Harmonic Inc (HLIT) 2013 Q3 法說會逐字稿

Hello and welcome to the Q3 2013 Harmonic earnings conference call.

My name is Myesha.

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.

Carolyn, please go ahead.

Thank you.

Hello, everybody.

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

I would like to point out that in addition to the audio portion of this call, we have also provided slides, which you can see by going to the investor relations page on harmonicinc.com and clicking on the third-quarter earnings call button.

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

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

We refer you to documents that Harmonic files with the SEC, including our most recent 10-Q report, and the forward-looking statement section of today's earnings press release.

These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements.

Please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP 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 a 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, and a recorded version of this call, on our website.

With that, let me turn the call over to Patrick.

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

Turning now to our slide 3, today we reported our results for the third quarter of 2013, which reflect continued solid execution and important progress on our strategic agenda.

Revenue was $122.9 million, up 2% year over year and 5% sequentially and our strongest revenue quarter since 2011, after excluding our HFC access business, which we divested earlier this year.

Business from our international customers contributed 56%, or approximately $69 million, but the continued international market strength and, domestically, some recovery in our cable business.

Broadcast and media customers represented a record 41% of revenue this quarter, while cable customers represented 39% and satellite direct to home and telco customers contributed 20% of revenue.

Our third-quarter bookings of $115.9 million were up 4% year over year.

Our book to bill for the quarter was slightly below 1. The third quarter has been, and was again, our seasonally lowest service renewal quarter, and we expect to see service bookings rebound in the fourth quarter.

Nonetheless, year-to-date book to bill remains greater than 1, and our backlog in deferred revenue stands at a healthy $123.6 million.

Gross margins for the quarter were 51%, in line with guidance.

This reflects a mixture of continued higher-margin new business and a particularly low-margin multimillion dollar long-term project that was recognized during the quarter.

Non-GAAP earnings were $0.07 per share, and cash from operations was $16.1 million, as we kept a tight focus on both operating expense and cash management.

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

Turning now to our slide 4, I will provide a little bit more color on the quarter revenue.

Driving our year-over-year and quarter-over-quarter revenue growth was our business with global broadcast and media customers, where we saw a record revenue of just over $50 million.

This business included the large, lower-margin project I just mentioned, but was joined by notable new customer wins, spanning traditional broadcast to new media and over-the-top applications.

In cable, we were pleased by the rebound in demand for edge products, where we had our best quarter in the last four.

Additionally, we received our first multimillion-dollar order for our new NSG Pro converged cable access platform.

In contrast to solid demand from broadcast media and cable, as anticipated we continue to see lighter demand from satellite direct to home and telco service providers, as many of these customers are looking ahead to next-generation technologies and associated services, including Ultra HD.

And finally here from a geographical perspective, our international business grew from Q2 to 56% of revenue for the quarter, with emerging markets being the prime growth driver.

Turning now to slide 5 and looking at the bigger picture.

During the quarter, we also made good progress on our value creation and strategic growth initiatives.

And as a reminder, our value creation agenda is comprised of three components -- executing on our strategic growth plan, continuing focus on capital structure optimization, and ensuring strong supporting corporate governance and management.

There were no new changes to the latter in the third quarter, and Carolyn will update you on our capital structure and stock repurchase progress in just a few minutes.

I will now provide an update on our strategic growth initiatives; that is, our focused programs to capitalize on a couple of very clear technology transitions and associated customer spending cycles, and our initiatives to expand our global customer base.

So let's move to slide 6 and first talk about our progress toward addressing what will be a major new $2 billion annual business opportunity for converged cable edge products, an opportunity driven by our cable customer's planned transition to a flexible, all-IP converged video and data network.

During the past several months, the first release of our converged cable access product, the NSG Pro, has completed integration testing with key North America cable customers for downstream video-on-demand, switch digital video, and modular CMTS data services.

It's also passed challenging physical and environmental testing, and we have received our first multimillion-dollar order, a major market endorsement of our view that the NSG Pro platform offers the most flexible, simple to operate, and futureproof path to the CCAP architecture in the market.

In parallel with getting our platform deployed in the field, we have been taking aggressive steps toward realizing full two-way CMTS capability on the platform, having scaled the R&D team and brought on board several DOCSIS experts during the past 18 months.

And we're making good progress.

During the quarter, we also successfully conducted cable modem and provisioning back-office interoperability testing of our in-development upstream CMTS capability at a key customer lab, another significant confidence-building milestone.

While we still have a lot of work and investment ahead of us here, and while we don't underestimate the challenge of penetrating a new and competitive $2 billion market, our strong execution and continued customer collaboration cause us to be increasingly confident in our ability to become a player and, ultimately, a category leader in this transforming cable edge space.

So turning now to slide 7, we also see a coming cycle of investment in next-generation video compression and Ultra HD technologies.

On the compression side, our research and development team is making exciting progress on several innovations that significantly improve compression and video quality for legacy MPEG-2 and MPEG-4 AVC services.

And these developments are really valuable to our customers because they enable tremendous wireless and wireline bandwidth efficiencies without requiring a costly client device upgrade cycle.

While we have not yet announced our productization plans around this innovative new compression technology, we are working closely with several early customers on 2014 deployment scenarios.

And in parallel, we continue our efforts to harness the new high-efficiency video compression, or HEVC, encoding encoding algorithm, which over time promises even greater bandwidth efficiencies.

In Q3 at the industry's IBC show in Amsterdam, we demonstrated for the first time live transcoding using HEVC in our ProMedia product line.

And also at IBC, we announced that telecommunications giant, Tata Communications, has launched an HEVC-enabled multiscreen file transcoding service based on our ProMedia family of products.

Turning to Ultra HD, a key milestone in the emergence of this technology was reached during the third quarter with the announcement of the HDMI 2.0 standard.

Earlier versions of the HDMI standard would support Ultra HD at only 30 frames per second and were therefore really insufficient for sports.

HDMI 2.0 now supports Ultra HD at up to 60 frames per second and is therefore quickly being adopted by the TV manufacturing industry.

For Harmonic in Ultra HD, our development work and support of customer proof-of-concept demonstrations has continued.

And we notably showcased our work with Sky Deutschland at our press conference at IBC.

And as an aside, while we were at IBC, it was announced that Tokyo will host the 2020 Olympic Games.

Now while Japan has been a big innovator in 4K Ultra HD, they were also showcasing at IBC 8K Ultra HD 2 technology.

And it's widely expected that their 2020 Games will be captured in the 8K format.

Although of limited commercial interest to Harmonic in the short term, possibilities of this future format bode well for further upgrade cycles over the next five to 10 years.

Turning now to slide 8, the final technology transition I would like to discuss is the move to over-the-top multiscreen video.

At your request, over the last year we have tried to highlight Harmonic's progress in this area and have placed special emphasis on describing new products and specific customer wins.

I know for many of you, it has been -- it has remained unclear as to how successful Harmonic has been relative to the many competitors who make a lot of claims in this space.

We're pleased -- we're very pleased, in fact, to deliver the news that earlier this month, industry analyst Frost & Sullivan named Harmonic as the number one market-share leader in multiscreen transcoding, the heart of the total multiscreen solution and the core of the multiscreen marketplace.

This adds to our market-share leadership in each of our key business and technology segments and reflects the market migration toward complete solutions that unify high-quality broadcast and mobile web delivery, a dynamic that raises the barrier to entry for smaller niche competitors and plays to Harmonic's strengths.

Now to be clear, the multiscreen market remains immature and relatively small, and will, therefore, be subject to share shifts on a regular basis as we go forward.

However, this Frost & Sullivan data point shows you that we are focused and winning in an area of strategic importance in which our customers will undoubtedly be increasing investments over time.

Now speaking of customers, let's turn to slide 9, and I will wrap up my comments with an overview of our progress on the second major plank of our strategic plan, growing our global customer base, a base of both service provider and broadcast and media customers.

Tying into both the themes of over-the-top and international market momentum, Harmonic announced several key customer wins during the third quarter.

In particular, we helped British Telecom Sport deliver their coverage of English premiership football over BT home data services.

We helped Totalmovie deliver linear and on-demand video services across Latin America.

And in Turkey, we announced the deployment of innovative new over-the-top services for both D-Smart, a service provider and Dogan, Turkey's leading media group.

As we look to further expand our over-the-top customer base, we also announced collaborative relationships with TiVo, with which we are partnering to enable all IP network DVR, and MobiTV, which has a particularly strong position in mobile video and is now leveraging our technology as part of its extended cloud-based multiscreen platform.

Expanding our broadcast and media customer base was also aided by our latest innovations in media production and playout.

We announced new wins with Nova, the leading operator in Greece, who is in the process of upgrading to HD video, and with Fox, which leveraged our technology to launch the exciting new Fox Sports 1 channel.

And for those of you who haven't seen it, the Fox Sports 1 channel is a new direct competitor to ESPN that uses the latest in Harmonic technology from our spectrum ChannelPort platform.

As seen in the screenshot on this slide, ChannelPort supports two windows of video, plus advanced digital effects and graphics for branding and advertising, a much simpler, condensed workflow, to dramatically reduce the time to market and operating costs of a technically advanced video or TV channel.

This Fox example highlights our strategy of functionally collapsing multiple elements of the video delivery chain into high density, easy to use, and increasingly software-rich platforms, enabling media companies like Fox to both more readily monetize premium content and realize significant operational efficiencies.

So in brief summary for me, this was a quarter of not only solid financial execution, but also significant progress on our growth strategy of positioning the Company to capitalize on coming major technology transitions, while at the same time driving the continuous expansion of our global customer base.

With that, Carolyn, I will hand it back over to you.

Thank you, Patrick.

Let's move to slide 10.

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

Our net revenue for the third quarter was $122.9 million, compared to $117.1 million for the second quarter of 2013 and $120 million -- $120.4 million for the third quarter of 2012.

Our bookings were $115.9 million, up 4% compared to the same quarter of last year, and our year-to-date book-to-bill ratio was 1.03.

I want to remind you that Q3 is our seasonally-lowest SLA renewal quarter, which adversely affects our book-to-bill ratio this quarter.

Backlog in deferred revenue was $123.6 million at the end of Q3, compared to $132.5 million at the end of Q2.

Our non-GAAP gross margin was 50.8% this quarter, a decrease from 54.1% in the previous quarter, but an increase from 50.3% in the third quarter of 2012.

The decrease in gross margin from the previous quarter is principally due to the large, relatively low gross margin project that was recognized this quarter, as well as a product mix shift with an increased proportion of total revenue coming from edge, which was up $7.7 million from Q2.

Non-GAAP operating expenses for this quarter were $53.7 million, down from $56.1 million in the second quarter of 2013 and up slightly from $52.9 million in the third quarter of 2012.

Operating expenses returned to more normal levels as the new product introduction costs and legal expenses we experienced in Q2 were not incurred this quarter.

Additionally, our focus on operational efficiency post our access divestiture has helped us reduce operating expenses.

Our headcount was 1,063, slightly down from 1,078 at the end of the previous quarter and 1,088 at the end of the third quarter of 2012.

Non-GAAP net income from continuing operations for this quarter was $7.1 million, or $0.07 per diluted share, compared to net income of $5.6 million, or $0.05 per diluted share, in the prior quarter and net income of $5.8 million, or $0.05 per diluted share, for the third quarter of 2012.

Our EPS for the quarter benefited from both our focus on expense control and the reduced share count resulting from the share repurchase program implemented over the past six quarters.

While we do not normally discuss our GAAP tax and GAAP earnings, you may have seen that we recorded a $39 million tax benefit in the quarter.

This benefit came from the release of tax reserves for uncertain tax position, due to the expiration of the statute of limitations related to the 2008 and 2009 tax years.

Moving to slide 11, our international revenue represented 56% of total revenue this quarter, compared to 53% in the second quarter of 2013 and 58% in the same period of 2012.

Both Asia-Pacific and EMEA had strong sequential growth this quarter.

Video processing represented 47% of revenue, up from 41% in the third quarter of 2012.

Production and playout represented 16% of revenue this quarter, compared to 20% for the same quarter last year.

And cable edge represented 17% of revenue, compared to 20% for the same quarter last year, but was up over $7 million from Q2.

Service and support revenue is roughly the same size this quarter, compared to the same quarter last year, representing 20% and 19% of revenue, respectively.

The broadcast and media market represented 41% of revenue, up from 34% in the third quarter of 2012.

This is the first time broadcast and media was the largest segment and shows our continued progress in selling all of our products into this customer base.

Our cable market revenues represented 39% of our revenue, which decreased from 43% in the same quarter last year, but increased from 36% in the second quarter.

And we believe we'll increase back to the historical range as we sell both video processing and edge products to this customer base.

Satellite and telco market decreased this quarter compared to the same quarter last year, representing 20% and 23% of revenue, respectively.

Our largest and only 10% customer for the quarter was Comcast at 16% of revenue, compared to 11% last quarter.

Now turning to slide 12, you can see we continue to drive a strong balance sheet.

We ended the quarter with a cash balance of $169.3 million, up $7.6 million from the previous quarter, reflecting approximately $7.7 million of cash used in the share repurchase, offset by approximately $16.1 million of cash generated from operations.

Our receivables balance was $85.1 million and our DSOs were 63 days, down from last quarter's 67 days.

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

Inventory was $40.4 million, down $4 million from the prior quarter.

As a result, our inventory turns were 6 times.

Capital expenditures for the third quarter were $2.5 million.

In order to secure more favorable pricing, we have decided to make an advanced payment of approximately $7 million in Q4 to one of our contract manufacturers.

Therefore, we expect our cash balance to be relatively flat or potentially down at the end of Q4.

Moving to slide 13, I would like to update you on our share repurchase activities this quarter.

We repurchased 1.1 million shares this quarter for a total of $7.7 million.

That brings our shares outstanding down to 100.9 million.

At the end of Q3, we had $94.8 million available from our Board-authorized pool for continuing repurchases.

Turning to slide 14, as we look into the fourth quarter, based on our backlog and bookings expectations, with little expected budget flush this quarter, we are currently expecting a similar revenue profile as the third quarter.

As such, we expect our revenue to be in the range of $115 million to $125 million in the fourth quarter of 2013.

Non-GAAP gross margin in the fourth quarter is expected to be in the range of 51% to 52%.

This range takes into consideration the revenue expected from our new NSG Pro, our cable edge platform.

The first group of units we are shipping do not benefit from fully cost-optimized production and carry a lower gross margin.

Additionally, with our initial shipments, we are shipping the razor; however, due to the density of the product, there is room for a lot more razor blades over time.

As you all know, that refers to the hardware that we ship initially with a relatively low number of licenses, and then the ability to sell more software into that box over time; hence, the razor, razor blades.

This margin is expected to improve as we move into Q1.

We have targeted our non-GAAP operating expenses for the fourth quarter to be $53 million to $54 million.

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

Lastly, I want to give you a framework to think about 2014.

First, while we are disappointed we did not deliver growth for the full year of 2013, we are expecting to deliver modest growth in the second half of the year.

We have been clear on our view of the growth drivers we see in front of us.

While we can't tell you the quarter each of these drivers will begin to impact our revenue, we remain convinced these impacts are on the horizon and we will realize more than our fair share of the opportunity in front of us, allowing us to continue to deliver revenue growth in 2014.

Given our guidance this quarter, we expect our gross margin to be approximately 52% for the full year of 2013, an increase from 51% in 2012 and from the mid-40s not that long ago.

We have made steady progress in driving more software components in our business, improving our focus on the most profitable business, and optimizing our operations organization.

This gives us confidence that we will be able to once again deliver an improvement in our gross margin next year.

We have been making investments in the technology cycles and opportunities we see.

Having said that, we see those investments leveling off at the current amount, which should allow us to deliver improving operating margins next year.

Lastly, we have reduced our shares outstanding by over 20 million shares in the last six quarters.

Our Board has authorized us to repurchase 90 million more going forward.

We have been focused on value creation by delivering improved EPS.

This focus continues as we move into 2014.

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

Okay, thanks, Carolyn.

So let me simply summarize by saying that during the third quarter, we delivered solid results and made important progress advancing our strategy to accelerate growth.

I think it's clear that this progress reflects our focused execution, as well as our customers' confidence in Harmonic and in our ability to continue to deliver industry-leading innovation and support a business partnership.

As Carolyn just spoke to 2014, as I look ahead to the next year, I want to tell you that we will continue to execute on our growth strategy, and we expect to expand our market share and global customer base while also investing and innovating to capitalize on the coming waves of cable edge and video infrastructure technology transitions.

We are consequently well positioned and committed to drive top- and bottom-line growth next year, and enhance value for our customers and for our shareholders.

And with that, we will open the call up for questions.

(Operator Instructions).

Tim Quillin, Stephens.

Carolyn, in terms of the outlook for 2014, I just want to make sure I understand what you're saying.

I think what I heard was that you expect to grow revenue, at least to some extent.

You expect to improve gross margins and you expect to improve operating margins.

And I guess, if you can tell me if that's the correct takeaway.

And then, the follow-on is that -- and especially in terms of the operating expenses, do you see any opportunities to do more specific cuts or would you just expect to get leverage on the current base of operating expenses as you grow revenue?

I will start by saying, yes, I think you summarized my comments correctly.

And I think as we go forward, look, we are constantly trying to optimize the mix of spending, but I think for general modeling purposes, I think the level of spending in Q3 and the guidance of Q4 is likely the range that you should think about, and that the margin improvement will come from both gross margin improvement and leverage on the revenue for the OpEx staying in this range.

Okay, thank you.

And then, I just had a couple of questions after spending a day at Cable-Tech, or would like to get your thoughts, I guess, on a couple things that I saw.

I guess number one is that it seemed like there is about 100 vendors of multiscreen transcoding.

I think some of them are realizing that it's not a stand-alone market and they are starting to come upmarket into your area.

I don't know how successful they will be, but I would be interested to get your feedback on that.

And then, the second thing is on CCAP.

My read is that it is moving relatively quickly, and Time Warner made an announcement around CCAP.

I'm just wondering if you think that there is a disadvantage to Harmonic if cable providers move quickly in the sense that you provide an evolutionary approach that might work best if you have a relatively slow CCAP rollout.

Thank you.

Sure, Tim, and as you know, I was down there in Atlanta as well.

On the first question regarding multiscreen space, we'd absolutely agree.

It is very crowded.

It's one of the reasons why I acknowledged just a couple of moments ago that it's somewhat confusing to follow.

That being said, we are very pleased with this Frost & Sullivan work because it shows that in the transcoding piece for small screens, Harmonic has managed to be number one in this space.

And of course, we are already well known as number one in the high-end space, if you will.

So as the market moves forward and as this high-end world increasingly merges with, for lack of a better term, the low world or small screen world, that certainly plays to our strength.

And on a different dimension, I think you are absolutely right.

Customers are more and more looking for end-to-end system solutions.

Several of the deals that I highlighted just a moment ago and that we won during the quarter involve not only our transcoding and our encoding, but our storage, our packaging, our [origin] server, in many cases our professional services.

The ability to put together that kind of bundle, particularly for overseas customers who are just saying, hey, come and help me get this done, help me stand up the service, it really plays to our advantages, and I think it allows us to leverage our scale, our end-to-end technology and capability.

So we like the way we are positioned competitively and we like the way the market is evolving.

Regarding CCAP, it's, in some ways, perhaps, a similarly quickly moving and evolving space.

From our perspective, frankly, there isn't a 100% CCAP compatible product that's out there.

I would agree with you that the market is moving quickly in terms of realizing that the cable plant is evolving towards an all-IP flexible infrastructure that will unify both video, as well as high-speed data.

We think we are as well positioned as anyone from a mid- to long-term perspective to move into that market and to take share.

We are not a participant in today's two-way CMTS market, and so from that perspective, it's all upside.

There are certainly a lot of competitive announcements out there.

From our perspective, these are really announcements about more or less today CMTS technology, and we think that real CCAP and what it implies in terms of turning the whole plant into an all-IP infrastructure is really yet to come.

And we think we are positioned to be there as quickly as anybody else.

Thanks, Patrick.

James Kisner, Jefferies.

I guess the first question was just a clarification more than anything else.

On the NSG, you said you booked your first multimillion-dollar order for the NSG next-generation product.

Did those hit in this quarter or are those in backlog?

The bookings were during the quarter.

We haven't -- we didn't take revenue on those bookings, James.

Okay, and is there a general -- is it all just VOD capacity or is there -- is anything changing from an application standpoint that really drove that strong quarter-over-quarter cable edge result?

Cable edge business, downstream business, is historically a mix of different applications, and that mix has evolved and changed over time.

It's not all VOD.

There is a fair amount of modular CMTS that continues to be a key component of that.

And although arguably a variant of VOD, we see increasing proliferation of catch-up TV or cloud DVR kind of functionality, different flavors or permutations of an on-demand video experience.

So traditional VOD, these new kind of services that I just spoke to, video services, as well as modular CMTS, are the prime components of the edge business, the edge downstream business, over the past quarter or two.

Okay, so I guess -- I'm not sure I got the answer to my question there.

I guess I'm just wondering sequentially, big pop, you didn't really see a big mix in [shipment] applications.

There wasn't (multiple speakers)

I'm sorry, no.

We didn't see any real mix change.

This was just an overall -- the overall tide was rising.

And it wasn't specifically in any one of those application areas.

It was overall, James.

Okay, thanks.

So here's a longer, I guess, medium-term-ish kind of question around video processing.

You've had a pretty impressive run here with over the top and broadcasters with video processing, and even just backing out -- it looks like you had a pretty strong services quarter with that group, if I am doing my math right, this last quarter.

You had a reasonably good video processing quarter still with them, and I'm just wondering.

Do you have any sense of runway for that business?

Could we continue to see strong video processing, broadcast and media, and other, that group -- or is this inherently a very lumpy business?

I am just wondering between now and HEVC, do you have enough revenues coming in from that group to maintain the video processing levels where they are?

I am just trying to figure out what happens between now and when HEVC gets momentum more towards the end of next year.

Thanks.

Okay, there is two parts, two aspects, to the answer to that.

First, specifically with broadcast and media, we see a lot of runway.

And frankly, the biggest reason for that is market share and market penetration.

There are thousands of broadcast and media companies around the planet, and particularly outside of the US, many of their infrastructures are very immature.

We estimate that HD broadcast and media facilities, for instance, less than 50% outside of the US have actually been even upgraded to HD.

So a combination of market-share gains and the increasing and continuing evolution of the infrastructure of these players makes us feel continuing good about this space.

And the market-share gains' statement also holds true for the US.

We highlighted Fox here.

Fox is not a legacy account.

We called it out as a new customer because it was a competitive win, an account that has historically been held by a key competitor.

So we see plenty of runway in broadcast and media for our video processing products.

And we continue to be quite excited about that.

The second piece I would like to highlight is that the runway between now and HEVC isn't only about that.

I highlighted in my comments that although perhaps not predicted, our R&D team has been making some quite remarkable progress on MPEG-2 and MPEG-4 compression.

And this work has really captured the imagination of a number of our large service-provider customers, and consequently, we're in a number of pretty interesting conversations about work to upgrade existing MPEG-2 and MPEG-4 infrastructure between now and HEVC.

And of course, that has particular interest for service providers because they would like to milk as much as they can the legacy installed set-top box infrastructure.

And as you know, there is a lot of MPEG-4 and MPEG-2 boxes out there.

So if we can come along and provide a significant bandwidth efficiency on those legacy services, it's quite compelling and quite interesting to our customers.

So that's the second plank of why we see a good runway for our video processing business even before HEVC or Ultra HD really hit full force.

So just a quick follow-up, Patrick, just on that last point, are there any particular products that you would point to in the portfolio that are new for MPEG-2 and MPEG-4, either in the past or coming, that are catalyzing that upgrade?

Thanks.

It's algorithmic work that, in some cases, will show up on legacy platforms in the form of a software or license upgrade sale, and some of it may show up as new platforms.

And as I mentioned earlier, we have not -- although we are having detailed conversations with some of our largest customers, we have not publicly announced our productization plans of this new innovative work.

All right, thanks a lot.

Simon Leopold, Raymond James.

A couple of things I wanted to go into a little bit further.

On the international business, in the prepared remarks you mentioned both Asia-Pacific and Europe, or EMEA, as showing improvement.

Can you give us a little bit more color as to the dynamics there?

In particular, one of the things I've been wondering is whether or not the acquisition of Kabel Deutschland by Vodafone has affected the environment by spurring other operators to think about investment, and what your sense is of the dynamics of each of those markets, Asia-Pacific and EMEA.

They are both pretty broad reaching, Simon, as you know.

There is a western Europe dynamic, I would say, which is that video service providers like Kabel Deutschland are doing quite well.

But our Europe region more formally is Europe, Middle East, and Africa, and it spans all the way to a pretty healthy African business and good success in emerging -- the emerging markets part of that as well, Russia, the Middle East, eastern Europe.

So there we see, in the emerging markets, so -- let me back up.

In the developed part, we see healthy competitive dynamics, very strong players.

Look what's happening in the UK right now, Sky and Virgin and Liberty coming in, et cetera.

I mentioned British Telecom getting very aggressive with sport content, so we see a heavy level of competition in western Europe and pretty good results continuing to come from the pay-TV operators.

At the same time in the emerging-markets part of that Europe, Middle East, and Africa region, we see a lot of the trends we have talked about previously, which is new middle class, new broadcast services, new media companies coming up, and that also characterizes a lot of what we see in the emerging-markets part of Asia as well.

It's a little difficult to generalize what's happening in Asia.

The dynamic in southeast Asia is different than the dynamic in Japan, which is different still from the dynamic in mainland China, but more broadly, the emerging dynamic -- market dynamic of more middle class, more TV screens, a move towards digitized content, it's happening across all these markets.

Okay, and then, I wanted to talk a little bit about your expectations for product mix, as well as the implications on gross margin for the December quarter.

Typically, the edge products are weaker sequentially and the more software-oriented products are better sequentially, but I'm surprised in terms of the commentary on gross margin and just want to make sure I am putting these things together.

And I guess part of it is you did explain with the new product, there is some pressure on gross margin, but I would be surprised that a few million dollars of chassis could take 100 to 200 basis points off of the gross margin.

So I feel like maybe there's more moving parts here than I'm appreciating.

The majority of it is that, actually, and it is -- and it depends on, which is why there is a range, on how much NSG Pro we get orders for and we ship, so there is a range there.

It does have not an insignificant impact.

And again, it is really the first batch of units.

After that, it drives back up to more typical edge margins for us, but these first units just come at a much lower margin because we are ramping up our cost optimization.

Beyond that, there is no big mix shift going in there.

We certainly don't have a lot of software baked in, an unusual amount of software baked in.

I would say an average mix quarter.

But how about the production and playout products?

Those typically -- we generally would think they would be a little bit stronger in the fourth quarter.

That seems like a reasonable assumption, or not?

I don't think there's a seasonality to them in particular.

Okay, thank you.

That's all I had.

Mark Sue, RBC Capital Markets.

Recognizing the razor and razor blade model, I'm just trying to get a sense of the density.

It seems these products are initially going out very lightly configured.

Does that say anything about the pace of the rollout by the cable operators?

Maybe if you could get a sense of how that might ramp, that would be helpful.

Thank you.

It's a correct observation, Mark.

These products, these downstream products, uniquely in the market -- actually the hardware; it's not just the chassis -- the downstream hardware supports the full spectrum.

And to the best of our knowledge, there isn't anything close like that.

And while that is the ultimate vision of the operators, the amount of IP traffic is a far cry today of the full spectrum.

So with this move, we're actually putting out a substantially larger amount of capacity than is being used today.

And so, it cuts both ways.

It is one of the reasons why we confidently state, sincerely state, that we think that there is a real futureproof aspect to this platform.

The downside for us, if you will, in the short term is that we are putting out powerful hardware that can really be scaled to be the full enchilada or the whole spectrum, all digital or all IP.

So (multiple speakers) we think it's the right strategic move and we think is going to pay dividends down the road.

Just on that, is there any specific product enhancements that need to be still finished?

I'm recognizing that downstream and the upstream component of that.

When is that all complete for your customers?

And that's it for me.

Thank you.

The downstream is ready to go.

That's what's been sold and deployed.

We're still working on the upstream or two-way capability.

I mentioned in my prepared remarks that we are already in one significant customer's lab doing testing.

We have not given a firm date for the release of that.

What I would say is we don't expect significant two-way revenue in 2014.

But we expect to make a lot of progress deploying these platforms in a very dense, a very attractive way from a downstream perspective over the course of the year.

And of course, those deployments take on real strategic importance for us.

And it's 2015 when we expect the two-way capability to really start impact us positively, financially, in a significant way.

Paul McWilliams, Next Inning Tech.

So in Q3, there was no material CCAP rev?

Correct.

Okay.

And on the HEVC encoders, you expect that to kick in the second half of 2014?

We haven't said exactly.

We expect there certainly to be demand.

I think that we could see opportunities before that, Paul, but we're making good progress with the product and we have several customers discussing that technology, although some of the more recent activity that we've been driving around MPEG-2 and MPEG-4 are stealing a little bit of the thunder there, but we're waiting to see how that shakes out.

I do want to emphasize that it is really a demand issue.

We have already started shipping the file-based HEVC product and we're just now beginning to deliver the live-based -- or make available for delivery the live-based HEVC product.

So the technology is there, and we're waiting and looking for a ramp around that.

Okay.

How come the pre-pay to your EMS provider?

It's part of a contract negotiation that allows us to get optimized pricing.

Oh, okay, good deal.

When you have the cash, that's a good way to use it.

Absolutely.

We get a better return on that than I get in the bank.

That's not hard to beat.

You mentioned in your presentation that the CCAP market's, at least according to Infonetics, around $2 billion.

What is their value on the -- your traditional edgeQAM market that you serve?

It is in the neighborhood -- something less than $0.5 billion, maybe $400 million-ish.

Okay, that's where I had it, but I wanted to get a correlating figure there.

Now Frost & Sullivan, when they came out on the transcoder piece today that I read, they estimated your share in 2012 at about 9%, or about $12.5 million, and project your share for this year at 10%, or about $16 million.

Do those dollar figures correlate well with what your expectations and your experience was last year?

Let me say it's the rough ballpark.

For us, certainly, the market is more interesting than that, but it's also true that we sell much more than just the specific transcoders that were measured in that study.

So I think it's probably the rough ballpark for that specific piece of the solution.

I think it goes to the fact of how fragmented this space is.

But for us, it highlights -- the leadership there highlights that that is a good wedge or stake in the ground for the broader solutions that we are driving.

Oh, yes, and I would think that your positioning in the broader market is something you can leverage and continue to increase market share.

One quick housekeeping question.

For Q4, on other income and your fully diluted share count, could you give me estimates for those, Carolyn?

Other income, our target is always to be close to neutral on that, so -- and a little bit depends on what happens with currencies, so I would shoot for neutral.

And on the share count, roughly right around 100 million.

Okay.

Well, thank you very much.

Tim Quillin, Stephens.

I'm wondering if you could quantify the impact on gross margins from the lower-margin project that you discussed, and then, if you could, just describe the nature of that project.

Sure.

Do you want -- Patrick, do you want to take the nature and I'll take the margin?

Sure.

It was a large international deal with a very key international broadcast and media company.

It was a competitive account, and we deemed it at the time strategically advantageous to move into that account.

And it was business that was actually closed some time ago, several periods ago.

That means it was booked -- that it was a project, and a project we finally just completed and recognized in this past quarter.

That's right.

And without being specific, I will say that it had up to a couple margin points' impacts.

Okay, great.

Thank you.

And then, following on with some questions about the cable edge business, but you did have a pretty big sequential decline in last year's fourth quarter.

Given that you are shipping NSG Pro, would you expect a less significant decline or maybe even flat revenue in cable edge, or what should we be thinking about there?

The overall driver is really the demand, and this industry and our largest customers really march to their own drummer.

And I don't think that there is a particular seasonality from a year-over-year perspective that -- it really depends, Tim, on where they are in their own cycles.

That being said, there has been some competitive shakeout that has happened in the market, and we think that our strategic and product position is with the Pro platform.

And several competitive platforms having been canceled or abandoned, we think we are stronger than we have ever been.

So we expect somewhat more demand in the edge space, and we think competitively we are somewhat stronger than we have been before.

So we see good opportunity there.

Okay.

Is there a shakeout in vendors or potential vendors for CCAP now?

Is it down to four instead of five?

I'm not sure about everybody who is going after this space.

Clearly, Motorola, having become part of Arris, is out of the business, and they were broadly considered the number three in the CMTS market.

The CCAP space is, in fact, a new space, in a different space, and different companies, including the traditional CMTS guys, and us are driving in it from different directions.

So I want to emphasize that it's a new space, and in fact, there could be other companies going after it.

We continue to like our positioning, though, and I think our somewhat unique advantages of leveraging our QAM, our deployed cable background, as well as our video expertise.

Okay, and just last question on production and playout, it looks like it's headed for the second year of revenue declines.

And then, I'm wondering what that market looks like.

Is it a declining market, or when and why would you see a change to topline growth in that business?

Tim, the first half of the year was actually up for us year over year.

What we had was a particularly weak third quarter, and we don't yet read that much into it.

We see demand out there, and certainly that business has been key to us in terms of opening the door to the video processing sales we have seen with broadcasters.

It does seem a little bit the broadcast and media agenda has shifted slightly to some of the video projects that our video processing products serve.

I talked quite a bit about the over-the-top initiatives and wins with those guys.

We see decent opportunity going forward for the production and playout space, and I would suggest that as we do, not reading too much into a weak Q3, which we think was a little bit more happenstance around just lack of overall activity.

Okay, that's fair.

Thank you very much.

We have no further questions at this time.

I would like to hand it back to Patrick Harshman for final remarks.

Okay.

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

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

We are looking forward to continuing the focused execution we demonstrated in the third quarter to further build shareholder value.

We look forward to speaking with everyone again soon.

Thank you.

Thank you, ladies and gentlemen.

This concludes the Q3 2013 Harmonic earnings conference call.

Thank you all for participating.

You may now disconnect.