Harmonic Inc (HLIT) 2013 Q2 法說會逐字稿

Welcome to the second-quarter 2013 Harmonic earnings conference call.

My name is Ellen 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.

Ms. Aver, you may begin.

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 second-quarter earnings call button.

I have just gotten notice that those slides are not yet up.

But we expect them to be up momentarily, so stay tuned for that.

Now, turning to slide 2 in the presentation, let me remind you that during this call we will provide projections and other forward-looking statements regarding future events or the future financial performance of the Company.

We must caution you that such statements are only current expectations, and that actual events or results may differ materially.

We refer you to documents that Harmonic files with the SEC, including our most recent 10-Q report, and the forward-looking 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 today.

Now, turning to our slide 3. Today we reported our results for the second quarter of 2013, which reflect a return to the business trajectory we expected coming into the year.

All the numbers I'll discuss here exclude the Access operations, which were divested during the first quarter.

Revenue was $117.1 million.

Business from our international customers contributed 53%, and reflected continued strength of international markets, together with some market vertical strength in our domestic business.

Broadcast and media customers represented 40% of revenue this quarter; while cable customers represented 36%; and satellite, direct to home, and telco customers contributed 24% of revenue.

We were pleased to be able to outperform the guidance we provided coming into the quarter, as we were coming off a slow start to the year.

We did signal that late first-quarter demand had continued into April, and we saw that continue through all of the second quarter.

Our second-quarter bookings of $126.3 million, again, significantly exceeded revenues in the quarter, driven in particular by continuing improvement in the Europe, Middle East, and Africa region and strong performance and Latin America.

Also, our broadcast to media market, where the Omneon acquisition first gave us a solid position, continue to be strong and notably drove progress in our domestic business; while aggregate demand from US Pay-TV service providers continue to be soft.

The net positive book-to-bill ratio drove an increase in backlog in deferred revenue to $132.5 million.

The increasing backlog is a continuing reflection of our strategic role with our customers as we move to more projects and increase professional services.

Turning now to operating performance, gross margins for the quarter were a strong 54%.

This reflects an increase from historical run rate margins due to the divestiture of the Access business in the first quarter; a mix shift to more profitable products; and some high-margin software-centric deals, such as we saw in the fourth quarter of last year.

Non-GAAP earnings were $0.05 per share, and cash from operations were just under $25 million in the quarter.

And Carolyn will provide additional details on these operating results in just a few minutes.

Turning now to slide 4, I'll provide a little bit more color on the quarter.

As I said already, the momentum we saw in February and March, after very slow January, did continue throughout Q2.

In fact, we saw better linearity throughout the quarter than we've seen for some time.

The second quarter also saw the percentage of domestic business increase, with particular strength from the broadcast and media market, driving our product mix towards higher-margin video processing and production and playout products.

Harmonic inroads into this segment really began in earnest with the acquisition of Omneon, 2.5 years ago, and this quarter saw several deals where our complete solution resonated with these customers.

Cross-selling across historical Harmonic, Omneon, and Scopus products was really notable this quarter.

Internationally, Europe continued to demonstrate recovery, and general visibility improved.

On the other hand, as we saw in the fourth quarter of last year and the first quarter of this year, business from US Pay-TV service providers continue to be soft.

However, video processing products did sell relatively well in this market in the quarter.

And we estimate that we gained market share versus key video competitors.

And we've said that these domestic Pay-TV customers are looking ahead to new technologies for service and/or efficiency differentiation.

And this quarter, we saw positive progress in this regard, particularly around our new CCAP platform, which I'll describe further in a few minutes.

Turning now to slide 5, and stepping back to the big picture, I want to return to the construct that we discussed last quarter in regard to our focus on turning our market success and financial progress into shareholder value.

Specifically, we outlined what we called our value creation agenda to provide more focus and clarity on our shareholder value efforts with three elements.

The first element is our strategic growth plan, which centers on our intent to capitalize on upcoming technology refresh cycles in each of our core markets, and to expand our customer base in our international, Pay-TV, and global broadcasting media companies.

The second element of the value creation agenda is our continued focus on cash generation and capital structure optimization.

And the third element is our corporate governance and executive management initiatives.

What I'll do here now is provide an update on our progress in each of these three areas.

So, let's turn to slide 6 now to review our progress in the technology transition areas targeted by our strategic growth plan.

The first of these is CCAP, the converged cable access platform, a specification developed by the cable industry to converge premium video delivery and high-speed data platforms, today deployed separately into a unified solution.

You may recall that in the fourth quarter of last year, Harmonic, already the leader in the EdgeQAM market, announced our intent to compete in this new, much larger, CCAP market with the launch of our new NSG Pro platform.

We said then that we would start with a CCAP-compliant platform and downstream QAM line cards that uniquely enable full spectrum, converged downstream video and data services; which is really important, as it will enable several of our customers to efficiently accelerate expansion and convergence of their broadband Internet and next-generation on-demand video services, services such as cloud DVR.

The rollout of this system will be followed by a Phase 2 introduction of upstream line cards that enable these already deployed NSG Pro platforms to evolve to full two-way CMTS functionality.

Initial market reaction to this architecture was quite positive.

And in the fourth quarter, we disclosed that we were in several customer trials.

And then in the first quarter, we said that we expected our first booking and shipment of the new platform in the second quarter.

Well, I'm very pleased to tell you that in the second quarter we did receive our first order and we did ship our first product.

And we expect growing demand for this new platform in the third, fourth quarters, and into 2014.

Although we have much work still ahead of us, I believe our significant progress demonstrates both our determination and our ability to be a significant player in this evolving CCAP market.

Now, the second targeted technology refresh cycle is in video compression.

We've discussed HEVC, or high-efficiency video coding, as the next generation of compression technology for video processing business, based on the new H.265 standard.

You may recall that HEVC offers compelling bandwidth savings for software-based mobile devices.

But for legacy televisions, it will require upgrades in the network and in the home, meaning that its adoption will be a gradual process.

At NAB in April, we announced and demonstrated our first HEVC products to very positive market response.

And we remain firmly on track to ship market-leading HEVC on our ProMedia platform in the current quarter.

As a side note, at the same time, I also want to mention that we're driving continuously for innovative improvements to today's AVC or H.264, as well as MPEG-2 encoding techniques, which can bring significant network efficiency benefits to our customers without requiring replacement of legacy set-top boxes.

Our third major technology cycle or initiative is around Ultra HD, also known as 4K with minor technical differences.

And we've seen this technology also continue to gain market momentum.

From the hype at CES in January came more reality at NAB in April.

And the market has continued to move quickly with production environments transitioning, Pay-TV operators looking to offer new channels for sports and home cinematic experience, and consumer electronics vendors already driving down prices.

For example, Asian brand Seiki today offers a 50-inch Ultra HD TV for just $966; and a 39-inch for $699; with low-cost 55- and 65-inch models coming soon.

Again, at NAB, we announced and demonstrated our first Ultra HD capability, encoded with HEVC on our ProMedia platform.

And we have since showcased industry first HEVC Ultra HD transmissions with several customers, which I'll describe for you here in just a moment.

But first let me review our fourth targeted technology cycle, that of over-the-top and multiscreen IP video, which represent the next generation of capabilities for and beyond the television.

For traditional Pay-TV operators, also broadcast and media companies, as well as new media companies looking for new delivery channels and revenue streams.

Now, monetization and business model challenges have continued to impede faster growth.

But we've discussed our market and technology leadership on several of our recent calls, highlighting that multiscreen is often an adjunct feature to linear television offering.

And this was demonstrated again in the second quarter by our announcement that Eutelsat's KabelKiosk deployed a Harmonic ultradense head end solution supporting up to 50 high definition; 100 standard definition channels; plus multiscreen capability.

During the second quarter, we also announced a multiscreen trial with Virgin Media using the latest MPEG-DASH standard.

And for our customers more focused on content libraries than linear TV channels and live content, we announced in the second quarter that our ProMedia Carbon multiscreen transcoder now supports the latest media formats and presets optimized specifically for Netflix.

So, let's move now to slide 7, which underlines our early leadership in HEVC and Ultra HD.

And what I'd like to do here is highlight several joint customer demonstrations carried out in the past quarter.

In April, leading European satellite operator SES teamed with Harmonic and Broadcom to demonstrate what it described as the first HEVC and Ultra HD transmission over satellite.

Harmonic supported a similar demo in May for a Tier 1 European cable MSO.

And in June, we were the HEVC and Ultra HD encoding technology provider behind a high definition -- excuse me, a high-profile demonstration of Ultra HD cinema content carried out by a Tier 1 US operator.

And I think it's really interesting to note that while satellite operators initially led the high definition deployment wave, in this emerging Ultra HD space, we're seeing equal levels of interest and determination not to be late to the market across our cable, telco, and satellite customer base.

Turning now to slide 8, let's go back to the second element of our strategic growth plan, our progress in expanding our global customer base.

International Pay-TV operators continue to represent a significant opportunity, as their subscriber base is growing significantly.

And we continue to see good growth potential and new customer wins in the Asia-Pacific region.

And, very positively, in the second quarter, we have seen our EMEA business continue to recover, and we have seen strong demand in Latin America.

Similarly, we've seen progress with broadcast and media companies globally, as with content proliferating and their route to consumer options expanding, they represent a large and growing opportunity for us.

Here, the Harmonic functional collapse strategy is playing out, with our new Spectrum ChannelPort solution delivered over the last year and updated at the recent NAB show, and gaining real market traction.

This quarter saw a big competitive win with a new account, taking us to significant projects now in three of the top five US media companies so far this year.

Again, this is the market where the synergy of the Harmonic and video delivery solution plays out best, with key deals leveraging products that originated in the legacy Harmonic, acquired Scopus, and acquired Omneon stables.

For example, one leading broadcaster now leverages Harmonic from storage for editing to channel playout to encoding and transcoding across its affiliate distribution network.

And finally here, while the US Pay-TV operator market has, of late, represented a challenging space for us due to where they are in technology cycles, it's important to remember that the levels of consumer penetration and high RPUs mean that they will always have tremendous buying power.

And as we mentioned earlier, this was an improved quarter for video processing product in this market, where we also make solid strategic progress with our CCAP initiative.

Further, we anticipate HEVC and Ultra HD leadership can spur new demand in existing accounts.

We're also creating opportunity for engagement with currently unpenetrated US service providers.

Okay, turning now to slide 9, let's transition from our growth strategy and talk about the second element of our value creation agenda, the optimization of our capital structure.

Approximately 15 months ago, we announced and commenced an aggressive buyback program that has resulted in the cumulative repurchase of over 20 million shares at an average price of $5.73.

Complementing our open market repurchase of about 8.8 million shares at an average price of $5.03 a share, early in the second quarter we announced a tender offer for accelerated repurchasing of up to $100 million worth of shares.

The result was that we were able to purchase just under $75 million of shares at $6.25 a share, further reducing our share count by approximately 12 million shares.

And beyond the clear success of this program to date, we take the offer not being completely subscribed as a vote of confidence in our strategy and our ability to execute.

Looking ahead, with our focus on strategic execution and earnings growth in mind, our Board has authorized the continuation and expansion of this buyback program, with a total of $100 million authorized and available to repurchase shares going forward.

On slide 10 now, let's look at the third element of our value creation agenda, which is our ongoing commitment to strong corporate governance and world-class executive management.

In June, George Stromeyer joined Harmonic as Senior Vice President of Worldwide Sales.

George came to us from Cisco, where he recently ran their $2 billion information security sales effort.

Clearly, George brings a strong track record of growth to our business, as he also previously led Cisco's European Pay-TV service provider sales, and served as managing director of Scientific Atlanta's successful Latin American business.

And I'll remind you that George is the third new addition to our executive management team over the past year, joining Peter Alexander, our Chief Marketing Officer, who also joined us from Cisco; and Kris Padmanabhan, who heads Video Product Management, and joined us from NetApp.

In aggregate, with these executive appointments, Harmonic's go-to-market capability is now stronger than it's ever been.

And finally on the governance front, our Board has nominated a strong slate of seven directors committed to shareholder value.

And our annual meeting is scheduled for August 14.

So, in summary, the second quarter was a strong quarter for Harmonic, and a welcome return to the trajectory we had envisaged going into the year.

Most of our cylinders were firing as we made improvements in the business model, operations, management, and strategic position of the Company.

Our commitment to turning this progress into value for our shareholders remains top of our agenda.

And with that, Carolyn, I will pass the call back over to you.

Thank you, Patrick.

Okay, let's move to slide 11.

As Patrick mentioned, we completed the sale of the Access HFC business on March 5. Accordingly, we have shown that business in the discontinued operations section of our P&L for all periods presented.

Our net revenue for the second quarter, as Patrick said, was $117.1 million, compared with $101.7 million for the first quarter of 2013, and $122.1 million in the second quarter of 2012.

The results this quarter, as Patrick mentioned, were driven by the strength in our video processing products across all markets.

Our bookings were $126.3 million, higher than the first-quarter bookings of $110.1 million, providing a 1.08 book-to-bill ratio.

Backlog and deferred revenue was $132.5 million at the end of Q2, compared to $126.3 million at the end of Q1.

Our non-GAAP gross margin was 54% this quarter, an increase from 51% in the previous quarter; also an increase from 50% in the second quarter of 2012.

The improvement in gross margin this quarter is principally due to the product mix shift to greater video processing revenue; and, in part, due to higher product margins, particularly in Cable Edge, due to additional software licenses sold on existing hardware platforms.

Non-GAAP operating expenses for this quarter were $56.1 million, up from $55.2 million in the first quarter of 2013, and up from $52.4 million in the second quarter of 2012.

The increase in operating expenses was due to costs related to bringing our new products to market, as well as increased costs related to litigation.

Our headcount was 1078, slightly down from 1096 at the end of the previous quarter, and 1080 at the end of the second quarter of 2012.

Non-GAAP net income from continuing operations for this quarter was $5.6 million or $0.05 per diluted share, compared to a net loss of $2.7 million or $0.02 per diluted share in the prior quarter, and net income of $6.5 million or $0.06 per diluted share for the second quarter of 2012.

Moving to slide 12, our international revenue represented 53% of total revenue this quarter, compared to 58% in the first quarter of 2013, and 54% for the same period in 2012.

While our international revenues grew in absolute dollars, the biggest growth in dollars came from the US; strongest in broadcast and media, but also in telco, satellite, and cable.

Video processing represented 53% of revenue, up from 49% in the second quarter of 2012.

Production and playout represented 19% of revenue this quarter, compared to 17% for the same quarter last year.

Cable Edge represented 11% of revenue, compared to 19% in the same quarter last year.

It is worth noting that in this quarter last year we had higher Edge revenue but lower gross margin, as we sold more of the hardware platform, or the razors.

This quarter, we sold more software licenses into that equipment, or the razor blades, which resulted in lower revenue dollars but higher gross margin.

Service and support revenue was roughly the same this quarter compared to the same period last year, representing 17% and 15% of revenue, respectively.

The broadcast and media market represented 40% of revenue, up from 33% in the second quarter of 2012.

This increase is due to the continuing success of cross-selling our video products from both Harmonic and Scopus into this customer base.

Our cable market revenues represented 36% of our revenue, down from 44% in the same quarter last year.

And we believe those revenues will increase back to the historical range as our NSG Pro comes to market.

Our satellite and telco revenues are roughly the same size this quarter as compared to this quarter last year, representing 24% and 23% of revenue, respectively.

Our largest customer for the second quarter of 2013 was Comcast, at 11% of revenue.

No customer represented more than 10% of revenue in the first quarter.

Now, turning to slide 13, you can see we continue to maintain a very strong balance sheet.

We ended the quarter with a cash balance of $161.7 million, down $66.6 million from the previous quarter, reflecting approximately $86 million of cash used in the tender offer and the share repurchase program, offset by approximately $24.8 million of cash generated from operations during the quarter.

Our receivables balance was $86.2 million, and our DSOs were 67 days, down from last quarter's 76 days.

The decrease in DSOs is due to better linearity within the quarter.

Inventory was $44.4 million, down $2 million from the prior quarter.

As a result, our inventory turns were 4.8 times.

Capital expenditures for the second quarter were $4.5 million.

Moving to slide 14, I'd like to update you on our share repurchase activities.

During the second quarter, we had open market purchases of 1.8 million shares at an average price of $5.85 per share, for a total of $10.7 million.

In addition, our tender offer closed on May 24, and we purchased 12 million shares for $74.9 million, or $6.25 per share.

This resulted in our shares outstanding on June 30 being approximately 101 million.

As Patrick mentioned, our Board increased the authorized share repurchase with an additional $85 million, bringing our shared -- bringing the amount available to repurchase to approximately $100 million.

Turning to slide 15, as we look into the third quarter, we continue to monitor our customers' investment cycle around the Edge and encoding business for US service providers, given the new products that are coming later this year and next.

However, we are cautiously optimistic about our international business and our domestic broadcast and media business.

Additionally, we enter the quarter with $132.4 million of backlog and deferred revenue.

We expect some project revenue that was previously booked may be recognized this quarter.

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

Our non-GAAP gross margin in the third quarter is expected to be in the range of 50% to 51%.

This range takes into consideration the additional project revenue which may be recognized in Q3, as well as the potential of recognizing the first revenue from our NSG Pro product, which is our CCAP-enabled product.

We have targeted our non-GAAP operating expenses for the third quarter to be $54.5 million to $55.5 million.

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

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

Okay.

Well, thanks, Carolyn.

So, summarizing here, during the second quarter we returned to our expected quarterly revenue trajectory while exceeding our gross margin target.

These results reflect Harmonic's increasingly strong competitive position and ability to expand market share profitably in a highly competitive environment.

Our positive momentum also reflects our customers' confidence in Harmonic and our capacity to continue to deliver industry-leading innovation, support, and business partnership.

Looking ahead, while we clearly have work to do, we feel positive about the future opportunities for the Company and its shareholders.

And we believe our value creation agenda -- that is our growth strategy and the associated coming technology transitions, our expanded global customer base, and our focus on cash flow and capital structure -- focus us on the key elements for success.

And with that, we will end the formal part of the call, and open it up to questions.

(Operator Instructions).

Simon Leopold, Raymond James.

Hi, guys.

This is Victor Chiu in for Simon Leopold.

I just wanted to just first to drive into what drove the upside in the broadcast and media sales for video processing, because that was a bit of a surprise.

What was the upside versus your expectation for the quarter?

And what's driving your confidence that you'll see this trend continue?

A couple of very significant competitive wins, Victor -- which I think in different cases, the sharp end of the spear was a little different from a product perspective.

But the common theme is is that we are increasingly being able to leverage the breadth of the product offering.

As I mentioned, the historic Omneon products were really home base in many of the broadcast accounts.

And what's nice is, whether it's a new opportunity for a refresh of the historic Omneon products, now called our production playout products; or whether it's a new video distribution opportunity, I think our customers are looking at the breath of what we're doing, at some of the innovative ideas.

The fact that we can really stitch together more end-to-end solutions, as well as the forward-looking aspect of the -- of where we're headed from an innovation point of view.

And it's really carrying the day.

So we're excited by the competitive momentum and the fact that, with these deals, we're able to make them effectively larger by bringing in a broader cross-section of our portfolio; again, across the historic Harmonic, Omneon -- and, in fact, Scopus businesses.

The domestic business was kind of the weak link last quarter.

But it seemed like this quarter that was better and helped the results.

Can you speak to that change?

It's really back to the point we just discussed.

The real uptick was in particular with the domestic broadcast accounts.

And I think some of that is just project timing.

A couple of these deals we've been working on for some time.

We saw a couple of big deals turn.

We were able to recognize revenue on a couple of other deals.

As I mentioned, the Pay-TV service provider environment was still somewhat soft for us.

But the good news was, is that we're still able to deliver strong sequential growth on the basis of really this expanded customer base that we've been slowly and steadily building for ourselves in the domestic market.

Last quarter, I also am just looking back, you also mentioned that there was some revenue recognition changes and possibly some push out of sales from last quarter.

Was that a factor in the results for this quarter?

No.

Perhaps what you're referring to is that we had some big projects that we said were going to be recognized in the latter part of this year.

So that didn't really impact Q2.

It is part of what is influencing our guidance for Q3.

Okay, got it.

And just lastly, really quickly, just a little bit of color around the gross margins, because that was -- I think that's the highest gross margins in quite a while, despite the mix that you've mentioned.

So maybe just some of the puts and takes around what was the driver behind the upside there.

Sure.

In fact, in Q4, we also had gross margins in the mid-50s.

So this is the second quarter out of three that our gross margins have popped up.

Look, if you think of us traditionally as a 50% gross margin company or traditionally -- let's say in the last couple years -- obviously we started in the 40s and have moved up.

We certainly expected, with the sale of the Access business, that that low 50% would move to, call it, 52% or 53%.

And for some time, we've targeted the mid-50s as the place we want to go.

I don't think this says we're there yet.

I think it shows that when we do well in video processing and P&P, those are definitely our highest gross margin products.

And that has a big influence on how our margins come out.

Also, as more and more of our products have more of the software component, and we get to quarters where we're delivering a lot of licenses, that as well has a big impact on the margins.

I think they are really signs of where we think will go over the next few years, and feel good.

So I think we'll have more quarters like this, where we have some upside because of the mix.

In Q3, I've guided conservatively, because we have some of these big projects that have some lower margin components to it.

And, certainly, as we begin to ship the NSG product, we're going to be back to the razors again.

So we're going to be back to shipping a platform upon which -- for, actually, several years -- we'll be adding components with higher margins.

So, it will be a mix.

But we're definitely moving in the direction that we've been executing against and planning for.

Thank you.

James Kisner, Jefferies LLC.

Hi.

Thanks for taking my questions, and congratulations on the nice quarter.

Just to drill down back in video processing a little bit, what would you say about the software mix within video processing?

I know you've been pushing a lot harder on the ProMedia platform for HEVC.

Was there also some software mix improvement within the video processing business in addition to the Edge business?

Yes.

That's interesting.

Okay.

And I'm just wondering, it looks to me, if I just do some rough math here, that you were up about -- if you look at video processing, ex-cable, you can back into that.

You were up something like $10 million sequentially.

And I was wondering what the deal size is starting to look like around some of these broadcast and media players.

Are there guys -- I don't want to name names -- but, for example, like an ESPN or something that might come in and buy $5 million worth of a product?

And also I'm just curious, are these driven more just by new channels, or is it driven more by their own over-the-top Web offerings?

Any more a color on this broadcasting media piece.

Sure.

So, first, James, the deal size is growing that we're being exposed to.

And I think it's a combination of a couple of things.

I think us -- it's just getting closer, strategically, to these companies, so we have a better insight into really where they're going strategically.

And it's becoming more of a partnership.

I think that's one aspect of it.

The other aspect is is that -- for us, technologically, and with our salesforce -- the broader solution set is starting to click together.

So we're doing a better job of executing frankly on what the strategy all along was, which is coming to market with a broader portfolio that can solve a broader end-to-end problem.

And the third thing -- which you just alluded to -- is it's an interesting time in the market.

We see customers doing two things; one, going back to existing infrastructure and trying to reengineer it to be more efficient; and also to reengineer it to open up new revenue streams.

Multiscreen is an interesting component of several of these deals.

And as I alluded to in my prepared remarks, one of the interesting dynamics we're seeing is we're starting to see -- I don't want to say fewer stand-alone, but perhaps the more interesting multiscreen opportunities for us are actually just a component of a broader opportunity, associated with a new buildout, a new service vision, that spans both traditional and new media delivery.

And the last thing I would say is just competitively -- we definitely compete against some good companies.

But I think in our customers' eyes, particularly in broadcast and media, they look at us and we look, I think, more stable.

We're clearly highly focused in investing in this video arena.

And I think they're impressed with the level of innovation, the level of service and support we're providing to the market.

And so I think that there's a little bit of competitive wind at our back as well there.

That's great.

I guess relatedly, this has been a home run for you from the standpoint of selling -- and you said this in the past -- the selling video processing into that broadcast and media base.

But, again, production and playout itself is just sort of hanging in there.

And I'm just wondering, what do you think about that business?

Is that something that we should just expect as a modest grower?

Is it a flat business?

I'm assuming it's not a declining business, longer-term.

But what do you think?

That piece just seems to kind of sit around $20 million.

How should we model that?

So, it hasn't, heretofore, grown the way we would like, but we actually do see it as a grower.

And as much as you think about Ultra HD, for example, in the context of delivery to the consumer, actually the place where Ultra HD technology is going to happen first is more in that production and playout environment.

So there is an example of one of these trends that we're talking about playing out right across the value chain.

And so we do see a number of significant catalysts for that business, and above and beyond being an entry point for the broader offering there.

So we remain quite optimistic and confident in that business.

The ChannelPort product that I mentioned in my prepared remarks has really established itself as the leading playout server, I think, in the market.

We're definitely seeing an upward trend on that particular product.

And I think the technology as well as the brand value is growing.

So it has taken us a little while, I'll admit, to get everything to click together.

And I don't want to say it's just the hockey stick from here, James.

But we do feel as though the broader offering for broadcasting media, including those production and playout products, are starting to get on firmer ground for consistent growth.

That's great.

And just one more, if I might.

In general, obviously your first offering of HEVC is software-based.

And do you think maybe -- is it getting more clear that the HEVC upgrade cycle will be more of a software driven cycle?

If you had to guess, perhaps is 70% of that going to be software; and perhaps we should be more focused on bottom-line than topline growth, just given that?

Or are you feeling pretty confident there's going to be a pretty the reasonably large hardware-based upgrade cycle as well for HEVC?

I think it's a good question, James.

We don't have a perfect crystal ball, but there's no doubt that it's software initially.

And then probably over time, the software mix will be greater than it has been for the historic encoding technologies.

So I think you're right -- the bottom-line impact is relatively greater than the bump that we saw from prior technology waves.

The reality is, in the short-term, there simply aren't the ASICs out there.

So the aggressive and first work that's happening now, in general, is on more general-purpose processors.

All right.

Thanks a lot.

I'll pass it.

Thank you.

(Operator Instructions).

Amitabh Passi, UBS.

Hi, this is Jim Hillier dialing in for Amitabh.

If I look at the cable business, it looks like it was down year-over-year.

You did talk about US Pay-TV demand remaining somewhat soft.

Could you elaborate on what you're seeing in the marketplace overall?

Sure.

Historically, our big domestic service provider customers are, each in their own right, are historically quite cyclical in terms of big waves.

A big push on the upgrade to digital video, MPEG-2 to MPEG-4, standard definition to HD.

And we've been clear that there is, I think, a little bit of anticipation in the market right now for what those next big waves are going to be.

There's a lot of looking forward to this Ultra HD.

In the cable space in particular, there's a lot of looking forward to CCAP.

And while we think that those are going to be significant, incremental growth drivers for us in the domestic business, there's a little bit of a waiting for that to happen in the big way with the domestic service providers.

That being said, there is certainly ongoing business.

In this past quarter, we had what I would characterize as a decent quarter with service providers, particularly around encoding and transcoding, for a variety of services -- high-end HD upgrades; transcoding.

And we have been, I think, competitively moving nimbly and taking advantage of, I think, good competitive opportunities.

Now if you look more deeply at -- if you cross-correlate the numbers you just cited, also, with our product breakdowns, you'll see that the major step down relative to a year ago is actually in the Edge product line.

And there, there is a couple of things playing out.

First, we do think that the market is softer just cyclically in terms of our overall Edge demand.

That's number one.

Number two, we do believe that some of our customers are looking ahead to this new NSG Pro CCAP platform.

And that has kind of put a little bit of a damper on Edge sales.

And number three, as Carolyn outlined in her comments, of the revenue we saw, a somewhat higher percentage was actually software licenses, QAM licenses, that we've sold.

And those come with quite a good bottom-line impact, but a smaller topline impact.

And so that also has the appearance of compressing -- well, not the appearance, it actually compresses the top line.

So those three things together conspire to make this a particularly soft quarter in the Edge.

I want to emphasize that we think we've not lost a step competitively.

And, as we said, we expect that demand to bounce back, particularly as we get the new NSG Pro really out there in the market.

Okay, got it.

Thank you very much.

And also in terms of OpEx, in looking at your guidance, it appears to be coming down in the third quarter, despite the somewhat higher revenue outlook.

Can you discuss what's driving that, and ultimately where you see OpEx trending as a percentage of sales?

Sure.

So, as I mentioned in my remarks about Q2, we had a couple of non-headcount-related costs that impacted this quarter.

One of those is costs related to these new technologies that Patrick talked about, that -- whether it's prototypes and early demo units, or a variety of things.

That won't continue -- some of it will continue for the next couple quarters, but over time that comes back down again.

Secondly, we have some litigation costs resulting from a lawsuit that we've been in.

And this was a particularly expensive quarter, and that particular activity is related to that lawsuit.

Again, we expect that to come down again next quarter.

So I think those two things in general just as it relates to guidance are what's driving our guidance.

On an overall basis, we haven't given a target of OpEx to revenue.

But as we focus on getting our gross margins up, we are equally focused on managing our OpEx, so that we can ultimately deliver an operating margin that we think is appropriate for this size of business.

So I'm not quite ready to give you a target yet, but I would say it's an area that we think will continue to improve.

We don't think we'll go up from here, certainly; and we're looking to continue to drive focus around how we bring that more and more in line.

Okay.

Thank you.

Kiera Kilkowski, Bank of America Merrill Lynch.

Hi, guys.

Thanks for taking my questions.

Just a few quick ones for me.

First, you spoke about it a little bit in your script, that you said that demand was improving in Europe a little bit this quarter.

I was wondering if you could talk about if that was product-specific, or a little bit more across the board?

Second, if you could give us some color within your international revenue, how much of that is from developed versus developing?

And I just have a follow-up when you're done.

Sure.

The strength, or the return to strength, that we're seeing in Europe is really right across our products, so it's not product-specific.

And, in fact, it's across different customer categories, as well.

So I would characterize it as broad.

And regarding emerging versus developed international markets, in this past quarter it's a little bit of both.

I also mentioned we had a particularly strong quarter and we have a good pipeline in Latin America.

And so I would definitely characterize that as continuing success that we're seeing in developed markets.

More generally, on past calls, I've talked about growing success in Southeast Asia.

So we remain encouraged by what we're seeing in developed markets.

And it continues to be a key area of focus for us.

That being said, no doubt about it, part of the resurgence of our European business is the resurgence of what I would call the developed markets -- in places like Germany, Northern Europe, the UK, et cetera -- particularly, major media hubs.

So at least in the current quarter and our immediate outlook, we can say there's a big difference in the demand profile we're seeing between developed and emerging or developing international markets.

Got it, thanks.

And just a quick follow-up; brought a new head of sales on -- I think you said in June.

Do you think that we're going to have to see some changes there?

Or you think that the sales process is going to stay pretty much the same?

Well, look, nothing is broken.

We deliver pretty good results, largely without George.

That being said, there's always room for improvement.

And, kidding aside, continuous improvement is something we're very much focused on.

And as we get to the next tier of scale, and as our business around the world grows, as our customer base expands, which is very much our strategy, someone with George's experience in terms of -- his last job was managing $2 million of revenue.

He's got extensive experience doing business around the globe with both enterprise as well as service provider customers.

I think he's really going to help the salesforce as well is the Company take it to the next level.

And I'm excited about what he's bringing to us.

And I should also add, that's across direct sales as well as channel sales.

Thanks so much.

James Kisner, Jefferies LLC.

Thanks, guys.

I just wanted to jump in here with one more on CCAP.

And you are alluded to this, that of course there's going to be some more hardware near term, but do you have any kind of sense for how CCAP deployments might roll out?

Do you think there could be a compressed period where there is a lot of activity as operators upgrade?

Or do you think it's going to be pretty gradual?

Just wondering what the potential is for either wait-for effects or, perhaps, relatively big hits to gross margins in the short-term; perhaps with upside in revenue.

It just seems like there's some divergent outcomes that are possible here.

Can you help us out a little bit on what you think about CCAP and how it rolls out, and how it might impact your business model?

Look, we're excited about the interest in the momentum behind our NSG Pro platform.

That being said, it packs so much capability in, that while I think all of our customers are responding positively to how that aligns where they eventually want to be, not all of our customers are ready to actually take that step immediately.

So, I see the rollout, at least over the next couple quarters, as being more gradual.

That being said -- and, Carolyn, you can add anything to it -- I think it will have a gross margin impact.

I highlighted one of the unique differentiators is that we can cover the whole spectrum.

Without getting too technical, that means there's a huge amount of capacity.

I don't see any of the initial deployments actually lighting up all of that capacity.

So inherently, we will be over-provisioning from a hardware capability perspective.

We'll be putting a tremendous licensing resource, if you will, out in the field.

And so I think that there will be -- there will certainly be a margin impact, much as we saw a year ago with some of the more hardware-intensive deployments that we talked about then.

And here we are a year later, reaping some of the benefits in terms of greater license sales.

The crystal ball isn't perfect, but my prognostication is more gradual, with some margin impact along the way.

And, certainly, the guidance we provided contemplates that.

Maybe I would just add one thing, and that is -- in addition to all those things that Patrick said, which would have an impact while we're in the phase of shipping the downstream product -- in the first couple quarters that we ship it, before we have ramped to our full state production, those early units also carry a higher gross margin.

It's just the -- sorry, a higher cost; a lower gross margin -- it's just the nature of rolling out a new platform.

So I think we'll see it in a couple of steps.

I think there will be definitely some impact -- and we've tried to put that in our guidance -- as we roll out the initial, earlier units.

We'll get improvement as we go to a more automated production of the units, which will be the case then for the rest of that product's life.

But then we'll get more benefit as we either ship more licenses in those products or ultimately deliver the two-way cards.

So, it will be a stair step function here over the next period of time as we get through those phases.

Very helpful.

Thank you, guys.

Randy Baron, Pinnacle.

Hi, guys.

How are you?

We're good.

How are you, Randy?

Good, good.

Carolyn, I just wanted to drill down on the open market purchases.

You said $10.7 million, post-tender.

Is that because -- is that it until June 30, or is that until today's call?

$10.7 million was in the quarter.

And what's the purchases been done through today?

Through today -- the total are Patrick's numbers -- in the quarter so far, we have purchased a couple of million dollars worth.

Okay.

Thank you.

We have no further questions at this time.

I would like to turn the call back over to Mr. Harshman for any closing remarks.

Okay.

I'd simply like to thank everyone again for joining the call.

And I want to let you know that we appreciate your support.

We're looking forward to continuing the momentum we've built in this quarter to build shareholder value through continuing execution of our strategy.

And we look forward to speaking with everyone again very soon.

Thank you.

Thank you.

Ladies and gentlemen, this concludes the second-quarter 2013 Harmonic earnings conference call.

Thank you for participating.

You may now disconnect.