Harmonic Inc (HLIT) 2015 Q3 法說會逐字稿

Welcome to the third-quarter 2015 Harmonic earnings conference call.

My name is [Adrian], and I'll be your operator for today's call.

At this time, all participants are in a listen-only mode.

Later, we'll conduct a question and answer session.

Please note, this conference is being recorded.

I'll now turn the call over the Blair King, Director of Investor Relations.

Blair King, you may begin.

Thank you, Adrian.

Hello, everyone.

And thank you for joining us today for Harmonic's third-quarter 2015 earnings conference call.

My name is Blair King.

With me at our headquarters in San Jose, California are Patrick Harshman, our CEO; Hal Covert, our CFO; and Carolyn Aver.

I'd like to point out that in addition to the audio portion of this call, we have also provided slides for this webcast, which you can see by going to the investor relations page on harmonicinc.com and clicking on the third-quarter 2015 preliminary results call button.

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

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

We refer you to the documents that Harmonic files with the SEC including our most recent 10-Q and 10-K reports and the forward-looking statements section of today's preliminary results press release.

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

Please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP basis.

These items together with corresponding GAAP numbers and a reconciliation to GAAP are contained in today's press release, which have also been 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, I'd like to now turn the call over to our CEO, Patrick Harshman.

Patrick?

All right, well thanks, Blair.

And thank you, everyone, for joining us today.

Before we get started with the third-quarter results, I want to first update you on some changes to our executive management team.

First, after five years with Harmonic and an impactful 25-year career in high-tech, Carolyn Aver has decided to step down and turn her focus to her family wine business.

Carolyn, you've been a strong executive and business partner, and you'll certainly be missed.

Stepping onto the team as our new CFO is Hal Covert.

Hal is a real pro with a passion for driving results.

And Hal, I'm really excited to have you join the management team and hit the ground running, bringing to bear your knowledge of the Company and your deep management experience, particularly in tech business transformations and software business growth.

With this change, Hal is stepping off of our Board of Directors and Nikos Theodosopoulos will be taking the reigns as our new Audit Committee Chairman.

Finally today, George Stromeyer, our worldwide head of sales, has also tendered his resignation.

George has been with us for about 2.5 years and has made important contributions as we've navigated through internal change in a challenging external market.

That said, we're fortunate to have a talented next-level team of regional sales leaders, and we've recently made several personnel and alignment changes within our sales organization that better position us to be successful in the current environment.

I'm confident our sales organization is focused, energized by our competitive position, and with my direct support, determined to drive our business now and in the future.

So with that, let's now turn to slide 4 for a summary of our results for the third quarter of 2015.

Our revenue in the quarter was $83 million, down 19% sequentially.

And bookings were $75 million, down 25% from the prior period, reflecting both greater than anticipated turbulence as we strategically transition our Cable Edge business and an overall challenging customer spending environment.

The combination of a lower mix of Cable Edge revenue and continuing progress evolving our video business towards more software contributed to record gross margin.

And we bought back nearly 1.3 million shares of our stock for $7.8 million.

Now, while we're disappointed in the weak topline here, I want to emphasize that we do not believe we've lost any market share, that our mid- to long-term market trends are positive, and that our core value proposition to our customers is stronger than ever.

So let's turn now to slide 5 where, as we've discussed with you in prior calls, there's a number of external market factors we see hampering near-term demand.

Among these factors is service provider consolidation impacting several of our customers during the quarter including 5 of our historical top 10 customers.

We also continue to experience currency-driven delays, particularly in parts of Asia, Europe, Latin America and the Middle East.

And across geographies, we continue to work with both service provider and media customers who are making buying decisions much more slowly than they have historically as they grapple with several significant business and technology transitions such as their emerging over-the-top and data center strategies.

So all in, the confluence of these factors resulted in nearly two dozen material orders being delayed out of the third quarter.

So taking a closer look at how this played out for our video business, after an encouraging second-quarter rebound, the video revenue slipped back to first-quarter levels, dropping 8% sequentially.

Several anticipated deals were delayed.

Now, to be clear again, we're successfully converting existing customers and adding new customers to our new VOS platform, and we had several promising new design wins during the quarter.

However, we're finding final buying decisions taking much longer than anticipated.

One of our largest anticipated third-quarter project was postponed as a direct consequence of customer M&A.

And we saw several emerging market deals delayed as a result of currency considerations.

Consequently, with both a growing number of delayed deals and good competitive momentum, we enter the fourth quarter with actually the strongest pipeline of video projects that we've had all year.

Now that said, our video business outlook will remain cautious until we see a faster rate of final spending approvals.

Turning to our Cable Edge business, revenue dropped $13.5 million sequentially to $11.5 million for the quarter versus $35 million in the first quarter and $25 million a quarter ago.

This decline stemmed from the unexpectedly strong spending pullback associated with a handful of consolidations in the cable industry and from a slackening of demand as some of our customers prepare for a fresh wave of new investment in the converged data and video DOCSIS 3.1 CCAP market, which is challenging for us in the near term, but highlights the mid- and long-term opportunity associated with our CCAP strategy.

As I'll discuss momentarily, during the quarter, we made significant progress on our CCAP initiative, and we remain laser focused on entering and driving growth in this market.

So let's now turn to slide 6 for a closer look at key video market dynamics and their implications for our video business.

The customer evaluation of IP-based video services and underpinning these services in virtualized operations are really the two key video business trends playing out in developed markets today.

And correspondingly, a material and growing portion of the opportunities in our video business pipeline are linked to a migration to IP workflows and the distribution of linear and on-demand, over-the-top, new skinny bundle, and new mobile video services.

And our recently announced Emmy win for really innovative video-over-IP work is indicative of our market leadership here.

Now, in parallel to all this IP and service and over-the-top activity happening, we're also seeing intense operator focus on driving greater network and operational efficiencies.

And in the quarter, this was evidenced by the addition of nearly two dozen customers to our VOS platform, while the number of existing VOS customers buying new licenses to expand functionality grew by nearly 30% over the prior quarter.

However, with a growing number of customers only just now beginning to roll up their sleeves on these topics, we're seeing the education and adoption cycles for these new technologies extending to roughly three to six months longer or approximately two times the length of our historic hardware-based appliance sales.

These longer buying cycles will not last forever, but do constitute a near-term headwind for us.

Now, with respect to Ultra HD or 4K, we continue to see encouraging signs that the market is slowing gaining momentum.

Ultra HD TV sales continue to grow, and set top boxes compatible with the new HEVC compression standard are starting to be deployed.

Importantly, we've recently seen a number of new linear channel announcements including from Rogers in Canada who promise exciting baseball and hockey content next year, or next season, delivered in 4K, DIRECTV's expanded Ultra HD service, and several new Ultra HD channels from both SES and Intelsat.

We expect this market momentum to continue to build while we continue to demonstrate superior picture quality at lower bit rates than our closest competitors, which in turn is enabling us to assemble a growing pipeline of new Ultra HD opportunities.

And at the big IBC event last month, our leadership in this market was further bolstered as we announced a partnership with NASA to launch North America's first linear, Ultra HD channel in 4K at 60 frames per second to televisions and connected devices.

This channel is available to test now, and scheduled to go fully live on November 1st, and it's generating quite a bit of interest among our customers.

Now finally, related to video market dynamics, let me comment briefly on the consolidation impacting the space.

Now, turning first to our service provider customers involved in M&A, our view is that as our customers complete these deals and move to leverage their new combined scale and capabilities, we'll see a rebound in spending as they ensure their competitiveness in the strategically important IP video market.

In the near term, however, these consolidations have created a more challenging spending environment than originally anticipated, and we'll remain cautious until we see clearer evidence of post-deal spending.

Now, separately but still under the same heading of industry consolidation, during the quarter we also saw the acquisition of two of our smaller video market competitors.

We view both transactions as a net positive for us as they help clean up a crowded competitive space.

Additionally, despite currently soft video infrastructure demand trends, the valuations placed on both businesses underscores the strategic importance and value of video compression and delivery technologies, areas where Harmonic holds a unique blend of portfolio breadth, intellectual property, and market leadership.

Okay, let's now turn to slide 7 and take a look at the market dynamics impacting our Cable Edge business.

As you'll recall from our last conference call, we expected the softer Edge QAM demand experienced in the second quarter to persist throughout the back half of this year.

Well, our third quarter result was more severe than anticipated as we saw customer consolidation in Europe and the United States, near-term project timing, and DOCSIS-related transitions all impact demand.

While we anticipate these dynamics will continue to weigh on our Cable Edge revenue in the near term, we also expect a modest rebound in the fourth quarter as some delayed projects move forward, and as we build on a recently acquired international footprint.

And I want to be very clear that we're disappointed with these Cable Edge financial results.

That said, our strategic plan has long anticipated a decline of last year's roughly $300 million Edge QAM market and its eventual replacement by the approximately $1.8 billion sized annual CCAP market.

And for this reason, over three years ago we embarked on an aggressive investment strategy to build the industry's best CCAP platform.

Initial deployments of two-way DOCSIS 3.1 CCAP architectures are anticipated to ramp beginning the middle of next year, and our development program is on pace to hit this development cycle running.

As projected, we'll enter customer and industry labs with our working two-way DOCSIS 3.1 CCAP platform in the current quarter, and field trials are still scheduled to commence in early 2016.

While we still have much work to do in advance of our anticipated mid 2016 launch, the feedback we're receiving from customers on our platform advantages and development progress is increasingly positive.

I've met with several key customers over the past month, including at the SCTE Cable-Tec Expo just two weeks ago where we demonstrated our working DOCSIS 3.1 CCAP architecture running converged live video and live data traffic.

My conversations with these customers and their feedback on our unique system advantages continue the strength in our conviction in Harmonic's ability to be a meaningful player in the CCAP market.

So look, as we sit here today, despite the expected headwinds for the legacy Edge QAM product category, we have our eyes on the price, maintaining an aggressive CCAP investment strategy and remaining laser focused on ensuring we become a market leader in this emerging CCAP space.

And while I acknowledge the risk is real, I'll tell you the upside opportunity is truly compelling.

And there is a growing sense of excitement brewing within our Company and amongst several key customers.

Okay, with that, let's turn to slide 8 and summarize by looking at our progress executing a strategic agenda and to driving differentiated innovations and long-term shareholder value.

In our video business, Harmonic is increasingly positioned to lead the next generation of IP-based video services with industry-leading innovation, products, and support services that uniquely span new content, media, and service provider applications.

With growing interest in network function virtualization in general and our VOS platform in particular, our transition to a higher value and more software-centric business model is well underway as evidenced by our steadily expanding gross margin.

In our Cable Edge business, the coming wave of CCAP investments presents a six times larger addressable market and a compelling growth opportunity.

And we're right on the cusp of penetrating this space with a disruptive blend of innovations that our longstanding customers are telling us they want.

In sum, our mid- long-term strategic position has really never been stronger.

We're positioned to address a significantly larger and more attractive market.

And the products and services we're going to market with deliver greater customer value and provide a durable foundation for the continuing expansion of the gross margin profile of our business.

And finally here, our business' ability to generate cash continues as does our commitment to maximizing shareholder value through a continuing buy back program.

We're truly excited about the future of this Company and the value we can create for our shareholders.

So with that, Carolyn, let me now turn the call over to you to talk once more about our third-quarter results and our financial outlook.

And we'll follow that with a couple of comments from our incoming CFO, Hal Covert.

Carolyn?

Thank you, Patrick.

Let's move to slide 9. As Patrick said, our net revenue for the third quarter was $83.3 million, down 19% from the second quarter's $103.1 million, and down 23% from the $118.1 million a year ago.

The decline in both our video and Cable Edge reflect a combination of project deferrals as our customers transitioned to the next generation of video and data products and architectures as well as an increased level of impact due to customer consolidations and project deferrals.

The persistent strength of the US dollar also continues to negatively impact the purchasing power of our channel partners and end customers overseas.

As Patrick highlighted earlier, this was primarily within pockets of Asia, Europe, Latin America, and the Middle East.

There were no 10% customers in the third quarter of 2015.

Our booking for the quarter were $74.6 million, down 25% sequentially, and 24% from the third quarter of 2014.

On a sequential basis, the same factors I noted a moment ago that negatively impacted our revenue also affected our bookings in the quarter.

And while the decline in bookings was both in our video and Cable Edge segments, it was most pronounced in the video segment reflecting project deferrals from several service providers in North America and EMEA regions.

To a lesser extent, this was also the case in our Cable Edge segment.

Our book-to-bill ratio was 0.9, deferred revenue and backlog was $110.8 million at the end of the quarter, down 8% sequentially and down 5% year over year.

The sequential decline is principally due to lower bookings in the third quarter.

Our gross margin was 56.3% in the quarter, a sequential increase of 310 basis points form the previous quarter, and an increase of 270 basis points from the third quarter of last year.

Approximately two-thirds of the improvement is due to operational efficiencies and product mix shifts in our product portfolio.

The remaining one-third improvement is due to the reversal of accruals.

As we've discussed on prior calls, this improvement also reflects our strategic focus on innovative products and services that deliver differentiated value to our customers.

Non-GAAP operating expenses in the third quarter were $47.3 million, down 5% sequentially and 8% year over year.

The sequential decline reflects our continued focus on balancing our spending levels with expected revenue.

Additionally, due to the results of the quarter, we also had lower variable compensation-related expenses.

Our headcount was 1,012, down 1% from the second quarter and down 3% from a year ago.

Non-GAAP earnings for this quarter were $0.00 per basic share compared to $0.05 per diluted share in the prior quarter, and $0.06 per diluted share in the third quarter of 2014.

Moving to slide 10, let's look into revenue and operating trends in our video segment.

As we've discussed, we experience a challenging customer spending environment with revenue declining $6.3 million sequentially to $71.9 million.

Throughout the quarter, several challenges stemming from technology and business model transitions, currency, and consolidation resulted in a surprising number of project deferrals.

Looking at operating performance, we've been working hard to optimize the margin profile of our business for several years.

We're not done yet, but we've certainly made solid progress.

Gross margin has expanded each year in this segment of our business since 2013, and we're on pace to maintain this trajectory again this year.

We did see a modest improvement from software, but this has yet to play out in a material way in our business.

While lower revenue in the quarter drove lower operating margin in the video segment down a little over a point to 5%, we are encouraged by the increased number of customers trialing our next-generation video architecture and related progress towards evolving our video business to software.

Now let's turn to slide 11 for a look into revenue and the operating trends of the Cable Edge segment.

As Patrick discussed, we experienced soft global demand for our Cable Edge products in the quarter.

We expected some of the project deferrals related to consolidations in the second quarter to continue through the back half of this year.

But a wider breadth of this activity within our customer base and a spending pause in front of the newer DOCSIS 3.1 CCAP technologies also deferred a larger number of projects than we anticipated.

Consequently, revenue in the Cable Edge segment declined $13.5 million sequentially to $11.4 million.

Turning to operating margins, the lower revenue in the quarter and the continued strong investment in our new new DOCSIS 3.1 and CCAP initiatives drove operating income in the Cable Edge segment down $4.4 million to a loss of $4 million.

Now moving to slide 12, let's take a look into the sequential revenue trends in the third quarter.

While the decline in Cable Edge was global, a greater portion of this business is in North America.

And therefor, the impact was felt more directly in the Americas.

In video, the revenue decline was again led principally by our service provider customers in EMEA, and to a lesser extent, the Americas, while broadcast and media was impacted to a much less extent in each of these regions.

While we were impacted by currency in some pockets of A-PAC and Latin America, that impact was partially offset by improved demand from both our service provider and media customers in these regions.

Now, moving to slide 13, while we continue to drive a healthy benefit, the impact of lower revenue this quarter was seen here as well.

We ended the quarter with a cash balance of $87.6 million down $17.5 million from the prior quarter, reflecting a $5 million use of cash of operations, $3 million of CapEx, and nearly $8 million used to repurchase shares of our stock.

The use of cash in operations in the quarter largely reflects the impact of lower revenue.

Our inventory level rose by $7.4 million related to several unexpected project deferrals in the quarter.

We anticipate working capital metrics to normalize in the fourth quarter which should return us to generating positive free cash flow.

Our receivable balance was $64.1 million.

DSAs were 70 days, up slightly from the prior quarter, reflecting a slightly higher mix of international sales in the quarter.

Inventory was $39.9 million, and inventory turns were 3.7 compared to 5.9 from the prior quarter, reflecting the unexpected increase in inventory I discussed just a moment ago.

Significantly, we have returned over $250 million to our shareholders in the form of share repurchases since the second quarter of 2012, leaving our shares outstanding at the end of the third quarter at 87.5 million shares, a 34% reduction over the same period of time.

Now let's turn to our outlook on slide 14.

While we do expect higher bookings in the fourth quarter, we enter the quarter with lower backlog and deferred revenue, which dampens our revenue outlook for the quarter.

We therefor expect our fourth quarter revenue to be in the range of $78 million to $88 million.

Non-GAAP gross margin in the fourth quarter is anticipated to be in the range of 54% to 55% due to an expected favorable mix of higher margin video product revenue.

For the fourth quarter of this year, we have targeted our non-GAAP operating expenses to be within a range of $46 million to $47 million.

And finally, we anticipate our non-GAAP tax rate for the fourth quarter to be approximately 21%, subject to our domestic versus international business split.

I would like to remind you that Q4 is likely the low point of operating expenses for the year.

Consequently, at this time, we anticipate operating expenses for the full year of 2016 to closely resemble our expenses for the full year of 2015.

Finally, as Patrick mentioned, I am leaving Harmonic to join my husband in running our family winery.

We are fortunate to have someone of Hal's experience both financially and operationally to step into the CFO role at this time.

I'd like to thank Patrick and Hal and wish them much success as Harmonic capitalizes on the opportunity in front of it.

With that, I'd like to turn the call over to Hal for a few comments.

Thank you Carolyn and Patrick for your kind words.

I'm excited about joining the Harmonic management team.

I believe that we will have a rewarding future as we continue to evolve our video segment with more of a software orientation and as we prepare to penetrate a much larger addressable market with our upcoming new CCAP architecture.

It is increasingly clear to me that Harmonic's core value proposition, market leadership, and strategic direction are in sync with the technology and marketplace transitions that are underway.

After eight years of serving on the Harmonic Board and Audit Committee, and working closely with Carolyn and her team, I am looking forward to leveraging my experience and knowledge about the Company to enhance growth and shareholder value.

Blair, I will now turn the call back over to you.

Thanks, Hal.

Adrian, if you could please open the call up for questions, and be happy to facilitate any answers.

Thank you.

We'll now begin the question and answer session.

(Operator instructions)

James Kisner, Jeffries.

Hi, guys.

Thanks for taking my questions.

So one thing I wanted to just clarify a little bit here was the currency-driven delays.

I guess I just wanted you to talk about that a little bit more.

I'm just thinking that if major purchasing power was reduced because of currency headwinds, that wouldn't necessarily be a delay unless currency bounces back.

I mean, is there just -- are they having liquidity issues?

(Inaudible) understand that indeed that's a temporary thing and a push-out, these currency headwinds.

Can you just -- and not just sort of like a disappearing of orders -- can you just explain that a little bit better?

Thanks.

Well, thanks for the question, James.

Listen, indeed we don't have a crystal ball on exactly how this will work out.

But I mean, let me give you a more specific example.

We saw several projects in Latin America, projects that we think are strategically important to our customers, put off.

Now, indeed maybe the currency situation there won't improve, but maybe it will.

And maybe it's part of a re-planning process for them to re-prioritize things out of which a broader portfolio of projects may be evaluated.

So it's true that in that case, we don't have a crystal ball, and we can't say definitively how things will work out in the future.

I would simply say that we're doing business with major players on an international scale, players that I believe intend to be competitive, intend to invest in their networks going forward.

And they're wrestling right now with a business plan that didn't contemplate the currency imbalances that exist today.

And let me emphasize, these are markets where we sell in US dollars.

So our products and services as well as others look proportionally more expensive.

And we think that our customers are simply grappling with how to best manage their way through that.

And that process is leading to some delays.

That's helpful.

Can you talk about Cable Edge for a minute?

I guess trying to understand -- sounds like if I'm interpreting it right, that you just had some customers that have just stopped buying Edge QAMs and moved to CCAP, and that's causing a temporary depression in that business.

I want to make sure that I understand that correctly.

And I guess sort of separately, how should we think about the trajectory?

And I know Q4, you're saying you're going to be up a little bit.

But should we just assume this remains pretty close to this level, say, through the first half of this year until your CCAP stuff ramps post-QM trials, or if there's any kind of color you can give there on the longer term trajectory on the Edge QAM -- or the Cable Edge business?

Thanks.

Well, I'll start with the last question first.

And while we're certainly not here giving detailed guidance for 2016, specifically in the Cable Edge area, I would say roughly the zip code of business for the next couple of quarters is a good if not conservative assumption.

Stepping back from that to go to your question about dynamics, I mean, let me be clear.

There's [multiple] dynamics playing out here as with out video business.

The impact of customer consolidation and delayed projects is certainly real quite independent of any technology transition.

As you know, both in this country and overseas, a number of leading cable operators are involved one way or another and focused on M&A activity.

Second, the currency issue is non-zero even in the Edge space.

Now, even though the Cable Edge space tends to be tilted a little bit more towards the US, we also do Cable Edge business in other parts of the globe, so that was the second factor also impacting the Cable Edge business.

And third, indeed, there is some amount of traffic that is migrating from traditional VOD platforms to DOCSIS platforms.

There's no customers who are going 100% wholesale, but we do see a migration of some traffic, which is also, I'd say, dampening demand for incremental Edge QAM capacity in the short term, in the near term.

So all three of those together conspire to make a particularly weak quarter.

We expect the consolidation issue in particular to resolve over the next couple of periods.

But the real uptick in this business, the meaningful uptick where we think real value is going to get created is really all tied up in our big push into CCAP, which as we've said a couple of times, is targeted to really commence in earnest from a revenue perspective the second half of next year.

Okay.

Last housekeeping.

Just, I mean, is it fair to say Q1 seasonality might be a little muted?

I mean, it's usually kind of a big down quarter for you off of a (inaudible) Q4.

I mean, it's not always like that, but sometimes it is.

I know you don't have a lot of visibility.

Tough question.

But any thoughts on just perhaps in video in particular what you're thinking about seasonality in Q1?

Yes, I regret to say it is a little bit too early.

We certainly don't have -- it's purely a guess or a feeling, James, and we don't really have good feedback or good visibility into our customers' plans for the first quarter.

I mean, I would say that seasonality historically has been most pronounced with the cable part of our customer base.

To the extent our video business is a little less cable-centric from that point of view, yes, less impactful.

And of course, as I highlighted, in particular in the video business, we've got a strong pipeline of projects.

There's kind of -- there's a backup here.

I think that there's a reasonable chance that we may see that break loose early next year if not at the back end of this quarter.

And I think that that would be a positive driver of business in the first quarter that might offset typical seasonality.

But we'll have to wait and see, and we'll update you when we've got better visibility.

Okay, thanks very much.

That's very helpful.

I'll pass it.

Greg Mesniaeff, Drexel Hamilton.

Yes, thank you.

I was wondering, Patrick, if you can give us more color on the recent shift towards a higher software content for your products.

What product areas are you seeing that in?

And going forward, what impact do you see that having on the pricing of your products, the price competitiveness of your products?

If you can just kind of give us some color there.

Thanks.

Yes, so good question.

Part of our VOS initiative, which started initially with our video processing products and coding, transcoding, et cetera, is a push towards the core of the intellectual property being captured in software.

We can deliver that as an appliance or indeed as pure virtualized software to be run on a customer's data center or off-the-shelf server.

So it's encoding and transcoding we're -- there's the sharp end of the stick for us.

The rest of everything we do in our video business is following.

And indeed, in those cases where our customers are not buying the off-the-shelf server from us, just the virtualized software, we're seeing a lower topline price.

But our strategy is just to drive obviously equal or greater gross margin dollars out of those transactions.

On an all-in basis, it's a modest impact today.

But proportion of sales that are pure software continues to expand.

And I think you'll continue to see it expand over the next year.

So indeed, it may be a headwind for the topline, but the strategy here is not primarily about the topline, it's about driving growth across margin dollars and then of course ultimately, from that perspective, the demand trends and the competitive position this new VOS platform has put us in is looking increasingly positive.

So in other words, in addition to what you said about the impact on the topline and margins, is it fair to say that, going forward, your products with the higher software content will be more price competitive and less pricey, quote-unquote, vis-a-vis the competition?

Is that -- and make, therefore, more attractive as an alternative for your customers?

Let me give you a qualified yes.

I don't want to suggest that we think that we've not been price competitive up until now.

But indeed, going forward, some of our competitors are engaged in software, others aren't.

And with the market by and large, particularly the Tier I customers pushing hard towards data center where they've got a real volume purchasing power over off-the-shelf server technology, et cetera, there's an even more compelling commercial offering that we can put in front of them.

And of course, our story and our value proposition isn't just about the price or the value of the software itself, but it's the broader total cost of ownership.

And that is where particularity the Tier Is are out in front, really realizing the significant really realizing the significant operating efficiency advantages of moving to a data center kind of infrastructure approach.

Got it.

And just one --

(Inaudible)

Just one quick follow up.

We've also seen your revenue segment from service and support creeping up throughout the year as a percentage of total sales.

Do you see that as being very much linked with higher software sales as a percentage as well?

The two kind of going together?

So our answer is yes, Greg.

Got it.

Okay, great.

Thank you.

All right.

Thanks very much.

Simon Leopold, Raymond James.

Thank you.

Appreciate you taking the question.

Quick housekeeping one first is if we could get maybe a little bit of color of how the former production and playout business is doing?

Sort of my interpretation is it sounds like you expected a good fourth quarter given the margin commentary, but just wondering where we are in the baseline revenue within the video products?

It's doing actually relatively well.

As you know, we don't break out explicitly.

But I'll tell you actually, our broadcast and media customers are not involved in much M&A right now.

And so we haven't had that headwind for our production and playout products.

And within our video revenue, actually the production and playout, and more generally the business that we're doing with the content and media players is relatively the healthiest and the strongest.

It's the products that we sell the large service providers that have been most impacted by slowdowns associated with M&A.

And that, I think, makes sense.

Okay.

And then this is kind of a bit of a difficult question to answer, I imagine.

But back in 2013, you exited the transmission business.

You sold that business that you had been in.

And just wondering what your appetite might be to reenter that particular part of the market for hopefully obvious reasons.

But given that you know the customer base, you know the products, just want to get your perspective.

Thank you.

Yes, well, tricky question, Simon.

Look, we're all in on the next generation of cable infrastructure.

Our view now, and our view actually in 2013 is that future is really all about DOCSIS.

And frankly, it's no longer analog.

It's all about IP.

So at the risk of getting too much into the detail, we're very interested in the future of the cable network vis-a-vis delivering IP packets to people's homes and, indeed, deep into the network.

But we're less interested in what I would call legacy analog transmission.

That's our strategic orientation.

It's why we did what we did, both divesting one business and really doubling down in terms of investing in this new CCAP platform that you know that we're working with.

And of course as I'm sure you know being kind of an expert in this area, Simon, the cable operators are increasingly looking at DOCSIS not only centralized, but new distributed architectures.

And here, indeed, I think that this Company has unique know-how, expertise, customer relationships, et cetera, to be successful above and beyond technology.

We're certainly going to press all of those advantages, and I think increasingly as part of our winning formula.

Might we down the road look for opportunities to further strengthen our hand?

Indeed, maybe.

That being said, we think we've put ourselves in a pretty good position as it is to take good advantage of where the cable operators are going with their next-generation IP networks.

Great.

Appreciate that.

And maybe an equally difficult question to answer.

I know there are not a lot of really pure comparables to your business, but there are other companies that sell to similar customers.

They aren't, at least seemingly, to experience the same kind of slowdown, at least not to the same degree.

So while you have peers selling to the operators as you are, they don't seem to be suffering as much due to the operator consolidations.

Can you help us understand what makes you different?

I don't know that we're different from any one particular competitor, Simon.

In terms of the slowdown, I think it's worth pointing out that we're not in CPE.

As you know, one of our large customers announced today, and the biggest step-up in spending was around CPE equipment.

Will we have reasonable scale?

The truth is we participate in a couple relatively narrow, specific areas.

And those are areas where we think we continue to lead.

But they're also areas where, for one reason or another, we think we've seen a spending slowdown.

I would hasten to add that in our case, we're driving across our portfolio a couple of very transformational product transitions.

In video, we're moving to a virtualized infrastructure.

And around Cable Edge, we're pushing on something that has really captured the imagination of our large customers.

There's no doubt that that's also part of the thought process and the calculus of how our customers are thinking about spend and those categories in general and about doing business with us.

A great example is what we're doing in DOCSIS, focusing just on 3.1 instead of 3.0.

And we announced a year ago our decision, we were informed by our customers' input and feedback to drive straight for 3.1.

And so that's another example beyond CPE where we see cable customers continuing to invest in 3.0 platforms, no doubt about it.

We've made the bet, for better or for worse, to be fast as possible to market with two-way 3.1.

And as I said earlier, we'll be demonstrating that in customer and industry labs this quarter and rolling that out to the field early next year.

We think that's on pace with, if not ahead of the rest of the market.

So strategic decisions as well and cadence of product releases, I would also suggest you consider.

Great.

Thank you for taking my questions.

You're welcome.

Thank you.

[Jeff Bernstein, Cohen.]

Yes, hi.

Thanks for taking my question.

So understandably, the headwinds that are out there are being experienced by anybody selling globally.

And you have particular technology transitions going on.

I guess seeing a significant change in a couple of senior management positions makes you kind of step back along with the magnitude of the decline that we've seen here.

So why should we not be worried?

Or what is it that is causing the transition in people that you felt like needed to take place at this point in time?

Well, I want to be clear.

I mean, Carolyn here -- and you can complement it -- well, Carolyn's departure is a loss for the Company.

That's for sure.

And this is not a change that the Company precipitated.

That being said, we're thrilled to have Hal here.

He'll just step right in.

As you know, he served on our Board and knows the Company well.

And while Carolyn, your departure will be a loss, I think we'll largely be able to proceed without really missing a beat.

And frankly, we'll benefit from the additional and new, fresh perspective of Hal.

So in the context of a business with a lot of opportunities, but also admittedly headwinds and some challenges, I think a fresh set of eyes, a fresh approach is a positive thing, and one that I hope is, in total, welcomed by our stakeholders.

So in terms of the sales leadership, were you guys surprised and unhappy about how you're forecasting has been?

I think you said with a lot of conviction that you have not lost any share to any competitors.

Just make us understand a little bit more what is going through your mind about what has happened here after a prior quarter where you looked like you were sort of muscling through these transitions?

Yes.

Well, we did feel as though we're muscling through.

And candidly, while I think we've executed fairly well in terms of the way we've gone to market, look, in everything we do, there's room for improvement.

And candidly, there's certainly room for improvement in our forecasting.

That being said, particularly when you're talking about M&A and a lot of moving parts with our customers, even they themselves don't have great crystal balls in terms of what's coming next.

So we're not so focused on beating ourselves up.

But we are focused on continuing asking ourselves how we can do better.

And that's what we're trying to do across the board, in sales, in engineering, and in every function.

And you can continue to expect us to constantly look for ways to improve the way we're running and driving the business.

Jeff, let me just add a couple of points.

This is Hal.

Number one, as indicated, I was on the Board for eight years, and I worked closely with Carolyn and her team as Chairman of the Audit Committee.

So I can tell you there's no issues from an accounting or financial standpoint that shareholders should be worried about.

The second thing is that if you look at my experience and background, I've been around the Valley for a number of years now as a CFO of a number of public companies and on the boards of a number of public companies.

And I wouldn't take the risk of damaging my reputation or my position if I didn't believe in the Company's strategic direction and operating plan, and I did not believe in the management team here.

So I think the Company has a good path forward, recognizing that we have a bumpy transition that Patrick has highlighted, I think we have a strong management team.

And I believe with my background and experience that I'm going to be able to help Patrick and the team so that Patrick can spend as much or more time with customer-facing activities and making sure that the transition continues so that we can hit the inflection point hopefully next year with an upward trend.

Great, I really appreciate the frank answers, guys.

We think you guys have a lot of opportunities in front of you.

So good luck.

Well, thank you very much, Jeff.

And we appreciate the candid question.

I'll not turn the call over for final remarks.

Okay, well thanks very much.

It was -- I think we just hit on really the key points.

From our perspective as a combined management team and a company, we're driving clear technology leadership in a challenging spending environment, but we're confident about our long- to mid-term strategic direction.

In our video business, our compression and delivery technologies, are clearly being valued and prized by a growing number of service provider and media companies.

And we see the technologies gaining traction and strategic importance to the market at large.

In the Cable Edge segment we're executing and we're increasingly well positioned to meaningfully penetrate this much larger CCAP market opportunity that's in front of us.

Our entire global staff is focused.

We're excited about what we're doing.

We've got strategic relationships that are growing with industry-leading service provider and media customers.

And the gross margin profile of our business is also steadily improving.

And finally, as we've just discussed, we've got a leadership team that's truly committed to diving our next phase of growth, profitability, and shareholder value creation.

So I want to thank everybody for joining us today, and let you know that we very much appreciate your support and we look forward to keeping you updated on our progress.

Good day.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating, and you may now disconnect.