Harmonic Inc (HLIT) 2013 Q4 法說會逐字稿

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

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

(Operator Instructions)

Please note that this conference is being recorded.

I will now turn the call over to Carolyn Aver.

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 fourth-quarter earnings call button.

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

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

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

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

Turning now to our slide 3. We reported our results for the fourth quarter of 2013 today, and these results reflect continued progress in our strategic and financial growth agenda.

Revenue was $120.2 million, up 2% year over year.

Business from our international customers contributed 60%, or approximately $72 million, reflecting continued international market strength, with Europe holding up and emerging markets still quite strong.

Broadcast and media customers represented a record 42% of revenue this quarter, while cable customers represented 35%, and satellite direct-to-home and Telco customers contributed 23% of revenue.

Our fourth-quarter bookings were $113.3 million, also up 2% year over year, driven across all geographies.

While book-to-bill for the quarter was below 1, we did again see a substantial mix shift into higher-margin software licenses, which drove a lower top line, but higher profitability.

Nonetheless, book-to-bill for the year was approximately 1, and our backlog in deferred revenue stands at a healthy $114 million.

Gross margins for the quarter were a very strong 54.3%, reflecting both the mix shift toward software licenses and continued healthy margin trends in the blended business.

Non-GAAP earnings rate cents per share in cash from operations was $18.6 million, as we maintained a tight focus on both operating expense and cash management.

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

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

Driving our year-on-year revenue growth was continued momentum of our business with the global broadcast and media customers, up 8% year on year, the result of our strategic focus on this market and the increasing competitive differentiation of our contribution in coding, multiscreen streaming, and production and playout products.

We continue to believe content is king, and we're pleased to see that our strategic focus on market-leading broadcast and media players is delivering growth.

In cable, after a very weak first half of 2013, we are pleased to see increased demand for our Edge products, sustained through both the third and the fourth quarters, with second-half Cable Edge revenue up 28% over the first half of the year.

But the top line was only part of the Cable Edge story in the fourth quarter.

More strategically, the significant was the mix shift toward software licenses to activate previously deployed column hardware; this is the razor and razor blade analogy we discussed with you previously.

So consequently, the Cable Edge top line was more modest than expected.

But we had record Cable Edge gross margins, strongly validating our strategy for leveraging our industry-leading dense EdgeQAM technology.

On the fourth quarter, Cable Edge highlights included recognition of our first revenue for the new NSG Pro platform, and the release of a new Infonetics Research showing that we strengthen our number one EdgeQAM market share position through the first three quarters of 2013.

Also in the fourth quarter, we saw sequential uptick in demand from satellite direct2home and Telco Pay TV service providers, mostly up 4% from the fourth quarter of 2012.

Here are near-term strategies to bring dramatic bandwidth efficiency innovations to the market.

We are making good technical and commercial progress.

Our newest encoding innovations are now running in several key customer labs, and during the fourth quarter, we received an early order from a tier 1 satellite direct2home operator.

And finally, from a geographical perspective, our international business grew again, to 60% of revenue for the quarter, and up 17% in the second half over the first half of the year, with Europe holding steady and emerging markets being the prime growth driver.

So let's now turn slide 5, and take a step back and look at the whole of 2013.

With revenue of approximately $462 million and bookings only slightly stronger, we are disappointed with our top line performance.

However, an important part of the story here is our strategic focus on higher-value deals and more software-rich new products, and correspondingly gross margins were up to 52.6%, a substantial step up year over year.

New product investments to enable strategic change in growth was a key theme for us 2013, in particular as we ramped hiring and spending on our NSG Pro CCAP initiative.

The bottom line result was non-GAAP earnings of $0.17 per share, coupled with significant progress on our targeted new growth initiatives.

Before we turn to the strategic progress, I also want to highlight to you our continued strong cash generation, approximately $54 million from operations, and associated stock buyback program, with over 18 million shares were purchased during the year.

Turning now to our strategic progress during 2013, a clear highlight was the growth of our business with global broadcast and media customers of approximately 11% year on year, and accounting for over 40% of our 2013 revenue.

With announced wins of customers like Fox, and with leading media companies from Turkey to Thailand, and new solutions like our Spectrum ChannelPort and multiscreen streaming capabilities gaining real momentum in market share, we created in 2013 a strong foundation for continued growth in broadcast and media.

A second strategic highlight is the progress we made during the year on major new product initiatives, initiatives we believe will be transformative for our business over the next two to three years.

Among these are our NSG Pro CCAP platform, next generation video encoding innovations, and an expanded multiscreen offering, all of which I will review in more detail shortly.

During the year, we also divested our HFC Cable Optical Access business, as we made the strategic decision to focus our business on higher growth and higher-margin CCAP and DOCSIS access systems.

And finally, we brought in new worldwide sales leadership, with George Stromeyer joining us from Cisco at the end of the second quarter.

While it's never easy to change the engines of an airplane while in flight, George has managed to drive continued strategic wins, gross margin improvement and market share gains, while in parallel undertaking a significant re-engineering of our sales operations.

Under George's leadership, we were encouraged to see second-half 2013 revenue up 11% from the first half.

So look, while 2013 was not a banner top line year for us, we head into 2014 having established strong gross margin and cash flow trend, positive top line momentum in the second half, and renewed customer, technology and go-to-market foundation the profitable growth in value creation.

On the subject of creating shareholder value, on slide 6 we return to the value-creation agenda we set for the year.

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

With respect to the last components, we added two new senior sales executives to George's team during the fourth quarter.

Both, as it turns out, joining from Cisco.

Spencer Hodson has joined us to run global sales operations, and Frank Montalto joined to run North America cable and Telco sales.

On capital structure optimization, Carolyn will update you on our cash generation and stock repurchase progress in just a few minutes, while I'll now focus on progress on our strategic growth initiatives, our key programs to capitalize on upcoming technology transitions and associated customer spending cycles.

So let's move to slide 7, and first talk about our progress toward addressing what will be a major new $1.5 billion to $2 billion business opportunity for us at the Converged Cable Edge.

An opportunity driven by our cable customers' plans transition to a flexible, all-IP converge to video and data network.

During the past four quarters, the Phase I release of our converged cable access product, the NSG Pro, completed integration testing with key North America cable operators for downstream, video-on-demand [switch to geo] video, and modular CMTS data services.

It also passed challenging physical and environmental testing, demonstrating both wire speed throughput and the most narrowcast downstream columns of any platform in the marketplace today.

And as a result, the fourth quarter was our first quarter of multi-million dollar revenue recognition for the NSG Pro, and during the quarter we secured our second NSG Pro customer.

And already in the first quarter this year, we've received a second multi-million dollar order.

Generally, we believe we are competing very effectively versus our major Cable Edge competitors.

And this was confirmed in November when Infonetics Research released their EdgeQAM report, which showed Harmonic to have 37% market share versus 26% each for Cisco/Harris; our turnaround from the fourth quarter of 2012, when Cisco had edged ahead.

So looking ahead to Cable Edge demand trends, a positive sign from the fourth quarter was Comcast's highly publicized success with its new Xfinity TV store.

In December, Comcast had notable success, outselling Amazon, Apple and Walmart VUDU in just-released sales of Despicable Me 2 and Hunger Games: Catching Fire, and much of this was delivered through Xfinity on-demand.

And more recently, we've also seen ABC and Fox make policy changes driving video on demand access to their paid TV partners, notably cable operators.

This is important, because the more successful cable on-demand services become, the more the cable MSOs will need expanded narrowcast QAM capacity and flexibility, and the more opportunity we see for new downstream NSG Pro platform.

And we like the way the market seems to be treading as we head into 2014.

So parallel with this downstream Phase I activity, we've continued to make good progress on Phase II of our program.

That is, adding CCAP-compliant two-way DOCSIS upgrade capability to the same NSG Pro platforms that are now being deployed in the field for downstream applications.

During the cable industry's Cable-Tec show in October, Harmonic published a joint white paper with Alcatel-Lucent highlighting the merits of our new CCAP architecture.

The paper was called: Transforming the Network Edge in the Cable Hub.

This approach is being very well-received.

And the white paper, which also includes a foreword from Time Warner Cable, is available on both our and Alcatel-Lucent's websites.

We continue to make good progress executing on this innovative two-way CCAP architecture.

We've now successfully conducted cable modem and provisioning back-office interoperability testing at a key customer lab, and we are on track for expanded two-way traffic testing and initial qualifications mid-year.

Our continued execution and close collaboration with our customers cause us to remain confident in our ability to become a player, and ultimately a category leader, in this transforming Cable Edge space.

We will continue to update you on our progress throughout 2014.

Let's now switch gears, turn to slide 8, and talk about the progress we see towards upgrade cycles driven by next generation video compression and Ultra HD encoding technologies.

Looking first to encoding of today's standard-definition and high-definition services, we've previously discussed the progress we've made toward significantly improving compression and video quality for legacy MPEG-2 and MPEG-4 AVC services.

Our new MPEG-2 and MPEG-4 compression innovations are of particular interest to our service provider customers, because they enable a significant new wire line and wireless bandwidth efficiencies without requiring costly set-top box upgrades.

In the fourth quarter, we moved one step closer to productization by taking these innovations into several key customer labs for evaluation, and the feedback so far has been very encouraging.

As I mentioned earlier, a key customer placed an order in the fourth quarter for evaluation units containing this new technology.

And more generally, we see growing potential of this technology to be a catalyst for new encoding system upgrades by several of our key customers.

So turning now to the new Ultra HD formats and the new HEVC compression standard that will make Ultra HD practical, we continue to see industry developments that re-affirm our belief that this technology will, over time, drive significant infrastructure refresh in our industry.

For example, a Chinese brand, Seiki, and Vizio recently hit new sub-$1,000 price points for Ultra HDTV sets.

Several TV manufacturers demonstrated HEVC Ultra HD clients in new smart TVs, and Netflix announced that it will begin streaming HEVC-encoded 4K later this year.

And of course, we at Harmonic have brought interest in Ultra HD coming to fruition.

At CES a few weeks ago, we showcased the amazing picture quality made possible through our end-development Ultra HD technologies.

We had joint demonstrations with Broadcom, Samsung and Sigma Designs.

And additionally, while the volume of Ultra HD and [color upgrade wave] probably crests only in 2015, we're starting to see growing consumer purchase of Ultra HDTV sets this year, begging the question: could today's HD channels be made to look better when displayed on Ultra HDTVs?

And consequently, we are beginning to see broad potential for today's HD infrastructure, primarily broadcast at 720p or Trinity I, to be upgraded to 1080p encoding, with the resulting picture up-converting nicely on these new Ultra HDTV sets.

So we continue to watch that space too, and we'll keep you apprised of how it is developing.

Let's now turn to slide 9 and talk about the other technology transition that we've discussed with you often in the past, which is multiscreen video.

You may recall that on our last call, we announced that industry analyst Frost & Sullivan had named Harmonic as the number one market share leader in multistream transcoding, which is the core of the multiscreen marketplace, adding to our verifiable market share leadership in each of our key business and technology segments.

Well, in the fourth quarter, MRG reaffirmed this view by also naming Harmonic as the multiscreen leader, this time specifically in multiscreen file transcoding.

So to be clear, we are still waiting for the multiscreen market to really take off.

However, the second 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.

So let's turn now, finally, for me at least, here to Slide 10.

I want to give you some color on 2014, and where we see investments more or less likely to meet growth-enabling market demand during the year.

I'll break it into two categories: high probability for traction, where there are strong indicators that our strategic initiatives will drive growth, and then upside trends, where 2014 impact remains subject to broader market dynamics.

On the higher probability side, building on the momentum we created in 2013, we expect to grow by further expanding our base of global broadcast and media customers, and expanding the breadth of technologies and solutions for deploying these accounts.

We also expect International markets to remain healthy, with emerging markets continuing to drive growth overseas.

Turning to products, we believe our NSG Pro downstream CCAP platform will continue to gain traction through the year.

While it's true cable operators have multiple CapEx priorities, we expect the strategic importance they place on scalable revenue-generating, on demand video and high-speed data services enabled by the NSG Pro to drive resurgent Cable Edge demand relative to what we saw in 2013.

Similarly, we believe our video processing business will also remain healthy.

Our new encoding innovations are driving high customer interest, and will be productized in time to have an impact this year.

We've also seen our service and support business grow steadily over the past few years, and with new service-level offerings coming to market this quarter, we believe the progress will continue.

And finally, we've invested in new sales and marketing leadership and practices, and we believe that these changes will bear incremental market share fruit in 2014.

So on the other hand, Ultra HD, HEVC compression and higher-volume roll-out of multiscreen surfaces remain wild cards for now.

We are confident in our position and strategy in each of these areas, and continue to see compelling market potential.

But while we're quite convinced each of these areas will become an incremental growth-driver by 2015, as will be the case for our two-way CCAP initiatives, the extent to which we see material 2014 revenue upside remains a question.

And again, of course, we will keep you updated as the timing and scale of these opportunities comes into sharper focus, and as we continue to position ourselves to fully leverage these transitions for stronger growth.

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

Thank you, Patrick.

Let's move on to slide 11.

As a reminder, we completed the sale of the HFC Access business on March 5 of this year -- last year, now.

Accordingly, we have shown that business in the discontinued operations section of our P&L for all prior periods presented.

Our net revenue for the fourth quarter was $120.2 million, compared to $122.9 million for the third quarter of 2013, and $118 million for the fourth quarter of 2012.

Our bookings were $113.3 million, up 2% compared to the same quarter of last year, and our book-to-bill ratio for the year was 1 to 1.

Backlog and deferred revenue was $114 million at the end of Q4, compared to $123.6 million at the end of Q3, principally due to the timing of recognition of deferred revenue.

Our non-GAAP gross margin was 54.3% this quarter, an increase from 50.8% in the previous quarter, and a decrease from 55.8% in the fourth quarter of 2012.

This brought our non-GAAP gross margin to 52.6% for the full-year 2013, compared to 51.1% in 2012.

The increase in gross margin this quarter, and generally this year, is due to three factors.

First, improving gross margins in our Edge product line, where we see growing license sales into existing hardware.

Second, a higher proportion of our video processing and production and playout revenue coming from license sales and new software products.

Any third, our initiatives to reduce cost through improved operational efficiencies and supply chain management.

Over the last several quarters -- over the last several years, our gross margins have moved from the mid- to high-40s, now on their way to the mid-50s.

While many factors play into this transition -- including strategically focusing on innovative products and solutions that deliver differentiated value to our customers, and a strategic decision to move away from commodity product categories -- we have been focused on delivering more of our value in software, and you see this trend continuing.

As we make this transition, we are driving the growth of our gross margin dollars.

And consequently, you may see compressed top line growth, as was the case this quarter.

Non-GAAP operating expenses for this quarter were just higher than expected at $54.5 million, up from $53.7 million in the third quarter of 2013, and roughly flat with $54.6 million in the fourth quarter of 2012.

The increase in operating expenses is due in part to higher sales expense, as we invest in our go-to-market activities, and in part to costs associated with the Avid litigation.

However, our headcount was 1,032, down from 1,063 at the end of the previous quarter, and 1,081 a year ago.

Non-GAAP net income from continuing operations for this quarter was $8.3 million or $0.08 per diluted share, compared to net income of $7.1 million or $0.07 per diluted share in the prior quarter, and net income of $8.3 million or $0.07 per diluted share for the fourth quarter of 2012.

Moving onto Slide 12, let's take a look at our revenue category breakdown for the quarter and the year.

International continues to represent a growing percentage of our revenue, at 60% of the total this quarter, and 57% for the year.

This increasing international contribution is driven principally by emerging markets, and to a lesser extent, some recovery in our European revenues from 2012.

From a product view, video processing, production and playout, and service revenue maintained or increased as a percentage of revenue for the year at 48%, 19%, and 18%, respectively.

Cable Edge decreased as a percentage of revenue, from 18% in 2012 to 15% in 2013, as customers paused their downstream [EdgeQAM] projects in the first half of 2013.

As Patrick mentioned, our Cable Edge business increased 28% in the second half of 2013, compared to the first half, bolstered in part by the release of our new NSG Pro platform.

The broadcast and media market represented the largest growth in our revenues in 2013, comprising 42% of revenue in Q4, and over 40% of our revenue for the year.

Our cable market represented 35% of our revenue in the quarter and 37% for the year, and our satellite and Telco market was relatively flat, representing 23% of our revenue for both the quarter and year.

Our largest and only 10% customer for the fourth quarter of 2013 was Comcast, at 12% of revenue for both the quarter and the year.

Now moving on to slide 13, you can see we continued to drive a strong balance sheet.

We ended the quarter with a cash balance of $170.6 million, up $1.3 million from the previous quarter, reflecting approximately $18.6 million of cash generated from operations in the quarter, offset by $13 million used in our share repurchase, and the $7.5 million for an advance payment made to one of our contract manufacturers.

We do expect cash to decrease in Q1, due to an increase in DSOs back to our mid-60 day target, the seasonality of payments in Q1, and our continued share repurchase.

Our receivable balance was $75.1 million.

And our DSOs were 57 days, down from 63 days last quarter.

Inventory was $36.9 million, down by $3.4 million from the prior quarter.

As a result, our inventory turns were fixed for the second quarter in a row.

Capital expenditures for the fourth quarter were $3.3 million.

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

We repurchased 1.8 million shares for a total of $13 million.

This brings our total shares repurchased in 2013 to 18.3 million shares, and our shares outstanding down to 99.4 million.

At the end of Q4, we had $81.8 million available from our Board-authorized program for continuing purchases.

Turning to slide 15, let's look into the first quarter of 2014.

Based on our backlog, and expecting a seasonally normal modest decline in sales, we expect our revenue to be in a range of $105 million to $115 million.

This represents 8% growth over Q1 2013 at the midpoint of the range.

Beyond our first-quarter guidance, we also want to provide a framework for you to think about revenue growth for 2014.

As Patrick mentioned in his 2014 outlook, we believe there are several growth drivers that we expect to continue from 2013, or gain momentum in 2014.

We believe these drivers will provide a base for growth in the mid-single digits.

While there are also some additional trends that we believe will drive even faster growth, the timing of those is less certain, and therefore not included in our 2014 outlook at this time.

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

This range takes into consideration the margin impacts we expect from increasing revenues from our new NSG Pro Cable Edge platform.

We will still be shipping from our first group of units, which do not benefit from fully cost-optimized production, and therefore carry a lower gross margin.

Additionally, as with previous generations of new QAM platforms, with our initial shipment, we are shipping chassis with power supplies in few cars, like razors slightly populated with razor blades.

And of course, we then expect to ship a high volume of additional cars -- the razor blades -- over time.

The NSG Pro margin is improving modestly in Q1, and expected to improve more significantly as we move into Q2 and beyond.

Due to this and our other ongoing strategic initiatives, we expect gross margins for the year to be in the 53%-or-better range.

As we bring these new strategic products to market, we are leveling off our R&D investments and moving some investment focus into go-to-market activities.

We also continue to focus on optimizing our general and administrative costs.

Our plan is to do all of this within a flat operating expense structure for the year.

We have targeted our non-GAAP operating expenses for the first quarter to be in the $54 million to $55 million range.

Finally, we anticipate our non-GAAP tax rate for 2014 to be 21%, subject to our domestic versus international split.

In summary, I think we've accomplished a number of our value creation objectives in 2013.

While we did have some revenue challenges, and made a meaningful improvement in our gross margin profile, we effectively managed our operating expenses while delivering on strategic product initiatives and embarking on a go-to-market transition.

We improved our balance sheet management by significantly improving our cash conversion cycle, and investing that benefit and more in an aggressive stock repurchase program.

As we move into 2014, we expect to return to revenue growth, continue our improvement in gross margins, and our focus on operating expense control.

We believe these activities will drive earnings growth and more value for you, our shareholders.

With that, we are ready for questions.

Thank you.

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

(Operator Instructions)

Mark Sue with RBC Capital Markets.

Thank you, good afternoon.

I understand the positive dynamics as it relates to trends in multiple-screen viewing, improved HD converged architecture.

Yet if I look at the revenue outlook for the near-term, and also how we should see things for 2014, we are not going to see any meaningful growth this year.

And I guess we have to wait until next year, 2015.

Are there things that the Company can do to drive the top line performance, considering that we've been near this $500 million run rate for quite some time now?

Thank you.

Mark, thanks very much for the question.

We're definitely targeting and we are confident we will achieve growth this year.

We believe we will continue to take market share.

We believe we will continue to do well with our new Cable Edge products, as well as our new video [mill] products.

From a market perspective, as you can see from our results, we're also very excited about the progress we're making with global broadcast and media customers.

Putting all that together, we've given you a first-quarter guidance that is 8% up, year on year.

And we've said that we are comfortable from where we sit today, appointing to mid single-digit growth.

Certainly we see that there's upside potential beyond that, and certainly that's what we are striving for.

That being said, the bigger growth drivers that we've been investing in -- massive upgrade cycle on the conversion to Ultra HD and HEVC compression, the broad market acceptance of true CCAP kind of architecture -- those are the things that are going to drive even stronger growth for us.

That's what we've invested in positioning ourselves for.

We're trying to say is, look, some of those things could happen in 2014.

But that side on the view that we've given you.

We have more confidence than hitting later.

But the point is, when they mature on the marketplace, when our customers are ready to move on those initiatives, we think we are extremely well-positioned to capitalize on them.

If I move lower on the income statement, and I look at the higher-than-normal cost structure, considering the overhead, post the HFC asset divestitures, are there things to protect the earnings outlook for 2014 before we see revenues accelerate in 2015?

What are some of the things you can do to reduce OpEx, considering you also need to spend to drive and capture the growth opportunity in 2015?

Mark, we've made a number of large investments in R&D over the last few years.

And at this point, we see that R&D investment leveling off, frankly, in absolute dollars.

And perhaps even declining slightly.

That's not because we have fewer people working on our initiatives.

It is to say we have over the last year managed our workforce and our workforce growth so that we've benefited from a lower cost of development across the globe.

So we continue to add resource, but we are doing that more efficiently today than we were a year ago.

So that allows us to free up, effectively, some dollars, or at least, dollar growth and move that to go-to-market, to really work on the initiatives that George is driving on the go-to-market.

And then lastly, across the board in G&A, we continue to optimize there.

That's helpful.

Okay, thank you, and good luck.

Thanks.

Simon Leopold with Raymond James.

Thank you very much.

I wanted to drill down a little bit on the ultra high-def opportunity.

So certainly, you sound very constructive on it at 2015, and suggested it might begin this year.

So I want to drill down on the timeline, and specifically, understanding your exposure to markets like Japan and Korea that seem like early adopters.

And then if you can walk us, in terms of what this means to our business, how material will it be, or when does it reach a meaningful threshold that you can call it out?

Thank you.

Sure.

Well, I think probably the best analogy is to look back at the way the HD market rolled out.

And that didn't happen all in one year.

It grew, and it was sustained over several years.

As your question indicates, we will see early adopters out there.

And that's both by geography -- and indeed, as you mentioned, Japan and Korea are, as countries, quite aggressive in terms of the adoption of these technologies.

But we also see certain customers who are willing to adopt a first-mover strategy there.

The announcement by Netflix, we think, is going to have an impact here in the US market.

We also bundled together Ultra HD and HEVC.

We may actually see these proceed independently.

In particular, we have some customers who are looking at HEVC compression even for HD today.

So it's still a little bit hazy in the crystal ball, but we see activity starting in 2014.

I think the comment here is that we don't see massive upgrades really commencing in 2014.

And if we are looking for really wholesale growth opportunities, the kind of which we saw as a Company in 2008, 2007, 2009 -- when HD was really in its prime -- we probably see that more as a 2015 kind of initiative.

That being said, we are positioned with product today.

We expect to have material revenue in 2014, on our way to taking advantage of the opportunity that's going to play out over several years.

And do you anticipate some aspect that your video encoding business could pause ahead of that cycle in sort of a classic Osborne effect of customers who know they want to invest in ultra high-def will perhaps slow down purchases of the current generation?

How do you prepare for that?

Cannily, Simon, that has been happening in the US for a little while.

If you look at our numbers, you can see that our overseas market has been the prime driver of the video processing business that we've had.

It is not a black or white statement.

And certainly in things like multiscreen, it has been quite interesting for us here domestically.

It is also true that, as we outlined in our prepared remarks, that we're doing some very innovative things around MPEG-4 and MPEG-2.

Which are driving market activity in both the US, as well as the international markets.

That being said, I think we've tried to be quite clear and transparent for a number of periods that there is a little bit of a waiting period on the parts of several of our big tier 1 customers looking forward to ultra high-definition.

So we really see upside, not downside from where we sit today.

We think we will continue to roll along nicely in overseas markets where, frankly, even HD is still kind of the new flavor.

Digital video is very often the new flavor in some of the International markets we are participating in.

And domestically, we see -- we don't see negative.

We really see upside around a ramp-up towards Ultra HD.

And in fact, as I mentioned, souped-up HD to look good on these Ultra HD sets that consumers are starting to buy now.

Great.

Thank you for the insights.

You're welcome.

(Operator Instructions)

Tim Quillin with Stephens Incorporated.

Hi, good afternoon.

Good afternoon.

Could you just give us a sense of how we should think about NSG Pro deployment in 2014?

You've got a couple customers right now.

Are you seeing orders more for select QAM replacements?

Or are you seeing broader upgrades that might have persistent trends over the next year or two?

Tim, right now the discussions we are having and the applications we are seeing are really everything under the sun.

So far, we've shipped things in both video-on-demand, as well as modular CMTS applications.

And as I highlighted, we are pretty optimistic about the growth of both of those service areas for our cable customers worldwide.

Certainly Comcast results today point to, as we said in our prepared remarks, a healthy overall video business.

And we think that on-demand network PVR -- cloud DVRs it's called -- are all very important, or increasingly important parts, in fact, of a resurgent video strategy.

We are also seeing customers starting to look at using this technology for converged downstream DOCSIS and on-demand video traffic.

So we see a fair amount of innovation out there.

We are getting tested and now deployed in a variety of scenarios.

Over the course of year, we see it becoming an increasingly big part of our Edge revenue.

Great, thank you.

And then on the services and support business, why was that down a little bit, both quarter to quarter and year over year?

There were some large project revenue, in particular, in Q3 that we talked about that was more of a one-time -- not a one-time, but unusual increase, I would say, in Q3.

Year over year, it was probably the same in Q4 of last year.

But definitely from Q3 to Q4, we had a big project we recognized with a lot of service revenue -- professional service revenue, in Q3.

Right.

Okay.

And then on the gross margin, so you outperformed your guidance in the fourth quarter?

I think that your rationale for the guidance at that time was the same, in terms of chassis shipment on NSG Pro, and not having to scale and manufacturing.

Is it fairly hard to predict the mix of business that you will have in any given quarter?

Is your gross margin guidance for first quarter a little bit of a place holder, and you won't really know the true mix until the end of the quarter, and could have some upside there?

There were multiple reasons that revenue or gross margins were higher in Q4.

It is true that a piece of my guidance was a little bit hedging how quickly the NSG Pro was going to ramp.

But offset by that were our highest margins ever in the Edge business, non-NSG Pro.

So more of the upside had to do with that.

All of our -- across all product lines, gross margins were up this quarter.

And there was a mix shift towards higher gross margin products in the quarter.

So a little bit of the improvement was a hedge in how much NSG Pro we were going to do in Q4.

But the majority of the upside came from those other areas.

In Q1, we have more visibility.

As Patrick mentioned, we received already a multi-million dollar order this quarter.

So we have more visibility.

And the fact that we are going to ship a meaningful amount of NSG Pro revenue this quarter.

So I do know that is going to have an impact.

What I don't know as much -- or I don't have as much visibility into is -- if we end up doing more software types of revenue in the quarter.

That's mostly the upside.

Right.

That make sense.

Thank you.

And then, one last question.

I know you don't like to break out litigation costs specifically.

But maybe if you can just give us a sense directionally how you are thinking about litigation costs in 2014, and what the update is on the timing of your Avid litigation?

Thank you.

Sure.

We expect that to be resolved in Q1.

So we don't expect the same level of litigation costs in the remainder of the year.

And that would be on the order of several hundred-thousand dollars a quarter that we are spending.

Okay, thank you very much.

We have no further questions at this time.

I'll now turn the call back to Patrick Harshman for closing remarks.

Okay, I want to thank everyone for joining us today.

I will summarize by saying that, during the fourth quarter, we delivered results that we believe demonstrate clear progress on advancing our strategy to both accelerate growth for the long-term, as well as build significant shareholder value.

We believe we have more work to do to get all of our cylinders firing at the same time.

Our progress reflects both our focused execution and our customers' confidence in Harmonic, in our ability to continue to deliver industry-leading innovation, support and business partnerships.

So looking ahead in 2014, as we've stated here, we will continue to execute on our growth strategy, innovating in current investment levels to capitalize on coming ways of Cable Edge and video infrastructure market expansion.

But also growing our market share in global customer base.

And as result, we are firm and confident in our targeting of both top and bottom line growth in the year.

And we see a clear opportunity to drive expanded value for our customers and our shareholders.

We thank you very much for your time today.

And we look forward to our next opportunity to speak with you.

Thank you, ladies and gentlemen.

This concludes the fourth-quarter 2013 Harmonics earnings conference call.

Thank you for participating.

You may now disconnect.