $0.09 per diluted share for the second quarter of 2011.

Turning to slide 10, let's look at our quarterly revenue and backlog in more detail.

As we noted, net revenue for the second quarter was $132.6 million, an increase of 4% from last quarter and a decrease of 1% for that same period a year ago.

On the other hand, our backlog and deferred revenue at the end of Q2 2012 was $146 million, an increase from $135.7 million last quarter and an increase from $122 million a year ago.

The largest component of the increase of backlog from a year ago is due to service bookings, which will be recognized over the next several quarters.

Moving to slide 11, while we have continued to expand our revenue base across different geographies, product categories and markets, our revenue mix has shifted in the last two quarters.

Our international revenue represented 54% of total revenue in the second quarter of 2012 compared to 59% in that same period of 2011.

This decline is primarily a result of softness in Europe and a stronger US market.

The recess in Europe particularly impacted our production and playout revenue.

For the second quarter, video processing represented 45% of total revenue and production and playout represented 16%, similar to last quarter but down from recent quarters.

Our Edge and Access revenue represented 25% of our total revenue.

Services represented 14% of our total revenue and grew in absolute dollars.

As Patrick mentioned, we have also had strong service bookings.

These bookings will be recognized as revenue in future periods and indicate the growing activity level surrounding conflicts deployment and the competitive importance of our unique video experience.

Our largest customer for the quarter was again Comcast with 18% of revenue.

None of our other customers were over 10% of revenue.

Our cable customers represent 48% of our business, reflecting our strong Edge and Access sales and relative softness in Europe where cable represents a smaller portion of our business.

Our satellite and telco customers represented 21% of sales, and our broadcast and media customers represented 31% of sales in the second quarter.

As you can see on slide 12, we continue to maintain a strong balance sheet.

We ended the quarter with a cash balance of $177.8 million, up about $9 million from the end of the prior quarter and up $43.5 million from the second quarter of 2011.

Our receivables balance was $102.7 million, our DSOs were 70 days, reflecting a strong collections efforts.

Inventory was $68 million, up slightly from the prior quarter and, inventory turns were flat at [$4.1 million.] Capital spending was $2.9 million in the second quarter, and we expect CapEx 2012 to be in the $12 million to $18 million range as we have capital related to new product releases planned for the second half of the year.

Finally, we repurchased 1.6 million shares for approximately $7 million on a share repurchase plan that was implemented in the second quarter.

Turning to slide 13, while we are encouraged by the solid bookings and customer demand in most regions, moving into Q3, we still face uncertain visibility regarding Europe.

Taking into consideration we expect net revenue to be in the range of $130 million to $140 million in Q3.

Non-GAAP gross margins in the third quarter are anticipated to be in the range of 47.5% to 49.5%.

We generally expect the pressure on gross margin to continue.

However, as Patrick mentioned, we have kicked off a series of initiatives to drive down cost and improve gross margin.

These initiatives will likely take a few quarters to impact our actual results and are therefore not reflected in Q3's quarterly guidance.

Our target for non-GAAP operating expense for the third quarter is $55 million to $56 million, reflecting increased investment in R&D for the product initiative Patrick discussed, as well as increased legal costs related to defending two losses.

Finally, we currently anticipate our non-GAAP tax rate for 2012 to be in the 25% to 26% range depending on the amount of international versus US income.

This rate also assumes that the R&D tax credit will not be extended.

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

Thanks, Carolyn.

Let's now turn to our last slide, slide 14.

In summary, we're incrementally more positive on the fundamentals of the business in spite of continuing headwinds in Europe.

We believe we have made the right strategic decisions to position the Company to benefit from the growth and proliferation of video.

We continue to make improvements in the execution of our strategy and the operations of the company.

We continue to broaden our customer base across geographies and drive clear technology leadership, including delivering on our new CCAP Initiative and driving market-leading IP multi screen video technologies.

With a fantastic global staff and our further strengthened senior management team, we are well positioned, confident in our ability to execute, and very excited about the future.

With that, we will end the formal portion of the call, and Carolyn and I would now be pleased to answer any questions that you have.

(Operator Instructions)

James Kisner, Jefferies & Co.

Just -- the topic du jour is Europe.

You said I believe that your bookings were down 5% year-over-year if I heard that right.

I was wondering if you could provide that number for Q1 to give us a sense of the second derivative there and I guess I'd just love some additional texture on Europe, and do you see any slope in the lines?

Is this thing stabilizing, is it unclear, is there any kind of feeling that perhaps Europe is done declining for the near term or not?

I think that generally I would say that it was relatively flattish in Europe from Q1 to Q2, and that the underlying -- our sense of the business would say flattish.

There are timing issues of certain deals that come in or come out that might move the numbers, but in terms of tone and demand and all of those things, we had a pretty precipitous drop in Q1, and I would say right now we think that is flat.

Relative, I think to our outlook, that is sort of what we would expect going forward, although we think visibility there is challenged.

That is fair.

Just one other question and I'll let somebody else ask one.

On pricing, you mentioned that numerous times in emerging markets, can you talk about what product areas or verticals you're really seeing that pricing pressure, and is that just a result of low demand or is it really -- is it more competition, could you elaborate on that?

James, we see an aggressive pricing environment really across product lines, particularly in emerging markets.

I think a lot of people view that as beach front property there in Brazil or India or wherever, and so it is just in high demand to get the foundation as new operators launch services and begin to expand.

We don't see it particularly related to any one product line.

More, too, I think the broader market's perspective in the strategic importance and long-term growth potential in these markets, and certainly our strategy is to take the long view.

We believe that being present as we are and as increasingly in places like Southeast Asia, in Brazil, in India, we think it is very strategically significant.

While we're not pleased with the gross margins, and as we mentioned, we have a number of initiatives to kind of aggressively move on raising our gross margin products up, our business decision right now is to take that business because we believe the strategic value of the footprint that we are establishing in these markets is quite valuable and important.

One quick follow up.

On the margins, is it fair to say the multi screen initiatives are helping margins or hurting them?

Helping in general, multi screen is part of our broader video processing.

In fact, we're building more and more multi screen capabilities into our traditional or mainline video processing products.

Like our overall video processing business, the gross margins associated with our multi screen solutions are substantially higher than the corporate average.

I guess [all other] video processing solutions are a little bit more software intensive, I guess was my intuition and therefore maybe positive for margins, or is it just very competitive and you don't really see that?

Maybe incrementally.

We have not broken it out in the past.

We have in the past said that video processing in general is kind of high 50s, and I would allow that multi screen solutions are probably incrementally above that.

Not dramatically.

Thanks a lot, I appreciate the clarification.

Richard Ingrassia, Roth Capital Partners.

Patrick, can you say a little bit more about the scope of the unannounced tier 1 over-the-top wins that were mentioned in the slides?

We're quite excited about the momentum, and what is nice is we're seeing it right across the customer categories that we addressed.

I think most of the tier 1 wins that I spoke to are actually pre-existing Harmonic customers, although we were previously involved in their Internet activities.

It's a combination of customers ramping up what they're doing for in-home delivery, that is creating the capability to hit iPads inside the home, as well as true over-the-top services outside of the traditional service delivery footprints to a variety of mobile devices.

How do you assess the penetration of the Omneon customer base so far and [crop sell] of Harmonic products there, vice versa?

Candidly, it is still a work in process.

I think as I may have mentioned in prior calls, we have been more successful getting the Omneon sales force to take the historic Harmonic product line.

You may recall that last year, we saw our business in broadcast media grew 17% year-over-year, and broadcast and media continues to be I think, Carolyn, this quarter of 31% of the business.

We're seeing very good traction of bringing our video platform including multi screen products into the media and broadcast accounts and the Omneon sales force is doing a great job there.

I will acknowledge that we are doing somewhat less of a good job, cross-selling the Omneon products the other way.

That is a work in progress and we continue to make progress there.

We are quite optimistic about the potential as we really get the machine going.

It is still a work in progress.

Finally, maybe just some specifics on the efforts being made to cut costs, to cut cogs and increase gross margins across the board.

Cost reduction is always something we are doing in and of itself and also with fundamentally part of the design process.

Introducing more features that deliver more value hopefully associated with less costs.

And in particular for emerging markets, we find that sometimes the requirements aren't exactly the same.

In many cases, some of the products that we have -- let's say for the US, may be in some way overkill for some of the emerging market applications.

It is just as much about tuning the products and delivering what is needed by the market as it is raw reduction of the existing products.

It's a portfolio of actions, but we are incredibly focused on it and we're confident in our ability to drive results.

Blair King, Avondale Partners.

I have a couple of questions.

Patrick or maybe this one is for you, is it possible, is at all possible for you to break out what percentage of revenue the multi screen business is today?

It is possible, but frankly, Blair, it is something we prefer not to do.

In fact, the multi screen applications are becoming increasingly intertwined with our mainline revenue.

Frankly, the largest multi screen deal that we have done in the last 12 months has been actually capability delivered on a heretofore not multi screen product.

So we've been very aggressively not only building our ProMedia product line which is specifically targeted at multi screen, but we've also been developing multi screen capabilities of enabled [for our new] software licenses that run on the historical products.

That is why I really want to emphasize the point that a number of the investments that we see being made today, even if our customers are buying products for traditional television applications, after the platform they're investing in is really also simultaneously investment in multi screen down the road.

This is core to our strategy and core to the way that we are approaching the market.

I think that this trend, Blair, is just going to continue.

My own view is that we're going to be sitting here 12 months from now not even talking about the multi screen anymore because by definition, the video business is going to be multi screen whether that is a new 4K, super high-resolution screen down in your -- I'm sure that fabulous movie viewing room you have in your basement to your new [read] display iPad that you are carrying around with you.

I think the business of video delivery fundamentally is about infrastructure to hit all of those screens, the business of our customers is not to differentiate them into different styles but basically to have that connection with the consumer wherever they are -- up in the bedroom, down in the screening room, out on the business trip.

Certainly the way we are thinking about the business.

Maybe just a follow-up to that question, Patrick, I appreciate the explanation there but, in the quarter, obviously there seemed to be a lot of activity around the multi screen phenomenon that you're referring to with 25 wins.

Is much of that business services or could you break down the percentage that's service-oriented versus product oriented that was actual shipped in the quarter?

I think as a mix question, it is incrementally -- there's more service associated with it.

A lot of our customers, and there's still a fair amount of small scale deployments and trials as you know, Blair, so kind of the name of the game very often is, hey, let's run quick.

In that context, securing our services I'd say is incrementally more part of the mix.

But honestly, we're seeing more services be part of the mainline business as well.

I wouldn't draw a bright line saying multi screen services traditional business.

-- Not services.

I think the key point is that we are increasingly for all of these applications being viewed as a strategic advisor, a consultant to our customers, and for me, above and beyond the services revenue, that is the part that I like to see strategically.

If I could just add though, Blair, on a relative basis in our total revenue and even in our revenue here, professional services is still a relatively small percentage of a total deal.

We're making big strides, and a lot of the growth in our service bookings is from professional services, so we are really very pleased, but it is still a small piece.

Point taken.

Last question, Patrick, just on the CCAP Initiative, I was wondering if you could just address your strategy competitively.

It almost feels like the next [gen edge] QAM from Harmonic might be behind some of the other HQAMs that are already starting to hit the market now.

Maybe, do you feel like you are coming into it a little late, or do you feel like you are right on time with where your customers are telling you need to be?

We feel that we are not late at all.

We feel we are right on time.

Forgive the strong tone, but I have to vigorously disagree with the idea that we have lost a step in the historic EdgeQAM business.

I think we clearly continued to gain market shares in the traditional EdgeQAM business and our technology there is I believe is second to none and I think that is why we're winning market share.

Certainly that position is a springboard to where we're going with our CCAP Initiatives, CCAP is much more than that, but certainly our dense QAM technology, which we introduced as part of our HectoQAM product, I think it stands alone in the industry.

I think the wins that we are racking up, the footprint that we are accumulating with both existing QAM cable customers as well as carving out new footprints.

I think it speaks to the power of this technology.

We're winning business today with I think the strongest EdgeQAM product in the market, and we're getting great feedback on our architecture direction and our development progress on our CCAP Initiatives.

We are into competitive space, I will give you that, but we are ready for the battle and we like our chances.

Greg Mesniaeff, Maxim Group.

I have one or two quick questions.

One is regarding the gross margin commentary that you gave today vis-a-vis what appears to be a rather significant shift towards services support.

I am curious whether the fact that you have seen some change in your gross margin profiles directly attributable to that shift to customer service and support and whether that will require a whole new way of managing costs going forward?

That is a good question, Greg.

Certainly the professional services, part of services has a much lower gross margin that is the part of, a part of our bookings that has been growing.

Not a lots of that is reflected in our revenue yet, although services went up about $1.5 million sequentially, and a good chunk of that is professional services.

On a year-over-year basis, when we look at why margins are down, a piece of that is mix, and that is definitely related in part to higher professional services revenue.

I guess as a part two of my question, when you look at professional services being offered, domestically versus professional services being offered in overseas markets, there must certainly be a cost differential there, and I'm wondering if you could maybe give us a little bit of color on that too?

I think like our product pricing in different markets, our service pricing is probably -- on a relative basis has the same impact and therefore sort of, as Patrick said on costs initiatives, you then have to find a service solution that allows you to do that for a lower price.

That is part of driving into some of these emerging markets and building our ability to do business there at a price that is competitive.

Now that you're servicing your traditional pre-Omneon products but the Omneon products as well, presumably there is a new component to the service and support professional services aspect related to that as well, right?

Yes, absolutely.

We have a broader portfolio to support, Greg, and I think we have a broader footprint of possible services, not just talking about service provider related opportunities, but also work that we can do directly with the media and content companies.

I guess managing the cost of goods sold is kind of a work in progress as the mix continues to change?

I think that is right.

I'd make one more comment, I think our, in some cases our success in some of the emerging markets has outstripped our local presence there, so we do find ourselves servicing some of these opportunities with resources for more higher cost geographies.

So over time as we continue to grow, I certainly imagine us further scaling our in-region service and support capabilities getting those trained, which will naturally lead to a lower cross space.

I just have one quick follow up.

Can you talk about any product refreshes that have recently occurred or will occur in the Omneon product line?

The biggest recent one is just about three months ago, we announced something called ChannelPort which is a very significant step forward.

It's an extension of our media ports of our spectrum server product line, now supports branding capabilities.

This is very significant from both a CapEx as well as an OpEx perspective for broadcasters and media companies, and we think really differentiable because it actually does not require a forklift upgrade to implement it.

It is directly compatible with the very large, actually industry-leading install base that we have with our spectrum video service product line.

This is in terms of recently announced initiatives the most significant thing that we announced over the last couple of months.

You haven't asked about it, Greg, but I will pivot now and look at little further ahead.

One of the apples in our eyes in terms of putting Harmonic and Omneon together was to really develop a whole next generation of a new class of products that actually married or integrated historically disparate technologies.

While we're not prepared here to announce anything yet, we are working in earnest on new products that really break down some barriers and will really deliver exceptional operational as well as capital savings to our customers that unify and integrate historically Harmonic and Omneon technologies.

I think this is going to be really unique and powerful for us as well as our customers and we're pretty excited about it.

Simon Leopold, Raymond James.

Hello, this is Victor Chu in for Simon Leopold.

Just going back to the multi screen business, the more gradual range of the multi screen business relative to the codec business in the past more a function of the complexity of the technology or more aggressive competitive environment or maybe a combination of both, what is the biggest challenge to Harmonic in accelerating growth in that particular segment?

I think the biggest challenge is just the size of the overall market and spend.

Certainly there is a lot of noise about it, the overall spend is still substantially less than the spend on any given day in what we would call traditional television delivery.

This has a number of reasons, we all just watched a big high-profile content battle play out on the front page of the Wall Street Journal.

People are still sorting through a lot of business rules that allow the business models etc.

There's some legitimate questions about how should you make money off of these new services.

I think just about every one of our customers has a foot in the water, and I am pretty pleased with the extent to which we are expanding our footprint in supporting these kind of foot in the water initiatives.

But for this really to start to kick into high gear, we need to scale the size of these projects to really expand dramatically, and I think the biggest limitation or the thing holding the market back is really what exactly is the right business model there.

There's no question in my mind or our minds that the future very much is this flexible multi screen it universe.

There is just some pretty natural business issues that have to be worked out between now and then.

That's very helpful.

One quick question, that hasn't been answered.

Can you give a little color around the shift in the product mix is quarter?

It seems like the video processing business was particularly weak last quarter in Europe and then not so much this quarter.

Can you speak to some of the shift in the mix, the dynamic behind that and the geography?

We don't actually breakdown products by geographies.

In general, we're getting a little bit more color on Europe because obviously it is central to what is happening I think with our business more generally.

It is true that Europe historically is a little less cable oriented, little bit more video processing and production and playout oriented.

But in answer to your question, I think it is just more the [vagaries] of timing of certain orders, Victor, than any underlying trend.

We just happened to see, I think, somewhat fewer video processing deals fall in the first quarter and some of those flip to the second quarter.

The real thing too take away is that this is historically a factor of our business, and I think you come back to the breadth of our products, the breadth of our customer base that we're bringing our products to, the geographies we are addressing, I think it helps us manage that.

So last quarter worked out pretty well for us.

It was relatively a stronger Edge and Access quarter, but somewhat softer video processing quarter, and we have seen that kind of flip, and I think there's no underlying trend other than the timing of certain orders.

Would you characterize your visibility in Europe as about the same as last quarter or any better?

I characterized it as about the same.

That is worse than normal.

(Operator Instructions)

Andrew Storm, Cortina.

I was wondering if you could help me understand in thinking about billings versus revenue.

In the first quarter, your billings were up 5%.

In the first quarter, they were up 8%, and the second quarter, they were up 6%.

Your revenues were flat to negative since then, and your guidance for next quarter also implies the midpoint flat to negative.

Your differed revenue's only up about $6 million or $7 million since the end of the fourth quarter, which would be about 2% a year if I broke that out.

What is the differential there, and you had that slide that shows your revenue and I understand it can be lumpy, kind of bouncing around and your bookings have been flat and really accelerate in the last two quarters.

Can you help us understand is there a big revenue acceleration down the line?

Is there something else that has been turned out?

How should we think about that?

Let me try to take it in pieces and I might -- you asked several questions in there, so let me try to get a few of those.

The first is, the difference between deferred and backlog.

Just billings and why it's not translating into revenue.

Right.

It's not billings that's not translating into revenue, it is billings and the bookings that combined.

We combine those two things so there is a number of things that are booked.

Some of those are services that get performed over a period of time or projects that you book a project this quarter, it gets planned, it begins to be delivered in a quarter or so and then gets delivered over a series of quarters.

That may or may not be a billing until the time the project is completed on a percentage of completion basis.

Right.

Can you just -- before you dive into that part, Carolyn, the point I was trying to get at was going through the last several quarters, you have seen mid single digit increase in bookings and your differed revenue has also been increasing.

I understand one or two quarter move around.

However, this has been almost a year long anomaly now where revenue and bookings have materially diverged.

Maybe it's an accounting issue, again it says afterwards, but it seems like there's something there going on.

Maybe it is a huge project for a longer term.

Certainly, for the last couple of quarters, a bigger piece of our booking, our services, two pieces to services both additional support agreements as well as for sure, there has been a pretty big increase in professional services bookings, that is the were talking about.

We're doing more professional services work with the customers.

Those get delivered over a series of quarters.

That makes sense.

To read through onto that as a result, mid single digit growth in billings doesn't really -- it doesn't imply that we should start seeing mid single digit revenue growth in the next several quarters, right?

One year contracts and things like that?

Right.

Generally I would say all of that should turn within a year.

Okay.

Then can you just talk about the acceleration of the last two quarters that you are seeing, is that just services stacking up?

Yes.

Those are -- if you remember last year, one of our big initiatives was to build our professional services organization.

We had quite a focus on that.

I would say the first half of last year that really went to working with our sales force even to begin the -- how do you sell services, how do we get value for services and then the second half of last year we really began to do a lot of proposals and more work around it.

Those are now converting to orders as you get into the latter part of last year and certainly the first half of this year, we should then convert into revenue as you move forward.

That pro-services piece again, I do not have the percentage here, but it is up significantly.

From a small base, but it is up significantly.

Okay.

Just to make sure I fully understand, since services revenue has grown a fair amount, of course being from a small base, a little smaller, as I look at your billings -- I'm sorry your bookings, does that imply because the rest of the business is even more negative?

Even if marginally, are your bookings for the rest of your business negative as well or is that seeing acceleration that hasn't flown to the PNL yet?

Yes, no.

No, the product revenue was not negative.

The other thing I should mention is that with some of the pro-services work, the product revenue gets connected to the pro-services, and all of it gets deferred.

There are some projects where these services are deemed as essential that they get tied up with the product revenue and both of those get deferred.

Right It just seems like this has been a recurring conversation for several quarters now.

You had some of these, I guess I'm wondering when some of this gets unlocked?

I think it is really two quarters.

Last quarter and this quarter.

I'm happy to go back and look at that in more detail, but I really think it is two quarters where we have had that phenomenon and I think it begins to get unlocked over the next few quarters.

Last question I have, on your guidance, as you were contemplating that you said you were assuming I think Europe remains flat, and you were assuming it to get worse, is that correct?

How much of that revenue to Europe was just book shift business versus the bookings that you already had in?

I don't want to be as specific as to say it has been a good thing particularly, it presumes a range of outcome.

I think what I was trying to indicate is that it does not presume really a recovery in Europe.

If there is some nominal decrease in Europe, that is probably presumed in there if Europe takes another hold step down.

I don't think we're contemplating that at this point.

I don't have the direct, while we do track in any given quarter how much of our revenue comes from the backlog and deferred and how much comes from book and burn, I don't have that specifically for Europe.

While it changes from quarter to quarter, I would roughly say it is somewhere around 50/50 and sometimes by the little bit more one way and sometimes the other.

I have no reason off the top of my head to think Europe is much different than that, but I have not looked at that specifically.

We have no further questions in queue.

I will now turn the call to Patrick Harshman for closing comments.

We would like to thank everybody for joining us today.

We very much appreciate your attention and your support and the time with us.

We are confident in our ability to further strengthen this business, we're excited about what we are doing and we look forward to talking with you next time.

Thank you very much, everybody.

Thank you, ladies gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.