Harmonic Inc (HLIT) 2012 Q4 法說會逐字稿

Hello and welcome to the Q4 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.

Thank you.

Hello, everybody.

With me in our headquarters in San Jose, California 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 on the fourth-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 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 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.

Well thanks, Carolyn, and thank you, everyone, for joining us today.

Turning now to our slide 3. Today we reported our results for the fourth quarter of 2012, which reflects solid strategic progress in several areas but also continuing marketplace challenges.

Revenue was $133.4 million.

Business from our international customers contributed 62%, or approximately $82.7 million, our strongest ever international quarter.

This international result was powered largely by new business and market share gains in Asia, Latin America and other emerging markets, although we also saw stabilization of our European business.

This combined international strength offset a slowdown in domestic business during the quarter, particularly in Edge and Access demand from our domestic Cable customers.

As a result, Cable customers represented 45% of revenue this quarter, the smallest Cable contribution year to date.

While Broadcast and Media customers represented 35% of revenue, the largest Broadcast and Media contribution year to date.

And Satellite direct to home and Telco customers contributed 20% of revenue.

Our bookings results of $127.5 million largely reflected the same revenue pattern.

Sequentially stronger international demand offsetting weaker US demand.

In particular, as anticipated, we saw no material budget flush which sometimes occurs during the fourth quarter.

Despite the slowdown in fourth-quarter demand, our total bookings for the year were up modestly versus 2011.

And we finished the year with a book to bill ratio of 1 to 1, with the backlog [several] million dollars larger than we entered the year with.

Turning to operating performance.

The clear highlight of the quarter was our gross margin which came in at 53%, also a record high.

Operating expenses were again carefully managed.

And non-GAAP earnings were $0.09 per share.

We also, again, had good cash performance, increasing our cash balance by approximately $9.2 million after using a little over $8 million to buy back approximately 1.86 million shares.

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

So let's turn now to slide 4 where I'll provide a little bit more color on the quarter.

Beginning with our software products and licenses which underpinned our strong gross margin results.

In the Video Processing product category, we realized strong sales of software licenses that expand the functionality and capacity of previously sold and deployed multiscreening coders.

And we also had strong sales of transcoding workflow software for one particularly large Internet video service provider.

Similarly, in the EdgeQAM area, although demand for new hardware was cyclically down, we had strong demand for licenses that unlock (inaudible)capacity on already deployed hardware.

While we do not expect to see the same software versus hardware mix as stand over the next couple quarters, it's very good to see the market responding positively to our growing software and capacity license capabilities.

A positive indicator of our ability to drive longer term margin expansion.

Another highlight of the quarter was continuing multiscreen and over-the-top momentum.

Our new Pro Media Express transcoding appliance is being very well received.

And we've had our first Tier 1 customer wins with this product.

This product is uniquely positioned in the market because it provides both industry-leading speed and amazing video quality.

Where generally, leveraging our full multiscreen solution portfolio, we've won important new projects in the Broadcast and Media market, the Cable market and the Telco market, spanning both developed and emerging markets.

Turning now to emerging markets more generally.

We're also very encouraged by the demand trends in our growing competitive and go to market strength in places like China, India, Latin America and Southeast Asia.

Results from these markets are a prime reason for the strength of our overall international business in the fourth quarter.

We're well positioned for the future in these markets.

While we're seeing good results in emerging markets across product lines, the tremendous growth of new and our locally customized content in these markets creates particularly strong demand for our Production and Playout products.

In fact, due to the strong emerging market demand, the fourth quarter was the strongest of the year for our Production and Playout product category.

And finally regarding the fourth quarter, I'm pleased to report that Cable customer response to our new CCAP platform and underlying innovative technology has been extremely positive.

Our development team continues to make great progress.

Our first generation project is now being tested in the labs of five Tier 1 customers with very positive feedback so far.

And consequently, we are increasingly confident in our ability to be a leading player in this exciting and large growth market.

So let's now turn to slide 5 and take a step back and look at the whole of 2012.

From a geographic perspective, we saw strong growth in Asia-Pacific and the Caribbean and Latin Americas.

We have good growth with US Broadcast and Media customers.

And despite a slow fourth quarter, we had solid growth -- a solid growth year with our US Cable customers.

In each of these areas, we benefited from new investment initiatives as well as competitive market share gains.

However, this growth was offset by markets where our revenue declined.

Specifically, both our overall business in Europe and our US Satellite and Telco business declined relative to 2011.

In neither theater do we believe we lost market share.

Rather, we believe we gained market share in what were very challenging market conditions where customer spending slowed considerable in response to both macroeconomic uncertainty, which was the dominate dynamic in Europe.

And business cycles with the early adopter satellite market in particular now looking ahead to the next major investment cycle.

While we compete with many good companies across all of these markets, we believe our unique strategic focus, innovation engine, scale and video infrastructure provide us with a competitive edge that we've been successfully employing when up against both large big iron and small hotbox competitors.

Evidence of our growing competitive strength and market share gains during the year is documented by multimedia research group's recently published IPTV market report.

This is a well-respected annual report that found Harmonic has now become the global market share leader in video head-ins for IPTV.

And the only Company in the report to move up in the rankings.

And I'd also like to highlight Harmonic's strong cash generation during the year.

We generated approximately $71 million of cash from operations despite the challenging market environment.

With this cash, and our confidence in our ability to continue to win in the marketplace and to continue to generate more cash, we announced mid year an initial $25 million stock buyback program, we're not expanding by an additional $75 million.

Turning now to slide 6. Behind these 2012 headlines that I've just reviewed is what I believe to be very significant, although perhaps quiet strategic process, that has fundamentally repositioned the Company for future growth.

First, over the past 12 months, Harmonic has substantially strengthened and broadened its product opportunity in leadership emerging from a muddled competitive playing field, we believe we've become the market leader in video infrastructure technology for multiscreen and over-the-top applications.

We've also entered the new CCAP space which will enable us to access an incremental $2 billion annual market that is vitally important to our Cable customers.

And we've grown our Service and Support capabilities into both a key competitive differentiator and a key driver of revenue.

Second, over the past 12 months we've significantly expanded our global customer base and go to market capabilities.

Our expanded on the ground presence, expertise and know-how in both developed and emerging markets has been and will increasingly be key to enabling us to access new video infrastructure opportunities wherever they emerge.

And third, we've changed and bolstered our Management team and Board of Directors.

We've added experienced and accomplished new marketing and product management leadership to the Executive Management team.

And two new industry leaders with deep and relevant business experience in media, software and telecommunications have joined our Board of Directors.

So how do we leverage a stronger market and product position, Management team and Board?

Well turning now to slide 7, we see significant technology change and growing customer investment in front of us.

In particular, we see four major industry trends begin to gain momentum in 2013 and that will lead to significant waves of new investment in video infrastructure.

There's no news in the statement that video will be delivered over IP, but what is news and opportunity rich is the fact that IP-based video services are going to move into the realm of premium video quality and user experience.

Anyone who's spent time with the Apple retina display or seen the latest OLED TVs, noted Netflix about getting into ultra HD, understands that the future of IP video is about super high-quality video.

And this where Harmonic's reputation for superior video quality will be our greatest differentiation.

This is going to be an area of industry investment where Harmonic is uniquely focused and determined to drive growth across the full range of our Production and Playout and Video Processing product areas.

In the Cable environment, all this high-quality IP video will be delivered over a new generation of IP delivery infrastructure based on new CCAP technology.

Converting this more efficient to all IP delivery model will be a major initiative for global cable operators.

And market analysts tell us that this will grow into a $2 billion a year market.

Harmonic is making a major investment in building a leading technology position from which to attack this opportunity.

And turning back to the video itself, just yesterday it was announced that the ITU has approved the next-generation video codec for both high-definition and ultra high-definition video.

This new codec technology, called HEVC, offers the potential to half the bandwidth required in the current coded video stream.

Making it mission-critical technology for high-quality video delivered over bandwidth constraints, satellite, mobile, DSL and Internet networks.

Consequently, over the next several years, we'll see the world adopting this new technology as a replacement to currently deployed MPEG-2 and MPEG-4 AVC compression, driving a large scale and coding and Video Processing technology refresh cycle across our entire customer base.

We believe this broad upgrade cycle will begin to play out beginning in the second half of 2013 and we're continuing to invest in being prepared to capitalize on this really tremendous opportunity.

And lastly here, the recent CES show in Las Vegas made clear that a whole new level of consumer experience is coming in the form of ultra HD or 4K video.

I think anyone who saw the video displays in the Samsung booth, for example, was just blown away by this new display technology.

The result of the CES event is that the industry question I believe has changed from if ultra HD technology is real to when it will be deployed in volume.

Now the technology trends I'm highlighting here, volume deployment of ultra HD, is probably the furthest out.

But we already see signs of a race to deliver first services with glowing global focus on the 2014 World Cup for example.

Anyone who has followed Harmonic's business knows that the move from standard definition to high-definition technology drove and continues to drive internationally a huge cycle of mobile business growth.

And in ultra HD we see an analogous opportunity beginning to play out, which is really exciting.

So turning now to slide 8. With these major technology trends in front of us, what are our objectives in 2013?

First, we intend to continue to gain strategic market share across the markets we serve.

Second, we intend to increase the value of and premium leverage we gain from our global brand, which is strengthening with our increased executive focus on marketing and our growing global reputation for innovation and market leadership.

Third, we're positioning the Company for strong 2014 growth taking full advantage of the expected surge in industry investment and the technology transitions I just reviewed.

That is to move to high-quality, IP delivered video, video infrastructure replacement and expansion cycles based on the new HEVC and ultra-HD technologies.

And the cable industry's move to new CCAP infrastructure.

And finally, delivering shareholder value is central to our mission as we pursue these growth opportunities while continuously improving our operational execution and cash generation.

And given our strong cash position, our confidence in the growth opportunities in front of us and in our ability to execute on these opportunities, we're pleased to be in a position to substantially expand our share repurchase program.

And with that, Carolyn, I will turn the call back over to you for your remarks on the fourth quarter -- first quarter and the additional information on the buyback program.

Thank you, Patrick.

With that, we'll move to slide 9. Our net revenue for the fourth quarter was $133.4 million, 2% below last quarter and 7% below last year's fourth quarter.

Our bookings were $127.6 million, slightly lower than the third quarter.

However, we still had a book to bill ratio that was greater than 1 for the year.

Our non-GAAP gross margin improved to 53% this quarter from 48% in the previous quarter.

This brought our gross margin for the full year to 49%.

There are a number of factors that impacted our gross margin this quarter.

First, we had several million dollars of software revenue.

This ranged from a multi million dollar follow-on order for a software-only transcoding customer, two additional software licenses for the large EdgeQAM order we had in Q1, two additional software licenses for a large multiscreen implementation we did back in 2011.

A second factor impacting higher gross margin is product mix.

With a higher percentage of our revenue coming from Video Processing and Production and Playout products this quarter.

Lastly, we are seeing the results of the initiatives we implemented earlier this year, which include improved margins in our Service business and cost efficiencies in our operation.

Non-GAAP operating expenses for the fourth quarter of 2012 were $56.5 million, up 3% from the third quarter of 2012 and up 5% from the fourth quarter of 2011.

Our head count was 1,148, slightly down from the 1,155 at the end of the previous quarter.

The non-GAAP tax rate was 25%.

As a reminder, the fourth quarter tax rate does not reflect the renewal of the R&D tax credit which came into effect in early 2013.

Non-GAAP net income for the fourth quarter of 2012 was $10.8 million, or $0.09 per diluted share, compared with $8.1 million, or $0.07 per diluted share for the third quarter of 2012.

Turning to slide 10 and looking at our quarterly revenue and backlog more closely.

We see net revenue for the fourth quarter has slightly decreased from the third quarter of 2012 to $133.4 million.

Backlog and deferred also dropped slightly to $132 million this quarter from the third quarter but increased 6% from the $125 million in the fourth quarter of 2011.

The increase in backlog and deferred revenue from the prior year is principally a result of our growing professional services business.

As we begin to deliver solutions rather than products, our revenue recognition spreads out over the delivery period.

We ended the year with a few large multi-quarter projects that are currently underway.

The revenue for these projects will be recognized later in 2013.

Moving to slide 11, our international revenue represented 62% of total revenue in the fourth quarter compared to 58% in the third quarter and 57% in the same period of 2011.

We continue to see the growth in Asia, the Caribbean and Latin America and in other emerging markets.

For the fourth quarter, Video Processing represented 43% of revenue, an increase from last quarter by $7.7 million.

Production and Playout also increased from last quarter and represented 19% of our revenue this quarter.

Overall, Production and Playout had a much stronger second half and we are encouraged by the market reaction to our newest product, the new Spectrum ChannelPort.

As we indicated in our guidance last quarter, the Edge and Access business decreased from the third quarter of 2012 and from the fourth quarter of 2011 when it represented 22% of revenue to 21% of revenue this quarter.

This decrease was a result of the completion of a couple of large projects which began earlier in the year.

Services and Support stayed flat from last quarter but was up 7% from Q4 of '11 and represented 17% of revenue.

While I expected Services would actually decrease slightly in Q4, we completed more projects than we had anticipated.

We expect Service revenue to grow again in 2013, but we do expect that Service revenue will be seasonally down in Q1.

The Broadcast and Media market has recovered nicely, and this quarter it represented 35% of our revenue up from 30% in the third quarter of 2012.

Satellite and Telco has remained flat from last quarter and still represents 20% of our revenue.

Our Cable customers represented 45% of our revenue, a drop from last quarter revealing the reduction in Edge and Access as we completed those large projects.

No customer represented 10% of our revenue this quarter.

Now turning to slide 12.

You can see we continue to maintain a strong balance sheet.

We ended the quarter with a cash balance of $201.2 million, up from $192 million in the third quarter of 2012.

Our receivables balance was $85.9 million.

And our DSOs were 61 days, down from last quarter 63 days as we continue to execute on our receivables objective.

Inventory was $64.3 million, down slightly from the prior quarter.

As a result, our inventory turns were 3.9 times.

Capital expenditures for the fourth quarter were $2.7 million, and for the full year were $12.6 million.

Now moving to slide 13.

Over the last three quarters, we purchased 5.1 million shares at an average price of $4.43 per share for a total of $22.6 million.

We also generated an additional $39.3 million of cash in 2012.

Therefore, today we have announced an expanded share repurchase program of $75 million for a total of $100 million with the intent to return some of our cash to the shareholders.

We expect to make open market purchases over the next 18 months.

These expected repurchases will be funded from available working capital and are expected to reduce our number of shares outstanding.

Turning to slide 14.

As we look at the first quarter, we continue to experience a macroeconomic overhang in Europe while emerging markets continue to grow.

We also expect the customer investment cycle around Edge and Access to continue to be soft in the first part of the year.

And as I mentioned earlier, while our backlog and deferred revenue were up year over year, we have a few large projects that won't be recognized until the latter half of the year.

Therefore, we expect our net revenue to be in a range of $115 million to $125 million in the first quarter of 2013.

While we continue to maintain our policy of providing guidance for only the next quarter, we do want to highlight that there are several factors impacting Q1 which we don't consider to be indicative of the full year.

While we don't expect the same level of software sales in Q1, we do expect some of the margin improvements to continue.

Therefore, non-GAAP gross margin in the first quarter are expected to be in the range of 49% to 50%, and we have targeted our non-GAAP operating expenses for the first quarter to be $56 million to $57 million.

Finally, we anticipate our non-GAAP tax rate for 2013 to be in the range of 21% to 22% subject to our domestic versus international income split.

These rates do reflect the benefit of the R&D tax credit in 2013 but exclude the expected one-time benefit for the 2012 R&D tax credit which will be recorded in Q1 and is expected to be between $2 million and $3 million.

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

Well thanks, Carolyn.

In summary, during the fourth quarter we delivered our highest ever revenue from international markets and our highest ever gross margins against the backdrop of a slower customer spending worldwide.

These results reflect Harmonic's increasingly strong competitive position and expanding market share.

Looking ahead, as Carolyn just explained, our first-quarter outlook indicates we did not expect an immediate reversal of fourth-quarter macroeconomic and customer investment trends.

And we do expect 2013 to remain a mixed environment with more upside opportunity in the back half of the year.

However, as the recent CES event made clear, new waves of investment in video infrastructure surely coming.

Whether these ignite in the back half of 2013 or in 2014, Harmonic is in a strong position to take advantage of these transformational technology trends as they unfold.

We press our competitive advantage and continue to invest in new growth initiatives, including emerging market expansion, our new CCAP platform, new HEVC technology and new ultra-HD technology.

And finally here as we close off 2012, I want to thank all of our customers for their support during the year.

And I also want to thank our fantastic employees all over the globe for their energy, their tireless efforts and their many innovations.

And with that, we'll end the formal portion of the call and Carolyn and I would be pleased to answer any questions that you might have.

Thank you.

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

(Operator Instructions) Mark Sue, RBC Capital Markets.

It's good to see the gross margin improvement, would there be some lingering impact to the gross margin lift, understanding a lot of that was software mix near term?

Does the March quarter margin guidance mark the new bottom for gross margin and then will you improve on from there?

It seems like you're making a big focus to improve margins, I was trying to see underneath the mix of what might be sustainable.

Yes, good question, Mark.

So we certainly, as you point out, have had a focus on gross margin and Q1 guidance does indicate a general -- if you look at 2012 for the full year we are at $0.49.

We're guiding up from there, or flat to up from there.

And we do think over time the margins are going to continue to go up.

We are going to do more software sales.

We do think the mix shift that P&P can have over time will improve.

On the other hand, we're also predicting lower Edge and Access sales in Q1, which helped margins in that case.

So I don't want to say it's a bottom because in any one particular quarter, we could have a mix issue or an opportunity where we've sell a lot of equipment without a lot of license and then two or three quarters later those licenses are going to come again.

So I don't want to predict in a quarter it's a bottom, but we've begun to think about it on a trailing four-quarter basis, and we definitely think on an average four-quarter basis you should see it go up and to the right.

Got it, that's helpful.

And maybe a question for you, Patrick.

If I look at it from a high level and what's happening in the industry, your primary competitor has more than doubled it's size where they build acquisition.

Recognizing past deals such as Scopus and Omneon, and also the product improvements you've made this year so far, are there bolder strategic possibilities that you may consider in 2013 as you try to reaccelerate top line growth in addition to the margin improvements that you guys have made?

Perhaps any big picture thoughts on how you might approach the business differently this year?

Certainly, there's always opportunities and we've got our eye open on what's happening out there in the market.

But as I explained, the opportunities that we see most clearly that are quite significant around new video technologies and CCAP itself, that's all areas where we feel that we have not only good technology but the industry's best technology in-house.

So our prime focus right now is executing on the opportunities we see in front of us and with the innovation engine that we have in-house.

Certainly, that doesn't preclude us doing anything, but in this industry being fast is often more important than being big.

And having great technology usually trumps everything else.

And so our goal is to move fast, develop the industry's leading technology to go after CCAP, go after HEVC, go after IP video, go after ultra-HD.

And that's what we plan on doing, Mark.

Got it.

That's helpful.

Thank you and good luck.

James Kisner, Jefferies.

So first question on Europe.

Can you talk about what your expectations are for them?

It sounds like it's been stable for a while.

I get the impression you say it's been stabilized recently, perhaps in this quarter it was flattish sequentially.

Are you expecting another leg down in Q1 or is -- what's your thought on parts of Europe going forward?

We're -- we don't have a crystal ball out I guess.

From the short term, we expect no material change up or down from the past two quarters.

You're right, the situation was declining or deteriorating rapidly through the first half of the year and seemed to stabilize in the fourth quarter.

And we're cautiously optimistic that it will continue to stabilize, and we're hopeful that we'll see a rebound.

It's important also to remember that in Europe, as in the US, the first quarter is usually characterized by seasonality.

And so for that reason, initially difficult to read the tea leaves in terms of if and how the market may be recovering at this time.

Okay, fair enough.

I also wanted to dig a little bit on this EdgeQAM dynamic.

So clearly -- even looking at the last two quarters, adding them together, I know you had a strong Q3.

And I know you said they're a project finished, but it was a pretty weak second half for EdgeQAM in aggregate at $68 million.

I'm wondering, and it sounds like getting the first half it's going to be weak for EdgeQAMs as well, I'm wondering is this partially a wait for effect for CCAP or is there also potentially some cannibalization of IP based video and demand or perhaps Netflix's perhaps cannibalizing that revenue somewhat?

Could you talk a little bit about what you think is happening with the EdgeQAM business in more detail?

So we had a very strong, not only -- of course, we had a very strong first three quarters I think.

The business tailed off towards the end of the third quarter, and as we I think predicted on the call a quarter ago, it was soft in the fourth quarter.

This is a historic cycle, particularly around infrastructure in Cable.

You go on a -- you build a lot of infrastructure and then you use it and digest it, so to speak.

And then you get back to building it again.

So our short-term outlook in the first quarter is that we don't expect to see a tremendous or more spending in EdgeQAM immediately, but that's certainly not a prognosis for the basis of the year.

And the second part of your question, we think that QAM technology will continue to be vitally important to Cable for the foreseeable future.

As a reminder, when we sell QAMs, we are selling them not only for VOD applications but very often for modular CMTS applications.

So you highlighted Netflix.

Netflix traffic is something that drives capacity, it challenges in the Cable network and drives the need for more modulars CMTS QAM, so that's very positive.

Okay.

And last question --

One other thing, if I could.

You also mentioned CCAP in there.

I -- certainly, we see a product transition down the road.

But I do want to mention that over this past year, I think we've navigated very well a transition from our previous generation EdgeQAM to the HectoQAM technology.

So I -- you always have to be careful with product transitions but it's something I think we really went to school on and did fairly well on.

And so I think we feel well positioned to navigate that transition.

Great and one -- thank you for that, that's very helpful.

And one final to sneak in here.

On the year in general, I know you're not going to want to give guidance for the year but I think you alluded to that Q1 has some unusual factors.

I mean here we've got five sequential quarters -- or including this quarter you're guiding to of year-over-year declines.

Could you -- what do you think about the possibilities that CCAP ramps at some point in this year, that you could eventually grow revenues in 2013?

You commented about 2014 being the year you're positioning for growth, is this another year of muddling through an investment, is it possible you could grow this year?

And then that's it and I'll pass it.

It's definitely possible that we can grow this year.

I'd go further to say I'll tell you honestly, I'll be disappointed if we don't grow.

I'm confident to hear you say I do not believe it's not going to be another down year.

How much growth is -- opportunity is out there I think remains to be seen.

It's more clear based on the technology trends that are out there that '14 will be a strong growth year.

To the extent some of these things catch early and the market starts to move quicker, we can see -- we can definitely see a further upside in the back half of the current year.

Great, thanks very much, guys.

Simon Leopold, Raymond James.

A couple things, and maybe let's start off following up on the discussion about 2013 growth prospects.

It does sound as if with the slow start in Q1 that it's a backend loaded year.

Do you have the ability to give us some idea of what kind of split you're expecting between the first half and second half?

We don't have guidance or a forecast for the second half of the year.

And so we -- I don't have a-- we don't have a quantitative way of talking about that.

Okay and then maybe looking at this a different way.

Product mix, you made a number of comments regarding the potential for mix shift sounding I think pretty positive on Video Processing.

Certainly, more constructive on Playout and maybe I would say cautious on Edge and Access.

That's I think what I heard.

And then you explicitly said you expected Service revenue to grow in 2013.

So if you could maybe talk about what you expect in your mix in March and how you expect the mix to look for the full year, at least relative commentary of what grows the most versus what might grow the least?

Sure, I'll take a crack at that and Carolyn you can help me as appropriate.

The comments on mix were really oriented towards the first quarter, Simon.

And I think that the headline might be something like a continuation of what we saw in the fourth quarter.

We saw slower Edge and Access spending.

We definitely don't think that persists throughout 2013, so I think that's a key point.

I wouldn't over interpret anything to it.

A year ago, first quarter was a big Edge and Access investment cycle.

Second quarter was a big Edge and Access investment cycle.

It's not in the first quarter, therefore, we think that that will be lighter from a mix perspective.

And yes, we're encouraged by the strength that we see in Video Processing and in Production and Playout, as we mentioned I think a couple times we had a strong quarter in Production and Playout on the fourth quarter.

So the initial view on the first quarter is it looks somewhat similar to the fourth quarter.

And when you think about the full year, what do you see as the most promising segment?

It really depends on to what extent a couple of these things take off in the back half of the year.

And I don't mean to be evasive, but it's true.

We're very excited about CCAP, as I think you know.

We're not really sure how quickly that will take off and how quickly that will ramp in the back half of the year.

If that ramps, I think it'll be a very strong year for Edge.

On the other hand, we've already got good momentum in Video Processing and in coding, both traditional as well as in Media as we've discussed.

Later this HEVC stuff, if that starts to ramp quickly in the back end of the year, that can actually look quite positive.

And depending on if that ramps more or less than CCAP, I can see a couple of different mix scenarios.

So we're thinking about it.

I regret the ambiguity, but for us it's a little bit of a portfolio picture.

We see a number of opportunities out there.

We've got more than just irons in the fire, we've got real growth plans behind each of those.

And we're really waiting to see how they're going to accelerate.

Are there any metrics you can share on the CCAP progress, number of trials or something along those lines to help us frame the prospects?

Well, the primary metric today is the fact that we're in five separate Tier 1 customer labs.

And we think that's quite encouraging.

The longest of those we've been in in one form or another since back in the fall.

We're pleased to see the number of customers expanding, and we think that that number will continue to grow.

And we will continue to let you know any further information about first deployments.

And one last one, you had a press release beginning of the year concerning a shift in sales leadership and you yourself were I think managing sales in the interim.

Any update you can provide on prospects for a new hire?

Well, I received your resume, Simon, and it looks pretty good.

(laughter)

Quiet.

Let's take that off line, okay.

We've hired a -- we've got a top-tier search, a retain search ongoing with a real leader in the market.

And it's always difficult to forecast those things.

The good news for us is that we have very strong regional leaders of each of our theaters running our North America Cable and Telco business, et cetera, Asia-Pacific business, et cetera.

So rest assured that we -- that the business is in safe hands, the same people who have delivered these market share gains that we've been talking about over the past year.

On top of that though, we have a retain search ongoing.

We're seeing actually quite good resumes, and I'm very confident that we will bring on a world-class leader who will help the Company take yet another step forward strategically.

Great, thank you.

Greg Mesniaeff, Maxim Group.

In the discussion earlier about the Edge and Access business in the fourth quarter, it appears that at least based on what you said, the -- a lot of activity wound down in the fourth quarter that was ongoing earlier in the year.

And that now you -- the focus has shifted more to an upgrade for software and various upgrade activity to the installed base, is that right?

Yes, but let me rephrase it slightly, Greg.

So my question is, how does that affect your visibility in 2013 on that business as it has changed?

So I need to back up, I don't mean to suggest a permanent change in the business.

We had a big cycle the first half of last year of putting new hardware, new infrastructure out there into the market.

And we saw slowdown of new hardware, new iron into the market.

What we did see is a number of customers coming back and buying additional capacity licenses on top of that existing hardware.

Now this is the cycle we've been talking about with our -- particularly with our very dense QAM technology.

We expect that that cycle will continue.

We have quite a bit of latent or unlicensed capacity out there in the market and it's part of the beauty of the footprint that we've established today.

This is a strategy that we began with the HectoQAM technology and we'll certainly continue with our CCAP NSG Pro product.

But at the same time, I want to be clear that I don't think that the industry is done by any means putting new hardware out there.

I think we're actually in a couple quarter cycle where it's a little bit more digesting that new hardware infrastructure, utilizing that capacity, perhaps expanding it somewhat as needed with the software licenses.

I very much think that we're going to be back to during 2013 further expanding the infrastructure, more hardware buys.

A little bit to Caroline's comment, with the vagaries of margin behind that, as well as on an ongoing basis, licensing the capacity on that hardware that previously deployed as well as newly deployed hardware with these licenses.

So our visibility I would say overall has not changed dramatically, Greg.

We have a pretty good idea from our Cable customers of what they're going to do.

Sometimes exactly when it's a little bit tricky to gauge.

And hence, that's a little bit of the uncertainty about exact timing about the next big push in terms of Edge and Access spend.

We're confident they're going to spend.

We're confident they're going to spend more in 2013.

And I would say not big difference in visibility between the traditional hardware sales and license sales that layer on top of that hardware.

Got you.

And as a quick follow up to that, a lot of the discussion on the Edge and Access business centered around the EdgeQAM product line.

Can you give us any color or granularity on some of the other products within Edge and Access and how they trended in the quarter versus earlier in the year?

The EdgeQAM is the edge part of the Edge and Access.

The other part of the business is our HFC optical cable access business and that business continues to tick along quite nicely.

I think we're probably guilty of not talking about it as much, it doesn't have the same upside potential with EdgeQAM because of the -- there's no analogous CCAP opportunity that is out there.

We have announced a couple of exciting new products in that area, including a double density WDM transmitter, which I believe is the hottest product in the industry in that category.

But that part of the business, Greg, continues to tick along pretty steadily.

Good, I'm glad to hear that because you not mentioning it made me think that perhaps something wasn't going right there.

But thanks for that update.

You're welcome.

Thanks for asking.

Thanks.

(Operator Instructions) Amitabh Passi, UBS.

Thank you, this is actually Chelsea Shi on behalf of Amitabh.

So it's encouraging to see the international revenue get to a record level.

Curious, could you give us some more colors what kind of customer, especially new customer, you gain internationally?

Is that a mostly Tier 1 customer, or it's broad based?

And also what [sector] do you see most of the growth internationally?

And probably what type of margin profiles, especially aggregate margin profiles, comparing to the revenue from US?

Because typically we have a good (inaudible) for the US revenues, but for international, appreciate any colors from you.

Thanks.

Sure.

Well, I think very good question.

The rest -- well to us here in the US, it's the rest of the world.

The rest of the world is a big place and so it's always difficult I think to generalize.

And the truth is, we do business across a huge range of geographies and customers.

Everything from large operators in Western Europe that -- very much like a large service providers here, large telecoms or direct to home satellite operators, or the very large cable operators.

All the way to smaller providers.

And I was actually in Southeast Asia last week where we're doing some very interesting business.

For those local countries, we do business with the Tier 1s.

But a Tier 1 there is often very much smaller or in a much more nascent stage growth part of their business.

So in general, we're doing business with Tier 1 or Tier 2 across the geographies we address.

And it is really right across the customers we address.

Medium Broadcast, Cable, Satellite and Telco IPTV.

I would say relative to the US business, our international business is less Cable centric.

Cable outside of a couple markets like Japan and the UK is actually not as strong as it is here in the US.

So the Satellite, Telecom and Broadcast and Media component of our international business is much stronger proportionately of our international business than it is here domestically.

Interesting.

So it sounds like the margin is more like say either comparable maybe over time could be even higher than in US, is that--

You've got two different dynamics which pull in opposite directions.

So right now we see a pretty broad basket, honestly.

Some of our highest margin business is indeed in international markets where we're delivering very high value products solutions and technology, and our customers well appreciate that.

And as you point out, on a proportionate basis, our Video Processing, our Production and Playout business is actually proportionally stronger overseas than it is in the US.

And those were our highest margin products.

On the other hand, particularly in some emerging markets, you often see quite intense price competition.

Even if that price competition is among so-called western competitors.

And so I'll also will acknowledge that sometimes we see some of our lower margin deals overseas where you see very acute competitive dynamics playing out over what, for lack of a better term, is beach front property in a really fast growing or emerging market.

A place like India comes to mind, which has a booming media sector, has a big change that's happening in the regulatory environment encouraging the growth of pay TV.

Pretty fast approaching transition to digital television.

A lot of dynamics, which make an extremely attractive market.

And hence, it's a very competitive market.

And in that market, just as an example, we're dealing with Tier 1 broadcasters, media companies, satellite companies, telcos as well as a couple of cable operators.

I'd say the business is dominated by our Broadcast Media and Satellite business there, and we see a range of gross margin profiles.

Got you.

Yes, really appreciate the color.

And a quick follow up, the ultra high definition.

I think there is a lot of excitement during the CES, but trying to get your opinion, how real do you think the uptrend is especially for 2013, or it's more like 2014 opportunities?

I think the volume opportunity -- it's a good question, I think the volume opportunity around ultra-HD is more of a 2014 opportunity.

All of the major technology trends that we talked about, CCAP, HEVC and coding, move to higher quality IP video, I think that ultra-HD is probably the furthest out.

But I don't want to say it's too far out.

There's a lot of interest and excitement even outside of the US about for instance adopting the technology for the World Cup in 2014.

So I think that, including my own, I think that what happened at CES changed a lot of minds about the value.

I think a lot of people went in thinking well this is another 3-D maybe a flash in the pan or a very narrow niche.

And really when you saw these displays and realized you can have this immersive experience without any glasses or headache or any of that stuff.

Right, right, definitely.

I think people really understood, this is powerful.

This is what's going to come next.

And it's really starting to move.

So our view right now is that it's more of a 2014 ramp.

I think you can see some early stuff in the back end of this year.

But really we're thinking about it as a 2014 and 2015 significant growth driver.

Yes, got you.

Cool, thank you.

That's all the time we have today.

I will turn the call to Mr. Harshman for closing comments.

Okay well thank you very much, again, everyone, for participating in our call today.

We believe we've made significant strategic as well as operational progress while facing a mixed customer spending and macroeconomic environment.

We're very focused on strengthening our position in the market and taking advantage of these truly exciting opportunities which we believe are in front of us.

All the while being mindful of improving our operational execution in the near term.

With that, I'd like to say we look forward to speaking with you all again on next quarter's call.

Thank you again.

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

Thank you all for participating.

You may now disconnect.