Harmonic Inc (HLIT) 2015 Q4 法說會逐字稿

Welcome to the Q4 2015 Harmonic earnings conference call.

My name is Danielle, 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 Blair King.

Blair, you may begin.

Thank you, Danielle.

This is Blair King at Harmonic, and I appreciate everyone being here today.

With me here in our headquarters is Patrick Harshman, our CEO; and Hal Covert, our CFO.

I'd like to point out that in addition to the audio portion of this call, we've also provided slides for this webcast, which you can see by going to the Investor Relations page on HarmonicInc.com and clicking on the fourth-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 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 said, I'll now turn the call over to our CEO, Patrick Harshman.

Patrick?

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

I'll begin with a brief summary of our fourth-quarter results, and then turn to updates and outlook for our Video and Cable Edge businesses.

Hal will then discuss our finance results and outlook for the quarter and the year.

And I will conclude by summarizing our key strategic priorities for 2016.

So with that, let's turn now to our slide 4, where we see that our fourth-quarter revenue was approximately $87 million, up 4% sequentially.

The financial highlight of the quarter was bookings of $101 million, up 35% sequentially, and our strongest bookings quarter of the year.

Relative to the third quarter, the rebound in bookings occurred across all geographies and product categories, but with strongest overseas and for our video business.

Gross margin was 55%, our second-highest margin quarter ever, a percentage point below the record 56% gross margin attained in the third quarter, and continuing evidence of the shift to software underway in our video business.

EPS was $0.01 -- just ahead of the breakeven result of the third quarter.

So let's now turn to slide 5 and take a closer look at our Video business.

The first key message here is that we are seeing improving video infrastructure demand trends globally.

As you know, for most of 2015, we saw hesitance to spend in the face of evolving television business dynamics, significant service provider M&A and significant technology transitions.

So it was good to see some of this pent-up demand break loose in the fourth quarter, driven in particular by global telco, cable and satellite operators.

Looking ahead to the balance of 2016, well, customer M&A, a transforming pay-TV business environment and associated technology transformations will continue.

We forecast improving demand and resulting growth of our organic Video business.

The second key Video segment message is that we're continuing to steadily transition our business to be more software-centric, with converged traditional pay-TV and over-the-top services playing an increasingly central role in our business.

Our VOS platform, which is enabling groundbreaking video compression delivered to our customers as software, is gaining strong market momentum, and was the key to several competitive IPTV and over-the-top wins in the fourth quarter.

As Hal will discuss, this ongoing video business transition to software results in our expectation for compressed top-line growth, but expanding gross margins and operating profit.

And the third key message of our Video business, is that our market position, technology differentiation and financial performance will all be enhanced through the Thomson Video Networks acquisition.

Let's turn now to slide 6 and take closer look at the TVN deal.

Since announcing the acquisition in December, global customer reaction has been overwhelmingly positive.

Now, as a remainder, TVN is an approximately $75 million revenue-per-year video compression competitor, with strong presence in Europe, Middle East and Africa, Asia Pacific and Latin America.

And a key supplier to blue-chip customers such as the BBC, BSkyB in the UK, DirecTV Latin America, Foxtel in Australia and Telefonica.

Through this deal, Harmonic will become one of only two global suppliers of video solutions that have product breadth, scale and leading market share -- the other competitor being Ericsson.

And through this combination, we expect to further strengthen our technology and product innovation capabilities, to move even faster to address emerging customer challenges and opportunities.

TVN is a well-run Company, with very talented employees, and we expect the opposition to be accretive within the first year, and strongly accretive thereafter.

And we now anticipate the deal will be closed by the end of March -- and Hal will provide corresponding financial guidance shortly.

So let's now turn our Cable Edge business on slide 7. Our Cable Edge strategy is to become a major player in the approximately $2 billion CCAP market by delivering truly innovative new DOCSIS 3.1 CMTS technology, that we call CableOS.

Since our last update to you, we've made significant progress, and our confidence in the ultimate success of our CableOS program continues to grow.

So let me now provide a couple of specific updates.

First, in addition to continuing to hit our internal development milestones, during the fourth quarter, we successfully demonstrated full DOCSIS 3.1 interoperability at CableLabs.

Second, I've been telling you that we have been working closely with a couple of lead customers, and I'm now pleased to report that we've received our first multi-million-dollar financial commitment from a Tier 1 international operator.

And third, we remain firmly on track to release CableOS and make our first shipments in a second half of this year.

Now, in the meantime, we expect global demand for our legacy EdgeQAM technology to be steady, but similar to the depressed level that we saw in the back half of 2015.

Meaning that our Cable Edge business will weigh on our total Company financial results until CableOS revenue starts to really take off.

Stepping back, for this segment of our business, it really is all about CableOS.

This is a major program that, frankly, carries real risk, but also tremendous upside.

And we are determined to turn this into a growing several hundred-million-dollar per-year business, with full product launch and further strategic wins later this year.

With that, Hal, let me turn the call over to you.

Thank you, Patrick.

I want to thank everyone for joining our call today.

During my discussion, I would like to cover two topics.

First, our financial results for Q4 2015.

And then our financial goals for Q1 and the year of 2016.

Since this is my first earnings call as Harmonic's Chief Financial Officer, and we just wrapped up a difficult year from a financial results standpoint, I would like to make two opening comments.

First, based on fact patterns that we have experienced over the last several quarters in our Video product segment, the management team has done a good job in 2015, maintaining our market leadership position.

As our customers have explored, and in some cases, taken the first steps in the transition to software-based video solutions.

While still in its early stages, it is our view, supported by customer feedback, that this transition will accelerate over the next year and beyond.

We believe we are in a solid position with our current VOS product offering to take full advantage of this opportunity to expand our market share and gross margin as a percent of revenue.

In addition, the acquisition of TVN clearly solidifies our market leadership position in the video market, enhances our revenue-generation momentum.

And positions the Company to achieve approximately $20 million of synergies on a global basis -- $18 million related to operating expense, with the remaining $2 million accounted for by cost of revenue.

We expect to record $5 million of these synergies in 2016, which equates to approximately $10 million on an annual run rate basis, and complete implementing programs for the remaining $10 million late in 2016.

By doing this, the Company will be in a position to enter 2017 with the benefit of $20 million of synergies fully implemented.

Turning to our Cable Edge product segment, based on feedback from our customers who are working with us in the development process of our planned converged product offering.

We will be in a good position to become a meaningful player in a large and growing marketplace in the second half of 2016, when we expect to start shipping our new products.

Second, the management team clearly recognizes that we need to improve our financial performance.

We believe that with continued strong marketplace acceptance of our customer value proposition in both of our product segments, improving marketplace momentum and solid operational execution, we will achieve continuous financial performance improvement throughout 2016.

With that said, I will now discuss our Q4 2015 financial results and our 2016 financial guidance.

Please note that our financial results and guidance are based on non-GAAP measurements.

A table reconciling GAAP and non-GAAP measurements is included in our Q4 2015 earnings press release issued earlier today.

Bookings for Q4 2015 were $101 million compared to $4.6 million in Q3 2015 and $121.1 million in Q4 2014.

Our book-to-bill ratio for Q4 2015 was 1.2.

Our bookings for the quarter were in line with expectations on a geographic and product segment basis.

And there was no single customer order or geographic performance that skewed our bookings results.

Total revenue for Q4 2015 was $86.6 million versus $83.3 million in Q3 2015 and $107.9 million in Q4 2014.

For Q4 2015, Video revenue was $72.4 million compared to $71.9 million in Q3 2015 and $86.9 million in Q4 2014.

Cable Edge revenue in Q4 2015 was $14.2 million versus $11.4 million in Q3 2015 and $20.9 million in Q4 2014.

The sequential increase was in line with expectations for both of our product segments.

On a year-over-year basis, the decrease in revenue was due to delays in customer purchase decisions related to product transitions, and M&A activity in both of our product segments.

There were no 10% customers in Q4 2015.

Gross margin for Q4 2015 was 55% versus 56.3% in Q3 2015 and 54.1% in Q4 2014.

Operating expenses for Q4 2015 were $46.7 million compared to $47.3 million in Q3 2015 and $51.6 million in Q4 2014.

The year-over-year decrease is the result of continuing efforts to tightly control and reduce operating expenses.

Operating profit for Q4 2015 was $1 million compared to a loss of $0.4 million in Q3 2015, and profit of $6.7 million in Q4 2014.

The sequential improvement was essentially due to higher revenue, while the year-over-year decrease was due to lower revenue.

Non-GAAP EPS for Q4 2014 was $0.01 versus breakeven in Q3 2015 and $0.06 in Q4 2014.

Again, the difference in both cases was a result of revenue -- higher revenue in Q4 2015 when compared to Q3 2015, and lower revenue in Q4 2015 when compared to Q4 2014.

We had 85.6 million weighted average shares of diluted common stock outstanding as of the end of Q4 2015 versus 88 million as of the end of Q3 2015 and 89.3 million as of the end of Q4 2014.

I will discuss our financial results for 2015 from an income statement standpoint when I cover our 2016 financial guidance.

Now turning to our balance sheet.

We ended 2015 with $152.8 million in cash compared to $87.6 million as of the end of Q3 2015 and $104.9 million as of the end of Q4 2014.

Our cash balance as of the end of Q4 2015 included net proceeds of $74.1 million from the issuance of $128.3 million in convertible notes less related fees, and the purchase of $50 million of our common stock.

Taking this into consideration, in Q4 2015, we used $8.9 million of cash.

Accounts receivable represents approximately $5 million of the cash usage, while the balance was accounted for by the purchase of our common stock.

During Q4 and 2015, we purchased approximately 0.5 million shares of our common stock at an average price of $5.95 as part of our authorized stock repurchase program, and 11.1 million shares as part of our convertible notes issuance at $4.49 per share.

As a result of these purchases, we reduced our outstanding common stock share count by approximately 11.6 million shares during the quarter.

Our days sales outstanding at the end of Q4 2015 were 73 days versus 70 days at the end of Q3 2015 and 63 days at the end of Q4 2014.

Our days inventory on hand were 91 at the end of Q4 2015, 100 and the end of Q3 2015, and 59 at the end of Q4 2014.

We have the opportunity to improve working capital management in 2016, and that will be a key area of focus for us throughout the year.

At the end of Q4 2015, we had $120.1 million of backlog and deferred revenue versus $110.8 million as of the end of Q3 2015 and $128.7 million as of the end of Q4 2014.

Staffing at the end of Q4 2015 was 989 versus 1,012 at the end of Q3 2015 and 1,028 at the end of Q4 2014.

Now I will discuss our financial guidance.

Since the acquisition of TVN is not expected to be finalized until the end of the first quarter of 2016, our financial guidance for Q1 2016 only includes projections for Harmonic on a standalone basis.

For Q1 2016, we estimate that total revenue will be between $82 million to $86 million.

This compares to total revenue of $86.6 million in Q4 2015 and $104 million in Q1 of 2015.

Our Video product segment revenue for Q1 2016 is projected to be in the range of $70 million to $72 million compared to $72.4 million in Q4 2015 and $69.3 million in Q1 2015.

The sequential decline is essentially due to seasonality.

On a year-over-year basis in 2015, our average quarterly revenue was $73 million.

In addition to the ongoing shift to software, to some extent, our Video revenue on a quarterly basis is subject to closing large projects in a particular quarter.

This attribute can cause some lumpiness in our quarterly revenue profile.

Our Cable Edge product segment revenue for Q1 2016 is projected to be in the range of $12 million to $14 million compared to $14.2 million in Q4 2015 and $34.7 million in Q1 2015.

The year-over-year decline is a result of customers putting off major video Edge purchase decisions until the next generation of our converged Cable Edge products begin shipping, which is planned in the second half of 2016.

Our new products will ship with DOCSIS 3.1, the next-generation operating system.

Gross margin for Q1 2016 is projected to be 54% to 55% compared to 55% in Q4 2015 and 53.9% in Q1 2015.

Operating expenses for Q1 2016 are projected to be in the range of $46 million to $48 million compared to $46.7 million in Q4 2015 and $49.9 million in Q1 2015.

Again, the year-over-year decrease in operating expenses is the result of our ongoing effort to tightly control and reduce operating expenses.

An operating loss for Q1 2016 is projected to be in the range of $1 million to $2 million compared to operating profit of $1 million in Q4 2015 and $6.1 million in Q1 2015.

The sequential difference is due to the mix of lower revenue and potentially higher operating expenses related to payroll taxes, while the year-over-year decline is due to lower revenue.

Non-GAAP EPS for Q1 2016 is anticipated to be a loss of $0.02 to $0.03 compared to non-GAAP EPS of $0.01in Q4 2015 and $0.05 in Q1 2015.

The sequential decline is due to lower operating profit as just discussed, and approximately $1.3 million of non-GAAP interest expense related to our convertible notes.

Q1 2016 is the first quarter that will reflect a full quarter of interest expense for our convertible notes.

On a year-over-year basis, the reduction in non-GAAP EPS is due to lower Cable Edge revenue and interest expense, somewhat offset by lower operating expenses.

In future quarters, Harmonic plus TVN synergies will more than offset interest expense.

We expect to have a approximately 79 million shares of our stock outstanding as of the end of Q1 2016.

For the full year of 2016, our financial guidance is as follows.

Please note that our annual guidance includes three quarters of financial projections for TVN, Q2 through Q4.

Starting with revenue, Harmonic's organic Video product segment revenue in 2016 is anticipated to be $290 million to $295 million as opposed to $292 million in 2015.

During 2016, we believe that the transition to our VOS software platform will accelerate.

We expect that TVN will result in adding approximately $55 million to $60 million of Video revenue in 2016.

Cable Edge revenue in 2016 is projected to be $55 million to $60 million as compared to $85 million in 2015.

In the first half of 2015, Cable Edge revenue was $59.6 million, and it was $25.6 million in the second half of the year.

In the first three quarters of 2016, we anticipate that Cable Edge revenue will generate between $12 million to $14 million in each quarter, and then increase in the fourth quarter, as we expect to start recognizing revenue for the next generation of our converged Cable Edge products.

Given the aforementioned revenue elements, our projected revenue for 2016 is $345 million to $355 million on an organic basis as compared to $377 million in 2015 and $400 million to $415 million for 2016, including TVN.

Turning to gross margin as a percent of revenue, Harmonic's organic Video gross margin percent is anticipated to be 57% to 58% as compared to 57.4% in 2015, as a result of higher VOS revenue.

TVN's non-GAAP gross margin percent is expected to be 47% to 50%.

We expect that TVN's gross margin percent will increase in 2017 by approximately 200 basis points as we take advantage of the leverage that our combined supply chains offer.

Cable Edge gross margin percent is projected to be 45% to 47% as compared to 44.4% in 2015.

We expect that our gross margin percent will increase in 2017 by approximately 200 to 300 basis points, as our converged Cable Edge products become a larger part of our overall shipments.

Given the aforementioned gross margin percent elements, our projected gross margin percent for 2016 on a Harmonic-plus-TVN basis is projected to be approximately 55%.

Operating expenses for 2016, including TVN, are projected to be between $208 million and $212 million compared to $193.5 million for Harmonic in 2015 on a standalone basis.

This projection includes approximately $5 million of synergies that are expected to be obtained in 2016.

And taking together with overall global cost-cutting initiatives, are part of projected annual synergy savings of $16 million to $18 million.

The full annual benefit of the aforementioned synergies is expected to be obtained in 2017.

Operating profit for 2016, including TVN, is projected to be between $14 million to $16 million.

This compares to $12 million in 2015 for Harmonic on a standalone basis.

With the attainment of the aforementioned synergies, we will be in a position to generate double-digit operating profit in 2017.

Non-GAAP EPS, including TVN, is projected to be in the range of $0.09 to $0.12 for 2016 as compared to $0.10 in 2015 for Harmonic on a standalone basis.

This projection includes approximately $5 million of non-GAAP interest expense in 2016 related to our convertible notes.

In summary, by achieving our 2016 financial guidance, we will truly demonstrate the accretive benefit of our Harmonic-plus-TVN combination.

There are four other data points that we would like provide as part of our 2016 financial projections.

First, after taking the payment point for the TVN acquisition and related restructuring charges into consideration, our goal is to end each quarter of 2016 with $50 million to $60 million of cash, including capital expenditures and changes in working capital.

To summarize, we ended 2015 with approximately $153 million in cash.

In 2016, we expect to use approximately $80 million in cash for the acquisition of TVN, incur approximately $20 million in restructuring charges and use approximately $15 million for capital expenditures.

Second, for 2016, we expect that our non-GAAP tax rate will be approximately 15% versus approximately 21% in 2015 as a result of more revenue being generated in international markets for both Harmonic's organic business, as well as the impact of TVN.

Third, during 2016, we currently do not plan to purchase any of our outstanding shares of common stock.

At the end of 2016, we anticipate having approximately 80 million shares of common stock outstanding as compared to 85.6 million at year-end 2015.

Finally, starting with Q2 2016, our financial results will include the impact of the TVN acquisition as part of Harmonic's overall financial results.

To be clear, TVN's financial impact will not be identified as individual elements in our financial statements.

Certain aspects of TVN's 2015 and 2016 pro forma financial results will be included in those for our financial statements.

This presentation format is in accordance with GAAP.

I will now turn the call back over to Patrick.

Okay, thanks very much, Hal.

Turning now to our slide 11, let me conclude by summarizing our key strategic priorities.

We have a Video business that is the market share leader in video encoding and related systems for the world's leading [day] television and media companies.

We're very focused on increasing the value of this business by leading the industry transformation to software-based video infrastructure from the next generation of high-quality, over-the-top services.

Through our acquisition of TVN, our objective is to accelerate this technology strategy, expand our global footprint and drive greater profitability sooner.

In addition to our Video business, we're also investing in the Cable Edge business that is poised for breakout growth with the release of our innovative CableOS platform.

Most of 2016 will be spent bringing this new CableOS product to market.

Increasingly positive customer response collaboration and now financial commitment cause us to remain optimistic about the growth and profitability outlook for this business.

And we're aiming to secure several Tier 1 customer wins by year end.

And finally, I want to stress that our entire organization is focused on the execution of these strategic initiatives, driving top-line growth and margin expansion.

And realizing approximately $20 million of annualized cost synergies to the Harmonic-Thompson combination, positioning the Company, as Hal has just explained, to exit 2016 with double-digit operating margin and a truly compelling future.

With that, we would like to open the call for your questions.

(Operator Instructions)

George Notter, Jefferies.

Hi, guys.

Thanks very much.

I wanted to ask about the TVN revenue assumption for 2016, and I think you guys said $55 million to $60 million.

I know that business was a $75 million, $78 million upon announcement of the deal.

So it feels like you are assuming some bigger revenue synergies here than you previously talked about.

Can you walk us through what you are assuming there, and why the change versus the prior thoughts?

Yes, first of all, just to point out, George, that the $55 million to $60 million is for three quarters.

And if you look back at 2014 and 2015, revenue for TVN was roughly in the $7 million to $76 million range for each one of the years.

And we're looking at, as we, again, head out of 2016, to be at or above that level.

So the revenue in 2016 is relatively flat compared to 2015, but that includes any dis-synergies from customers who may require more than one vendor who they buy from.

In terms of the cost reduction synergies, first of all, we're talking on a global basis.

And we have not really disclosed a lot of detail about those in the past, but $20 million has essentially been our target from our early planning stages for the combination of Harmonic and TVN.

Got it, okay.

Fair enough.

Great, that make sense.

And then I wanted to ask also, you guys had talked to -- going back to last quarter, you talked a lot about some of the mergers that were going on in the industry on the cable side.

And bookings were certainly better this quarter.

You did not really talk a lot about disruption from those situations.

Can you talk about what you are seeing now?

Are they still having an impact on your business?

Are we getting beyond the impact of those mergers?

Walk us through what you are seeing there?

George, first through the fourth quarter, we saw a little bit of catch-up in the fourth quarter.

We saw a couple of deals that had been pushed out, closed.

But it certainly wasn't the totality of what did get pushed out related to M&A activity.

Looking ahead, we are still clearly M&A environment, where M&A among our customers is ongoing.

There's no secret that we're all waiting to see what's going to happen with the charter and Time Warner.

Just today, two of our key customers in Europe, Vodafone and LGI, announced a merger of sorts of their Dutch operations.

So our guidance contemplates 2016 continuing to be like we saw in 2015, with a number of deals going on -- some announced, some not yet announced.

And with those creating mid- to long-term opportunity for the Company, but creating some choppiness in terms of demand as those companies work through the complexities of putting their businesses together.

Got it, great.

Thanks very much.

No, thank you.

Tim Savageaux, Northland Capital.

Hello, good afternoon.

Good afternoon.

A couple of questions here.

First on that last topic, talking about some improvements in service provider demand globally, would you say that the catch-up or M&A was the primary driver?

Or was there any element there of adoption or decisions to move ahead with new technologies, whether it be new encoding technologies, 4K video, what have you?

Is there any sense of that logjam breaking up a bit, or really just a tactical impact of less near-term M&A activity?

Well, thanks for asking that question.

I certainly did not intend to suggest, Tim, that the strength of bookings that we saw in the fourth quarter to be due primarily to some M&A-related catch-up.

That was an element.

But to your question, I would actually say a stronger element is the number of customers getting off the fence.

And we saw customers on the fence for a variety of reasons -- currency issues, trying to wrap their heads around what's coming next technologically, et cetera.

And we've been pushing hard with our new POS platform.

For us, the real highlight on the video front was not only the rebound in the number, but the fact that much higher mix than ever before was associated with the VOS platform.

Frankly, we exceeded -- in VOS demand, we exceeded in the fourth quarter what we had done in the first three quarters of 2015.

So as you see from our guidance in 2016, it is a little bit early for us to call the knee in the curve.

But we definitely saw people get off the fence; we definitely saw more than ever people wrapping their heads around and embracing software.

And when they are making that decision, we saw more than ever, embracing this VOS platform.

And so all those things were encouraging to us in the context of our Video business.

Great.

And if I could maybe follow up with another M&A, but different M&A-driven question, which is to say, have you have seen anything meaningful from a market or competitive perspective?

I guess most notably with Elemental going into Amazon, and whether that has impaired it as a, let's call it, merchant supplier, or changed behavior at all?

And I guess perhaps to a lesser extent, with Ericsson and Envivio.

But have you have seen any changes in competitive behavior as a result of those recent deals?

I think it is too early to call.

But I think it is an important question, and something that we are watching carefully.

Let's face it, this has been a crowded and probably too crowded and competitive space.

And as your question points out, over the last three months of the year or thereabouts, we saw Ericsson make an acquisition to acquire a software strategy with Envivio.

We saw Elemental go into Amazon.

And of course, we announced the TVN deal that we have been working on for a while.

So it is going to be a very different kind of marketplace as we go into 2016.

I think we really want to -- we are optimistic about what that could mean.

Our guidance really does not contemplate a significantly more benign environment, but we are going to wait and see.

Maybe one last thing to say.

Elemental is a good company, with good technology.

But I would tell you that a number of our larger customers do look at Amazon from a little bit of a competitive point of view.

And that will certainly be interesting to see how it plays out for us.

Okay, thanks.

I will pass it along for now.

All right, thank you.

Greg Mesniaeff, Drexel Hamilton.

Yes, thanks, good evening.

This is Greg Mesniaeff.

A question on the $20 million in cost synergies with TVN that you alluded to earlier.

Was most of that really focused on the sales and marketing side, or the R&D organizations of the two entities?

First of all, Greg, just let me point out that it is $20 million on really a global basis, which will include Harmonic and TVN.

And we think there's opportunities in each one of the three primary operating expense lines -- R&D, sales and marketing and G&A.

And our goal is really to try to optimize both organizations, and as we are doing that, to pick low-cost areas of doing business on a global basis.

As Patrick talked about earlier and we indicated, I think, in a couple different points during the call, our international business is really growing at a fairly significant rate.

So it is all about optimization and using the best capabilities of both organizations.

Okay.

But there's really not going to be a situation where you've got two concurrent sales forces operating for -- in tandem for a while?

There is going to be pretty steep ramp, by the end of which, the two should be integrated, right?

Yes, this will be -- start to answer the back part of your question, and then I will pass it over to Patrick on the sales side.

Keep in mind that we are actually not planning on closing the TVN transaction until the end of the first quarter, as we indicated.

We're doing a lot of planning right now.

A lot of those plans will start to get implemented in Q3 and Q2.

So Q2 and Q3 will be major implementation efforts, and then we will have another primary implementation plan that will go in late in the fourth quarter.

So it is going to happen throughout the year.

But our goal is to exit the year with all the synergies fairly well locked on and in place so we can get the full benefit in 2017.

Now, relative to the sales organization, I will pass it over to Patrick.

Maybe the way I'll answer it is just to explain that this is a business that we competed with historically, so we know each other's customer base, solutions, et cetera.

Our largest customer is [Nobel] Company -- I highlighted that we have extremely positive feedback from our largest customers.

And frankly, the marketplace is eager to see what we can do working together.

So as we've indicated, our operational plan is not to run two separate businesses, but to bring the businesses together as quickly as possible, without slowing our sales down and without missing any commitments in the marketplace.

We really want to take advantage of the synergies as quickly as possible.

Not only the cost synergies, but just as importantly, the innovation synergies, the solution synergies, the customer support opportunities that we have -- in general, the go-to-market capabilities.

And we think there really is value.

And this goes back a little bit to the last question we were asked -- is it the consolidating space?

Our customers have seen a number of businesses being acquired or changed, et cetera.

They're really looking around to see who is going to be strong and standing.

And we're delivering, I think, a compelling message to the marketplace that says, two very capable, well-respected technologically leading Companies in this space are joining forces.

And we're going to hit it very hard.

And that's the message our customers are responding positively to, and that really is what's driving the idea of let's put these businesses together as quickly as we can.

Just one point on the cost synergies again, too, Greg.

Keep in mind that our of the $20 million, we think there's at least $2 million above the gross margin line that we are focused on through supply-chain efficiencies.

Sure, great.

That's very helpful, thank you.

All right, thank you.

Simon Leopold, Raymond James.

Hi, guys, this is Victor Chiu in for Simon Leopold.

I just wanted to circle back up on the synergies for one second.

Did you say that it is about $5 million of synergies in 2016, on a pro-rated basis for the three quarters, and then about $20 million for 2017, is that correct?

Yes, basically our plan is to -- we think we can, in effect, record $5 million worth of synergies during 2016.

To be able to be in a position to do that, we have to really drive $10 million of run rate synergies.

So roughly half the $20 million will be implemented, and we'll start receiving the benefits in 2016.

The remaining $10 million of synergies we plan on implementing late in the year.

And we have not included those synergies in our earlier guidance.

We might be able to obtain some of those in our fourth quarter.

But our plan, more importantly, is to exit 2016 with the $20 million of synergy programs in place, so that we can get the full benefit in 2017.

And by doing that, we think we can generate double-digit of operating profit during 2017, as compared to single-digits over the last couple of years.

So we think we have a major opportunity.

We want to make sure that we are ready to go after that.

Okay.

So what is -- I guess for 2017, given that target for about $20 million, what's the assumption or basis of growth for 2017, I guess, that you are basing off from the top-line perspective?

Well, we don't have any guidance for 2017 right now.

The first thing to do is get 2016 locked down and in place.

We do feel that we have opportunities with our software platform, and we think the market will continue to show momentum.

So we believe that if we can go in 2017 with the right operating infrastructure, in very efficient manner, again, we're going to have a major opportunity to really drive EPS in 2017.

Okay.

So assuming that sales are flat in 2017, then you would expect your costs to be down about $20 million, roughly, I guess?

Yes, I think, again, we would not assume sales are going to be flat.

But if they were, we are still in a very good position, because we have -- by that time, with our successful implementation of our programs, we will have a very efficient operating infrastructure from an execution, as well as a cost, standpoint.

Okay, great.

And then secondly, I just wanted to drill down a little more on the Thomson acquisition.

Just from high-level perspective, can you speak some as to what drove the decision from a strategic standpoint?

Because it seems as if, on one hand, you're acknowledging a rapid shift towards software-based solutions for encoding.

But the Thomson deal seems to imply a different attitude, in that it is mostly hardware-based.

So can you speak to that -- give us color around that?

Yes, I appreciate you raising that.

I'm not sure where the misperception has arisen, but it is a misperception about hardware and software.

Thomson has fantastic engineering.

We've long-considered them really our bidding competitor, from a video-compression point of view.

As that kind of algorithm plays out, that kind of technology can be deployed or employed on any kind of platform, hardware or software.

Like the rest of the industry, including Harmonic, Thomson came from a place of deploying their technology in a so-called hardware platform and an appliance.

But their latest R&D efforts, much like ours, have really, starting a couple years ago, have tilted towards new Intel-based platforms.

It is true that the US leads the way, really, in the adoption of data center kind of architectures for these applications.

And even here in the US, it is still early days.

So as a mix of the Thomson Video Network's business, I'd say software is even less than Harmonic's.

But that's really a reflection of where the customers are.

One of the things we were quite impressed with as we studied Thomson and then did our due diligence is the maturity and the sophistication and capability of their software Intel-based platforms.

So we are quite excited about getting the top tier engineers from both sides under one roof, and getting both teams running twice as hard on a converged software platform.

But the addition of that team and that team's historic vector, their historic innovation, is quite well-aligned with our push towards software.

Okay, great.

And I guess, really quickly, if you are looking at the business as a whole, including Thomson now, I guess, just going forward, how do you envision the mix of the business going forward in terms of software and hardware?

Is the vision kind of, at some point, shifting Thomson customer base towards a software-based platform?

Or do envision them moving towards that, and you're adapting to that as that happens?

Yes, okay, so another good question.

You know, it's really less about their customers or Harmonic's customers; it is really more about the geography and the orientation.

As I mentioned a moment ago, if you go overseas, you see a little bit more caution, at least in the media field, in terms of employing data-centric kind of approaches.

But our belief is, is that we will see the entire market tip that way over the next three years.

Maybe what we would consider developed markets first, but arguably the opportunity, the cost synergy advantages are even greater in developed markets, of really going to data center or cloud architectures.

So I think that we will see the entire market that Harmonic and TVN -- today separately, tomorrow together -- address is tilting toward software and data center.

I think that it will probably be on a 50/50 run rate as we exit 2016, and driving toward 100% software, as I said, over the following 24 months.

And I see that adoption, as I said, being more dependent on different customer orientation, how comfortable they are, how mature they perceive the technology to be, et cetera.

It is a transition that has created a little bit of slowness in the market, that we've talked about over the past year.

And we are really looking forward to getting to that tipping point in US, and then seeing that expand more rapidly overseas.

Great, thank you.

Hey, Victor, just one other thing to keep in mind, that the guidance that we provided for revenue for 2016 only includes three quarters of TVN.

Right.

So even if you added a full year's worth of revenue in 2017 -- and keep in mind that we're transitioned to more and more software.

So even on a flat-revenue basis, our gross margin, we believe, as a percent of revenue, will be up.

And then if you take the expenses, based on the $20 million taken out, if you run through the calculation, you'll see that even that delivers a pretty good bottom-line performance.

And again, as we indicated earlier, we think we can actually grow revenue in 2017.

So it is too early to talk about that now.

Again, we want to lock down 2016 first.

I think that's right, but it does, Hal, bear emphasizing that we see the opportunity for a very profitable Video business.

And I think the context of this conversation has been video, and I do want to step back and remind everybody that on the other hand, that we've got this CableOS business.

We are going to be releasing to market our CCAP product in the second half of the year.

Strong customer feedback continues.

And while again, it is premature for us to offer 2017 guidance, suffice it to say that we think 2017 is going to be very exciting year on the Cable Edge side of our business.

Thanks, that's very helpful, thank you.

Thank you.

Matthew Galinko, Sidoti.

Hey, guys, thanks for taking my question.

I think you mentioned stronger uptake in VOS in the fourth quarter, and really the rest of the year.

So I just wanted to make sure I understood that correctly.

And if that is the case, what are you seeing that indicates the steeper curve versus maybe seasonality in the business?

Or benefits that you are seeing from consolidation in the rest of the video processing industry?

Number one, just to validate the fact, indeed we've had a number of customers who, through the course of 2015, were carefully evaluating our VOS platform, were looking at what other customers were doing, et cetera.

And we did see a fair amount of that break loose in the fourth quarter, and that was exciting.

I do want to emphasize that most of that software was delivered packaged with an Intel-based server.

This is why you have not yet seen the margins really go up.

But actually we saw the first piece of a couple of Tier 1 customers taking pure software to run on their own data center environments.

And that's where we run into the, I would say, accelerating gross margin but top-line headwind kind of scenario that we have alluded to here.

Now, turning to the market trends, Matthew, the thing to remember is that we just saw a lot of volatility.

We had a pretty good Q2, we had a very slow Q3, we saw the demand really bounce back strongly in Q4.

So we have kind of given you an outlook that does not assume that we are riding that curve from Q4.

We simply want to collect more data from the marketplace before we draw too many conclusions about a fundamental rebound in the demand.

But certainly the trend in the fourth quarter was encouraging, and it was encouraging that when customers had money to spend, they turned to our VOS platform.

Got it.

I guess in terms of customers kicking the tires on initial tests with the platform, is that still something that's fairly active?

Or is everybody somewhat familiar with it in terms of the North American market?

Or just where do you see that trial activity at this point?

Well, we deal with hundreds, if not thousands, of customers every quarter.

So our Tier 1 customers in the US have certainly -- I would say, we've passed through the tire-kicking phase.

And that's quite positive.

But there are -- let me call them Tier 2 and Tier 3 customers in North America, and customers of all size overseas who are only now just starting to really check out the platform.

So it's a process, and we're still in the midst of.

But we think over the course of this year, the platform is going to gain more and more momentum.

Great.

And one last one, just on the TVN acquisition.

Is there any risk to the timing of the late Q1 close at this point?

Or are you fairly confident that, that's where it will come in?

Based on everything we know right now, we believe it will close at the end of Q1.

We've actually had very good discussions with TVN.

The [works council] groups, and so forth, have viewed, and we're onto the next step.

And we are just simply now waiting for some French government approvals that, based on feedback from our advisors and everyone else, should happen.

And we are hopeful that everything will be wrapped up so we can close before the end of Q1.

So we view it as low-risk of this point in time, but until you get the final approvals, there's still a risk.

Fair enough, thank you.

Thank you.

Jeff Bernstein, Cohen Prime Advisors.

Hi, thanks for taking my questions.

Just a quick question.

The cash restructuring cost number you gave for 2016 was what?

Approximate $20 million.

$20 million, okay.

And then a couple of competitive questions.

I guess the compression as-a-service, as maybe personified by Amazon -- has that been a market share-type headwind or a mind share headwind at this point?

And where are we in resolving that in whatever direction it gets resolved?

I think you guys have bought a couple service bureaus in that space, and what kind of traction are you getting there?

Jeff, we made a very small investment in a San Francisco-based company that does some file-based encoding-as-a-service.

It's a cloud-based offering as a service.

And really that was to get our foot in the water and understand that business.

It is relatively small.

And indeed, compression-as-a-service is still a very small part of the overall global spend.

I don't have a precise number for you, but I would estimate less than 5%.

That being said, it is a segment where we think growth will happen over time.

Many of our larger customers don't anticipate completely, let me say, outsourcing their operations, but using such a service for burst capacity or for variable capacity, on top of the fixed capacity that they know they need day to day.

So we see compression-as-a-service being an interesting growth opportunity for the industry and for the Company over the next couple of years.

It still a relatively small part of the picture, but you can expect to see us do more in this space over the course of 2016 as the sector starts to mature.

So six to nine months ago, were you spending a lot of time really discussing that kind of thing, or is it really the software transition that's been the big subject?

For us internally, it has really been a software transition.

Frankly, we did not have to look far in the broader IT space to see the move to SaaS.

So we've hypothesized for several years here that, that can be an important part of the market.

For us, a first and necessary part of the transition was to move the technology platform to software, to applications really, that can be run on off-the-shelf, bladed-over infrastructure, or indeed, on third-party cloud infrastructure.

And that's what we've done now.

So we are actually in a place where we can deliver our technology in a box as software to run on someone's blade, or indeed to run it on an Amazon Rackspace, or anything else.

And that's been a huge technological effort, frankly, over the last couple of years, but we think we've largely scaled that hill.

And now we're at the point of commercially monetizing that and figuring out where the market wants to go.

Most of our customers today are large ones.

They are still saying: hey, I want to take it as a capital sale.

But we do think, to your question -- and we are starting to have, I'd say, an increasing number of conversations where people are looking at service offerings as part of the whole.

Okay.

So it sounds like customers are starting to actually really sort this stuff out and be able to make some decisions.

And then on the CCAP side, you underscored both the risk and the opportunity there.

Can you just go back over the competitive environment you guys, Cisco, CASA, anybody else -- and I know there's a couple of iterations of CCAP product architectures that people have been considering.

What is it about your offering that you think is a winner, that gives you confidence that we are going to actually see the fruit of the opportunity as opposed to the risk here?

Okay, the competitive landscape in the market today are two publicly held companies, Eros and Cisco, who are the dominant -- the legacy CMPS providers.

As you mentioned, there is private company, CASA, that is also a player.

And while there may be some very small players, I think between the three of them, it accounts for over 99% of the global broadband infrastructure spend made by global cable operators.

This is a space that we think is poised for tremendous growth, but also has some real challenges.

Bandwidth needs to go fast to keep up with the video services that are being rolled out over them, as well as the competitive push by companies like AT&T and Google, et cetera.

And as we talk to customers, there's fundamental scalability and flexibility issues that they are struggling with.

Like, coming with a brand-new architecture, we've really had the opportunity to build something really creative from the ground up.

And candidly, Jeff, we've not gone public with all of the key differentiators that we have.

And for us, frankly, it's been bit of a little bit of a learning and an evolutionary process.

But we've done some things that our customers are telling us are fundamentally different, that have really solved -- are solving fundamental scalability issues, in particular.

And when it comes to pumping multi-gigabits down to small areas of homes.

And nothing is certain, but we believe that the way we've implemented the technology, the way the technology can be packaged, and the way that it can be deployed, particularly in the distributed cable architecture.

Is quite unique and quite well-suited to address the challenges that our customers have told us that they're really concerned about addressing over the next two to five years.

I don't want to make too much out of it at this stage, it's just an important step and data point.

I did mention in my prepared remarks that we've received our first several-million-dollar financial commitment from an international cable operator, who really is dealing head-on with some heavy-duty fiber-to-the-home competition.

And this is a customer who uses competitive product today.

The fact that they would make that kind of commitment to us and this technology, I think, speaks to the fact that we've got something here.

That's terrific.

Thanks so much.

Good luck.

Thank you.

Robert Moses, RGM Capital.

Good afternoon, guys.

Good afternoon.

Just had -- thanks for the additional clarity on the synergies and the numbers.

It is good information to work with.

So I guess -- and I understand your reluctance to talk about 2017 at this point.

We are just six weeks into 2016.

But just trying to understand when the dust settles on this is, I just want a clarification if I'm thinking about this correctly.

So for 2016, if you pro forma the acquisition, you would have revenue closer to about $425 million, if it was in for the full year -- something like that?

Yes, I would probably say it would be a little bit more than that, Rob, probably maybe $430 million or so.

I'd add roughly another $15 million or $20 million.

Okay, got it.

And you also mentioned, while it won't be in there for the quarter or even for the year, kind of a 10% operating margin.

I believe depreciation has been running, what, about $13 million, $14 million a year?

Would that be incremental to that 10% number?

Our depreciation is roughly $13 million to $14 million per year, yes.

Okay.

And with -- would that include the acquisition, or could we see that number increase, just given a full year of that transaction?

No, the number will increase.

Okay.

So if we think about a 10% non-GAAP operating margin, and that -- I don't know, $15 million to $20 million of depreciation for combined entities, we should be more in an operating -- or an EBITDA margin, sorry, of in the 13%,14%, 15% range.

Does that math seem reasonable?

It does, yes.

Now, just to be clear, what timeframe are you talking about now?

I just talking about as we get into 2017.

Really just trying to understand (multiple speakers)--

Yes.

You know, shareholders -- obviously, we felt the brunt of the downturn, as well as the convert and everything else, and lack of information.

So I think we are just trying to get an understanding of, when the dust settles, the earnings power of the business.

And I think at the same time, the other nuance would be your implications for the fourth quarter would be for the Cable Edge business to be more like $15 million to $20 million in quarterly revenue exiting the year, as opposed to $12 million to $14 million.

You are fairly close on that also.

Okay.

So 2017, we will get past this cash restructuring, the cash flow for 2017 -- unless we get a major downturn in our markets, which you don't expect at this point -- should be quite significant?

It should.

Great, thank you.

And depending how quickly we get the remaining half of our synergies implemented in the fourth quarter of 2016, there could be potential benefit there too.

But again, you have our guidance.

Thanks.

Okay, thank you.

Danielle, this will be -- we have time for one more question, if that's okay.

Tim Savageaux, Northland Capital.

Okay, great.

Made it for a quick follow-up.

Wanted to ask about the hardware versus software discussion, and to what extent, at least short term, that's a proxy for streaming over-the-top versus service provider from a customer standpoint?

You mentioned the pace of that transition might be dictated to some degree by the movement of certain customer segments in that direction.

Would it be fair to assume -- and understanding this could be different parts of the same customer, right, in certain cases.

But understanding that, is it fair to think about it that way, then, the streaming guys might be early adopters of that?

And then more broadly, you noted a rebound demand amongst the service providers.

I wonder if you could talk about the demand trends and the streaming over-the-top part of the market?

And it looks like you did see an uptick in broadcast and media revenue in the quarter, if not bookings.

And maybe discuss your share and competitive position there, relative to the more linear part of the market?

Okay.

Several things there, all good questions.

First, yes.

Whether it is a standalone, brand-new, over-the-top streaming company, or whether it is a streaming group within a larger, let's call it, legacy media company service provider, those people tend to be a little bit more data center-oriented.

Think in terms of rolling out software applications on servers.

So yes, they are the push, or the orientation for our software products is probably greatest.

That being said, I don't want to give you the impression it is limited to that.

Look at AT&T's Domain 2.0 initiative, just as an example.

A lot of press over the weekend about their big push to -- and the imperative for the employees to get on the bandwagon with cloud and software, et cetera.

It is where our larger telecommunication customer companies are going for all applications.

And that's new streaming, as well as legacy.

And maybe that dovetails to the next major point, which is that, actually for us, we are seeing a real convergence of what I'd call the legacy linear applications and the streaming applications.

The streaming opportunity increasingly is about live -- live sports, live everything else.

And I think more and more of our customers are saying: hey, why do I have two separate operations or infrastructure?

Let me get to one platform that can deliver things seamlessly to the television living room, as well as to the iPad in the bedroom.

And that's part of what, I think -- both the technological aspects of that, as well as the business aspects of that, is part of what a lot of our large customers have been wrestling with over the last year.

And to some extent, still going forward.

So while I mentioned -- and we are quite excited about over-the-top and streaming, I would tell you the biggest opportunities are with what you might call legacy, or our traditional customer base.

And those are people who are looking at a next-generation converged video service, where convergence means a single platform delivering both the legacy linear, as well as the over-the-top.

And of course, we think -- we know that we, as well as does Thomson, have a great entrenched position with most of the legacy service provider and a large media players globally.

So we think it is a good place to be.

It has been choppy in terms of demand, as the business models and the technological transformations have been getting figured out.

And as our guidance indicates, we don't think we are out of the woods yet.

But things are moving, and I think that they are moving in a way that's favorable and aligned with where we are investing in technologically, and where we are installed historically.

Okay, thanks very much.

Okay.

Well, thank you, Tim, again.

And let me thank everyone for joining us.

I hope it comes across -- we have challenges in front of us, but we are very excited about the things we are doing -- an organic video business, and the way that business is going to be even stronger with the addition of TVN.

And then separately, everything that's going on with our CableOS business, which we think has tremendous growth opportunity for the Company over the next several years.

We are currently focused on execution, you can count on that.

And we look forward to providing you updates as we go forward over the course of 2016.

Thanks very much, everyone.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.