Harmonic Inc (HLIT) 2012 Q3 法說會逐字稿

Hello, and welcome to the third quarter 2012 Harmonic earnings conference call.

My name is Miesha, 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 this conference is being recorded.

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

You may begin.

Thank you, hello everybody.

With me in our headquarters in San Jose, CA, is Patrick Harshman, our CEO.

I'd like to point out that, in addition to the audio portion of this call, we have also provided slides which you can see by going to the Investor Relations page on Harmonicinc.com and clicking the third quarter earnings call button.

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 expectations and actual events or results may differ materially.

We refer you to the documents of Harmonic, filed 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 basis.

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

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.

Thanks, Carolyn, and thank everyone for joining us today.

Turning now to our Slide 3, today we reported our results for the third quarter of 2012, which were in line with our guidance issued a quarter ago, and sequentially up from the second quarter.

In the context of continuing macroeconomic challenges, these results reflect our focus on improving operational execution and gaining market share, while also making the right strategic moves and investments to position the Company for stronger long term growth.

With that as background, revenue was $136.7 million, driven by healthy demand from our global cable customers, and good execution on services related to international projects.

Demand from cable operators was particularly strong for our Edge & Access products, where we believe we continue to gain market share.

Record service and support revenue reflected growing revenue recognized on multi period projects booked in prior quarters.

Reflecting continuing macroeconomic headwinds, new bookings were $128.7 million, down sequentially.

In particular, new orders from Europe were down over 15% year-over-year.

Yet despite this, we believe we gained market share in Europe, particularly in Cable Edge & Access, and in multi screen, where we again saw a number of new customer wins.

In contrast to Europe, we did see solid year-over-year growth in new orders from Asia and other emerging markets.

And as a result, year-to-date book-to-bill is still greater than one, and we head into the fourth quarter with a healthy backlog.

Turning to operating performance, our gross margins were 48%, slightly better than the second quarter but still below our target, due to both product mix and the geographic mix shift towards emerging markets.

Operating expenses were approximately $55 million in the quarter, and non-GAAP earnings were $0.07 per share.

We again had robust cash performance, generating approximately $22 million in cash from operations during the quarter, resulting in a cash balance increase of approximately $14 million, after using approximately $7.4 million for our share repurchase programs.

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

So turning now to Slide 4, I'd like to provide a little bit more color on the quarter, beginning with our international business, which accounted for 58% of revenue.

As I mentioned a moment ago we continue to see macroeconomic headwinds impacting the market in Europe, with new orders from the region declining both sequentially and year-over-year.

On the other hand, we saw strong growth in Asia and other emerging markets.

Despite these macroeconomic differences, the business and investment trends playing out internationally have some common themes.

We continue to see migration to pay TV business models, and corresponding digital TV and HDTV technology development trends.

They're really still in the early index.

For example, during the quarter, The Wall Street Journal noted in an article about Liberty Global's opportunities in Europe, that today still less than 10% of German households pay for premium TV services.

So we see the ongoing penetration of pay TV and digital TV services driving demand for our traditional video processing products for the foreseeable future.

We also see more video content in television channels being created for local audiences around the globe, which drives demand for our production play out products.

In fact, the third quarter was the strongest year-to-date for our production play out products, with particularly strong demand coming again from Asia.

And in both Europe and Asia, we also closed several multi screen deals in support of more advanced operators rolling out over the top services.

As I mentioned earlier, we continue to see strong demand and improving revenue recognized related to our service and support capabilities across international markets.

And finally here, the competitive landscape in our markets is today more in flux than at any point I've seen previously.

Several of the companies we compete with are for sale, in private equity hands, and a strategic turning point, or some combination of all of these.

In this context, our customers view us as a reliable, focused and innovative market leader, positioning Harmonic to gain additional market share in the coming quarters.

So let's now turn to the US markets, and Slide 5, where we continue to see strong demand from our domestic cable and telco customers.

The demand from domestic satellite operators and media companies was down year-over-year.

Underlying the strong cable demand is competitive momentum in the Edge QAM and optical access space, and accelerating cable network demand for high capacity video-on-demand and high speed data services.

Our newer Hecto QAM product, with industry leading density, is a great solution, and for the first time we saw Hecto QAM shipments exceed those of our previous generation Edge products.

Turning to our video processing product area, we see the growing imperative of bandwidth efficiency also creating opportunity for competitive differentiation of our encoding and transcoding products.

Across both traditional and new media are multi-screen formats.

Our combination of exceptional video quality and bandwidth efficiency is increasingly valued and enabled in competitive ways.

While customers are generally still struggling to find the right business model necessary to justify volume investments in multi-screen and over the top capabilities, when they are investing, our increasingly strong product set is enabling us to gain share.

And regarding market share, my prior comment about the opportunities presented by the evolving competitive environment is equally valid in the US as it is overseas.

So staying with this theme of new media, and turning now to Slide 6, I'd like to briefly highlight ways Harmonic demonstrated industry leadership during the quarter to our customer partnerships to bring coverage of the 2012 London Olympics to the world, to thousands of networks, and to millions of screens.

As was previously announced in separate press releases, our technology was at the heart of the media work flows of a number of companies, including the BBC and Virgin Media in the UK, and NBC here in the US.

In particular, our MediaGrid shared storage solution was deployed to enable editing in live production environments.

Our Electra encoder was widely deployed around the globe for super high quality widescreen HD services.

And our ProMedia suite of software based video processing products were widely deployed for both live multi screen delivery, and off line file transcoding for on demand access to the events.

Our work also included an important industry first.

The first live public trial of the new MPEG-DASH adaptive bitrate streaming stamp, enabling the public broadcaster BRT in Belgium to deliver high quality Olympic experience to its customers' personal devices.

So, let us turn now to Slide 7, where our strengthening industry leadership has also been recently recognized by a series of meaningful awards, including CSI's best mobile TV technology award for our ProMedia suite, TV Technology Europe's STAR award for our powerful new ProMedia Xpress transcoding appliance, three BTR Diamond Technology awards, given at the recent SCTE cable show in Orlando, and our second Emmy, to be formally awarded at CES in January for our work on the development and commercialization of digital local cable ad insertion.

And while awards don't pay bills, they do send a clear message to our customers and partners that Harmonic is a uniquely focussed, innovative and capable industry leader and business partner.

In regarding technology innovation, Harmonic has continued to invest quite heavily in new technology and products, despite the challenging macroeconomic environment that has impacted our top line this year.

We've continued to invest because we strongly believe there are several coming technology disruptions that we are uniquely positioned to lead and benefit from over the next several years.

So to finish up the discussion here, I'd like to highlight a couple of the initiatives we're investing in that we believe are going to be significant growth drivers for our business.

So with that, now turning to Slide 8, the first major investment area emerging growth driver I'd like to discuss is the Cable Edge in CCAP.

CCAP, or Converged Cable Access Platform, is the convergence of the video and high speed data edge into a common platform, massively increasing cable head in efficiency and density, and therefore making transition in this technology a high priority customer initiative for the foreseeable future.

From a business perspective, this convergence combines the addressable markets for the Cable Edge QAM and T-MTS into one, significantly expanding the revenue opportunity for Harmonic, and making our anticipated early market entry with a true CCAP-compliant platform, a meaningful competitive advantage.

In one of our biggest product launches ever, we showcased our new NSG Pro platform, designed for CCAP from the ground up, at the recent SCTE cable show in Orlando, and disclosed that it is already in customer lab trials.

The prior to initially targets downstream QAM-only applications, but development of full, two way data capability is under way and our customers seem genuinely excited about this product.

Turning now to Slide 9 I'd like to highlight two new video trends that we believe may also fundamentally reshape video infrastructure over the next several years.

First, we're starting to see the industry seriously look beyond today's HD to even higher quality formats in the ultra HD or 4K, so named because the picture has horizontal resolution of approximately 4,000 pixels providing dramatically more detail than today's HD services.

Camera technology and television supporting 4K are just beginning to emerge and like 3D the question really is whether the experience warrants the investment.

I believe that through several of our key customers that 4K has a much stronger chance of success than 3D, as it offers a really powerful and compelling visual experience without the need for special glasses, et cetera.

So while it remains to be seen how this ultra HD opportunity will play out, should it gain traction, the video infrastructure implications would be tremendous.

From playout servers to encoding, from storage to streaming, 4K ultra HD represents a significant long term opportunity for Harmonic.

Now more certain is the opportunity we see in high efficiency video codec, or HEVC, which we expect to be adopted en masse over the next several years driving a large scale technology refresh across our customer base.

HEVC essentially halves the bandwidth requirement for an encoded video stream which makes it extremely compelling for both ultra HD delivered to the living room and more important -- more immediately and perhaps importantly the high quality standard definition and high definition video delivered over bandwidth constrained mobile and internet networks.

We have been showing customers early demonstrations of this technology over the past couple of months and they have been simply blown away by the quality of the video that we can deliver with so few bits.

We see a broad opportunity playing out beginning in the second half of 2013 and we're investing now to capitalize on this tremendous opportunity.

So in summary, Harmonic is continuing a sharpen our focus on near-term execution.

We'll also continue to invest in longer term market leadership and fundamental growth opportunities.

With that, Carolyn, I'll turn the call back over to you for remarks on the third quarter and to share our outlook for the fourth quarter.

Thank you Patrick.

Moving to Slide 10, our net revenue for the third quarter was $136.7 million, an increase of 3% from the second quarter, and 2% below last year's third quarter.

Our bookings were $128.7 million, lower than the second quarter bookings by $10.8 million, however, our book-to-bill for the year is still over one to one.

Non-GAAP gross margin improved from Q2 to 48%, but are still below last year's gross margin of 50.6%.

The decrease in gross margin is largely due to product mix issues as well as a shift of revenue to emerging markets.

Non-GAAP operating expenses for the third quarter of 2012 were $54.8 million, up 2% from the previous quarter and a year ago.

Our head count was 1155 at the end of the third quarter, up eight from the end of the previous quarter.

Non-GAAP net income for the third quarter was $8.1 million, or $0.07 per diluted share, compared to the $7.2 million, or $0.06 per diluted share in the prior quarter, and $12.7 million, or $0.11 per diluted share for the third quarter of 2011.

Turning to Slide 11, let's look at our quarterly revenue and backlog in more detail.

As noted, net revenue for the third quarter was $136.7 million, an increase of 3% from the second quarter and 2% below last quarter's -- last year's third quarter.

On the other hand, our backlog in deferred revenue at the end of Q3 was $137.7 million, a decrease from $146 million last quarter but an increase from the $125.4 million a year ago.

In the past two quarters our bookings have exceeded revenue principally due to increased service bookings.

This quarter we began to recognize some of those service projects.

Moving to Slide 12, our international revenue represented 58% of total revenue in the third quarter compared to 51% in the same period of 2011.

This increase is primarily a result of strong growth in Asia-Pacific, and some emerging market growth, offset in part by year-over-year declines in Europe.

For the third quarter, video processing represented 37% of our total revenue and production and playout represented 17%, slightly up from recent quarters.

Our Edge and Access business represented 29% of our total revenue.

Our Edge and Access business continues to perform well.

As Patrick mentioned, our high dense city Hecto QAM shipment exceeded our previous generation shipments for the first time.

We also saw sequential up tick in our Access business as cable bandwidth constraints drive demand.

Service revenue represented 17% of total revenue, and grew 20% from the second quarter, and 35% from last year's third quarter.

Services in general, and professional services specifically, have been an area of focus for us.

This quarter's revenue represents the successful completion of several projects.

I do expect that service revenue will decrease slightly in Q4.

Our largest customer for the quarter was again Comcast at 13% of revenue in the third quarter.

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

Our cable customers represented 50% of our business reflecting our strong Edge and Access sale.

Our satellite and telco customers represented 20% of sales, and our broadcast and media customers 30% of sales in the third quarter.

As you can see on Slide 13, we continue to maintain a strong balance sheet.

We ended the quarter with a cash balance of $192 million, up $14.2 million from the end of the prior quarter despite $7.4 million in stock repurchases.

Our receivables balance was $94.6 million, and DSOs were 63 days, down from last quarter's 70 days, reflecting a strong collections effort.

Inventory was $68.3 million, up slightly from the prior quarter.

As a result, our inventory turns were slightly up to 4.2%.

Capital spending was $3.3 million in the third quarter, and we expect CapEx for 2012 to be in the $14 million to $16 million range.

Finally, we repurchased 1.65 million shares for $7.4 million during the quarter on a share repurchase plan that was implemented in the second quarter.

Turning to Slide 14, while we are encouraged by our healthy backlog and customer demand in most regions moving into Q4, we still face uncertain visibility regarding Europe.

Additionally we anticipate somewhat lower Edge and Access revenue as certain customer projects are completing.

Taking all of this into consideration we expect net revenue to be in a range of $132 million to $142 million in Q4.

Non-GAAP gross margins in the fourth quarter are anticipated to be in the range of 48% to 50%.

Our target for non-GAAP operating expenses for the fourth quarter is $55 million to $56.5 million, reflecting increased sales expenses as we near year-end, as well as increased legal costs relating to defending two lawsuits.

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

The rate assumes the R&D tax credit has not yet been extended.

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

Thanks, Carolyn.

In summary, we believe Harmonic is executing well, gaining market share in a challenging environment, and making valuable investments and significant growth opportunities.

And regardless of the near term macro situation, we will opportunity to broaden our customer base across geographies and drive clear technology leadership, including delivering on our new CCAP and HEVC initiatives, and driving market leading I.P. multi-screen solution capabilities.

With a focused global staff and strengthening strategic relationships with industry-leading service providers and media customers, we're confident in our ability to execute.

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

We will now begin the question-and-answer session.

(Operator Instructions)

First question is from James Kisner with Jefferies.

Please go ahead with your question.

Hi, guys, thanks for taking my questions.

Generally I want to start with a big-picture question here so I can understand what's going on in the business right now, very generally, high level.

It looks like your bookings are down, and I appreciate year-to-date that the book-to-bill is above one, but they are down this quarter and you're still guiding up sequentially, so it sounds like you're planning to burn some backlog here in a seasonally strong Q4.

I'm curious, is that all Europe?

Is there any chance for some budget flush with America, I know Comcast implied a pretty strong ramp in the back half.

Could you elaborate a little bit more on that in the current business environment?

Look, it's challenging in many parts of the world, including Europe, and we don't expect that to change in the fourth quarter, James.

And I would say more broadly, including in the US, we see a fair amount of conservatism and careful spending, so our guidance for the fourth quarter doesn't contemplate that much budget plus activity.

As you pointed out, and as we pointed out, bookings were sequentially down in the quarter.

A little bit of that is around timing, but also reflecting continuing slow activity in Europe.

That being said, as we also pointed out, we're quite encouraged by the growth that we saw in Asia and in other markets.

And we continue to see that whenever the cable operators spend, they're spending it increasingly with us, particularly in the US.

So it's a little bit of a mixed bag.

I recognize that, but putting all the puts and takes together, we feel as though we're well positioned to deliver another, let's say, in line quarter.

And to the extent that the market improves above and beyond that we think that we're extremely well positioned.

Thank you.

Next question is from Richard Ingrassia with Roth Capital.

Please go ahead with your question.

Good afternoon, everybody.

Patrick, can you say a little more about the CCAP opportunity?

Why do you think you might have the must-have product for that initiative if it's something other than being first to market, and if you could size the addressable opportunity over the next two or three years?

There is a couple of things there Richard.

First we do think we have extremely strong technology that positions us very well.

Understand, we're not coming out of this market from out of the blue, we're coming at it from being the market leader in Edge QAM technology.

And a key aspect, if not the key aspect of the CCAP value proposition or architecture, is density of QAMs.

Here we lead the market with our Hecto QAM product, and the product that we announced and will be shipping in the first quarter is significantly ahead of any other product that's been announced or that the market currently anticipates.

So we comment that from the place of having extremely strong QAM credentials and leadership, and the response from our customers is it has been extremely positive.

We're excited about the opportunity.

We have a lot of work to do, but we see our customers very focussed here, and confident in our ability to succeed.

We have been working closely with them from the beginning.

You asked about the size of the opportunity.

There is a number of market research studies out there, the bread boxes, about $1.5 billion to $2 billion a year incremental opportunity that we currently don't address, that is above and beyond the pure QAM market.

So it is a substantial opportunity for us.

It is why we are investing as heavily as we are, and why we are as focussed as we are in this space.

Okay.

Thanks for that.

And a question on gross margins, if I can.

You mentioned why the mix shift drove non-GAAP margins to the lower end of your expectations for Q3, but Q4 guidance actually suggests a decent increase over the last few years.

Can you explain what is changing in your expectations here in Q4, is it backlog burn or is it something more we should be watching?

I think it's -- I mentioned that Edge and Access we thought would be down sequentially, so that mix shift goes the other way.

And so it's a series of things, we've had focus on cost initiatives, so we'll see some of those begin to benefit in Q4.

We do think the product mix will shift a little bit the other way.

So those two things together ought to drive slightly higher gross margin.

Next question is from Simon Leopold with Raymond James.

Please go ahead with your question.

This is Victor Chiu in for Simon Leopold.

I wanted to go back to Europe really quickly for a second.

In the last conference call you mentioned that you expected Europe to be relatively flattish but it was actually a bit weaker.

Is the weakness in Europe related to specific segments?

Because it seems like video processing was up a fair amount last quarter, but this quarter it was a bit weaker and the opposite for Edge and Access.

Well, Victor, in general, our European business tends to be tilted more strongly toward the video processing products than the US, simply because cable represents a lower percentage of our business in Europe.

In Europe -- well, in the US cable is a real big piece of the business.

In Europe, cable is an important segment, but actually no bigger than IPTV, business we do with telcos, the business we do with satellite direct to home operators, and as well as the business we do with media companies.

So a down business in Europe disproportionately impacts both our video processing products and our production and playout products, because that is where we really have the exposure in those products, or what play, not Edge and Access and satellite and media companies, et cetera.

So, indeed, video processing was down this quarter and you got it correct, it was basically in line with the fact that Europe was weaker, on an absolute basis and in fact on a relative basis, weaker than we anticipated.

And also even as I pointed out domestically, satellite and media orders were down as well.

Those two things together drove the video processing number overall down in the quarter.

Really quickly on gross margin, can you give us an update on your cost reduction efforts and maybe some specifics around how that's reflected in your guidance?

I think you mentioned that you were fine-tuning some of the processes for particular markets, for the specific products, instead of flat costs, so can you mention how that is going to impact the results going forward?

I think it's -- so we haven't quantified dollars of gross margins publicly, but we have initiatives that are beginning to be impacted in Q4, and really will impact next year probably more significantly, because they take time to roll into your standard costs, if you will.

So we're seeing a little bit of that benefit in Q4 and we'll look to get more of that into next year.

On the products for market, I think you're referring to Patrick's comments last quarter.

We're trying to focus the right product at the right market, and also look at our broad portfolio of products, and make sure we have the right products in the right places, and certainly that effort continues and is something we do on an ongoing basis.

Next question is from Amitabh Passi, please go ahead with your question.

Thanks, this is actually Jim Hillier for Amitabh.

Another follow up question on the gross margin.

Your Edge and Access businesses were both stronger in the quarter and I did think through typically lower margin, yet we did see a sequential improvement in the margin.

So if you could talk about some of the puts and takes there, that would be helpful.

It's an overall mix, because the other thing is that P&P was up this quarter, which is our highest margin.

So I think there was some offset between the increase that we would get from the production and playout products and the impact on Edge and Access and those two things, I think, balance each other out.

Does that make sense?

Okay, got it.

And then maybe another strategic question with regard to the NSG Pro product, and how you think that that product can compete effectively.

Perhaps, again, some of the incumbent CMTS providers that are also pursuing the CCAP opportunity?

There is no doubt that we'll have competition.

As I mentioned earlier we have been working closely with our customers from the beginning.

We've got some fantastic core technology that we're building this around, which is best QAM technology in the market, and as far as I know, we're the only ones to announce actually QAM density technology that meets the CCAP spec.

Where we had the luxury of starting from scratch in terms of a new platform, and so we've built this NSG Pro that we've announced, really, from the ground up to support the CCAP specifically.

And frankly, we've hired some top tier talent that also has some deep DOCSIS, high speed cable data experience, to the team.

So we've complimented the team with people who have been there, done that.

Through a combination of all of those things, it is not a slam dunk, nothing in this world is, but we feel as confident as I think we could at this point that we have a product that's going to be extremely competitive.

And as I mentioned in the prepared remarks we've already now deployed it in customer labs, and the early returns on that testing has also been extremely positive, and it is bolstering our confidence and as well as the confidence of our customers, that this Company and this product really have something to offer in this space.

Thanks, thanks again.

(Operator Instructions)

Next question is from Greg Mesniaeff with Maxim Group.

Please go ahead with your question.

Yes, thank you.

Patrick, can you go over what some of your assumptions are on Edge QAM pricing in a post-CCAP environment?

Do you see pricing getting more robust or more competitive after your Edge QAM products assume a CCAP form factor?

So I'm going to stay qualitative for obvious reasons, Greg.

But look, individual QAM pricing will go down, but the volume is going to go through the roof.

The whole thesis here, why this is being deployed, is the idea to turn the entire cable spectrum into QAM-enabled spectrum, over which IP traffic, in particular IP video, is traversing.

That is really a revolution in the infrastructure.

It is a revolution in the volume of QAMs that are out there.

So the idea is we see a good win-win for the industry.

We see the opportunity with the industry to deliver innovative, IP based services, and with this technology at a much lower cost than would be feasible with today's DOCSIS technology.

On the other hand, because the volume will be so great, and because of the way the technology is progressing, we see an opportunity to realize not only substantial revenue gains but also a higher margin product.

We're investing a lot in this product, we're delivering a lot of technology and value that I think will be appreciated by our customers.

And so we -- the price per QAM goes down, the volume goes up, and we see a pretty attractive business opportunity.

Got you.

And just a quick follow-up.

What kind of a substitution slope do you see for the CCAP and the form factor Edge QAMs, versus -- in other words, are the current non-CCAP Edge QAMs, is there a long tail for them?

Or is the tail rather steep and it hands off pretty quickly to the CCAP?

I think these transitions are always hard to forecast, it's one of the reasons we adopted the strategy that we have.

What we're going to be delivering to the market is a CCAP compatible chassis that holds just Edge QAMs initially.

And with that, we expect to build footprint, we expect that to be used the way Edge QAMs are today.

But over time, when, and this is going to vary I think from operator to operator, and perhaps from system to system, when they're prepared to move to CCAP infrastructure, we're there with a field hardened platform, one that operationally they know how to use.

No rewiring, no forklift upgrade, et cetera, et cetera.

It's a cliche, and I cringe saying it, but as much -- as close as it gets to in this space, this is a future proved solution, and that is really a big part of what our customers responding so positively to.

I assume it is the same network management software that will control the family.

Absolutely.

It is a unified platform and operating system.

For us, we call it cable OS, and it's migrated from our QAM system and, again, the early returns from customers who are taking a close look at this are very positive.

So it is common management software, that's part of the beauty of this solution.

Got you, Patrick.

Thank you for that color.

We have a follow-up from James Kisner with Jefferies.

Please go ahead with your follow-up.

Thanks, I just want to quickly ask about ultra HD.

You mentioned a couple of times before, I recognize you haven't set a time line, but I'm curious where do you think that that might be rolled out first?

I guess geographically, or by segment, also, would be helpful.

Do you have any idea?

Yes, I do.

We've talked about it and certainly been out there in the standards work, companies in the camera space and some of the consumer electronics guys and TVs have been working on it.

What has changed materially from my perspective in the last three month is been the fact that several of our customers are starting to really take notice and to really think about how they differentiate themselves.

And James, there isn't a pattern.

We have a cable customer in one geography who is extremely interested.

Another geography, I'd say the lead customer is a satellite direct to home operator.

So there is not a -- I think it's down to the individual operator and their vision of how they're going to differentiate themselves.

I would say the common theme is, in any market, it's the operator who really wants to differentiate themselves as having the premiere video technology, video viewing experience, available.

And increasingly, that's a way that we see it in different market verticals, different geographies, our customers trying to differentiate themselves.

So the televisions are coming.

And if you've seen one of these demos it's nothing short of stunning.

You put that together with the latest Dolby audio, and it just blows you away.

I don't think there is any volume next year, but there may be initial things.

But certainly I believe we will certainly start to see real volume in 2014.

We have no further questions at this time.

I would now like to give the call to Mr. Harshman for closing comments.

All right.

Well, I'd simply like to thank you all for participating today.

I hope it comes across that we're excited about our business.

We're undaunted by the challenges that we see macroeconomically, and we're very encouraged by the progress that we see in several geographies, as well as the excitement we see from our customers around our newest technologies.

We're extremely focused on executing for the short term as well as for the long term.

And we very much appreciate your continued support of Harmonic, and we look forward to speaking with you again next quarter.

Thank you.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.