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Operator
Welcome to the first quarter 2016 Harmonic earnings conference call.
My name is Anna and I will be your operator for today's call.
At this time all participants are in a listen-only mode.
Later we will conduct a question-and-answer session.
Please note that this conference is being recorded.
I will now turn the call over to Blair King.
Blair, you may begin.
Blair King - Director of IR
Thank you, Anna.
Hello everyone and thank you for joining us today for Harmonic's first quarter 2016 earnings conference call.
Again my name is Blair King.
I'm the Director of Investor Relations at Harmonic and with me at our headquarters in San Jose, California are Patrick Harshman, our CEO and Hal Covert, our CFO.
I would 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 first quarter 2016 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 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 that we provide you on this call are determined on a non-GAAP basis.
These items, together with corresponding GAAP numbers and reconciliation to GAAP, are contained in today's press release which we have posted on our website and filed with the SEC or form 8-K.
We will also discuss historical, financial and other statistical information regarding our business and operations.
Some of this information is included in the press release and the remainder of the information will be available and a recorded version of this call on our website.
So with that, I'll now turn the call over to our CEO, Patrick Harshman.
Patrick?
Patrick Harshman - CEO
Well, thanks, Blair, and thank you all for joining us today.
I'll start here with a brief summary of our first-quarter results, and then turn to updates and outlook for our Video and Cable Edge businesses.
Hal will then provide further color on the financial results and on our outlook for the second quarter and the full year.
And I'll conclude our remarks by summarizing our strategic and execution priorities.
Turning to our slide three, our first quarter was characterized by encouraging market demand particularly for our new software-based products and services but also revenue recognition delays which impacted our current period results.
Specifically, new bookings were approximately $110 million comprised of about $105 million from the organic Harmonic business and $5 million from the March stub period of the newly acquired Thompson Video Networks business.
The $105 million organic Harmonic bookings represents 4% sequential and 8% year-over-year growth and the highest quarterly bookings delivered by our business since 2014.
Due to the increased mix of software services and CCAP orders, and the injection of approximately $20 million of backlog from the Thompson business, our total backlog in deferred revenue has grown to approximately $180 million, up over 60% from six months ago.
On the other hand, revenue was approximately $82 million.
Down 5% sequentially.
As a lower percentage of new software and services bookings converted to revenue than expected.
This delay in software and services revenue had a direct impact on period gross margin, 51%, and EPS where we recorded a non-GAAP loss of $0.11.
While we're disappointed in these first quarter revenue and earnings results, our strong order book and healthy market demand trends cause us to remain confident we will deliver on our full year financial targets.
To better understand our reasons for confidence, let's turn to slide four and take a closer look at our video business.
The first key message here is that we're continuing to see improving video infrastructure demand trends globally.
Now as a reminder for most of 2015, we saw depressed spending in the face of evolving television business dynamics, service provider M&A and significant technology transitions.
While following a healthier fourth quarter it was good to see the demand momentum continue through the first quarter driven by a resurgence of service provider projects that span traditional pay TV and over-the-top services, particularly live over-the-top services.
In the recently announced strong North America cable operator video business results, and the growing trend of over-the-top services adding live programming, further reinforce our positive outlook for video infrastructure spending.
The second key video segment message is that we're continuing to steadily transition the business to be more software-centric with converged traditional pay TV and over-the-top services playing a central role in our strategy.
Specifically our first generation VOS platform continues to have strong market momentum recently surpassing 20,000 channels deployed.
Pressing our advantage here, we recently announced the further extension of this VOS technology for deployment in open stacked based cloud environments and we also announced our own software as a service offering based on this advancement.
A new business development intended to both expand our addressable market and open the door to recurring revenue model.
And the third key message about our video business is that integration of the acquired Thompson Video Networks business is going quite well.
We closed the deal in late February.
We continue to be very impressed with the quality of the Thompson employees, technology and customer relationships.
Our global cost synergies and 12-month accretion plan is on track and our customers are responding positively to our strength in the global presence and innovation pipeline.
So putting it all together here, the bottom line is that our full-year video business growth and expense plan is firmly on track.
So lets now turn our cable edge business on slide five-day.
As a reminder our cable Edge strategy is to become a leading player in the roughly $2 billion CCAP market by delivering truly innovative new DOCSIS 3.1 technology that we call cable OS.
Since our last update to you we've continued to make material progress and are confidence in our CableOS program continues to grow.
So why are we confident?
Well first, we're continuing to hit both our internal development milestones and third party and key customer testing milestones.
And the product performance is looking really good.
Second, one of the key attributes of our solution is that it seamlessly addresses both traditional centralized and emerging distributing DOCSIS 3.1 network architectures.
As we anticipated, there's now growing sentiment in the industry that the second half of 2016 and 2017 will see a disruptive shift to distributed DOCSIS architectures and we're aiming to be at the right place at the right time as this shift takes place.
Which brings me to the point number three.
We remain firmly on track to release CableOS and make our first shipment in the second half of this year.
In the meantime we expect global demand for our legacy EdgeQAM technology to be steady but down compared to historic highs and this is exactly what we saw in the first quarter with revenue of approximately $17 million.
Encompassing both augmentation of existing deployments and several new hardware chassis deployments.
So as a reminder again, this means that our cable edge business will continue to weigh on our total company financial results for the next couple of quarters.
But stepping back and in summary, for this segment of our business, it really is all about CableOS.
This is a major program that does carry real risk but tremendous upside.
And our plan to turn this into a growing several hundred million dollar per year business with full product launch later this year also remains firmly on track.
So with that, Hall, let me turn the call over to you.
Hal Covert - CFO
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 Q1 2016 and then our financial goals for Q2 and the year of 2016.
Just before getting into our financial results for the quarter, I would like to start with an opening comment and provide some key details regarding our bookings, backlog and deferred revenue.
We are disappointed that Harmonic's stand alone revenue and non-GAAP operating profit were not in line with our plan for the quarter.
As you will hear shortly, we had the potential to be within our financial guidance ranges for the quarter, not including TVN's financial results for March which were not included in our Q1 2016 financial guidance.
On a positive note, our bookings, backlog and deferred revenue for Harmonic on a stand-alone basis for the quarter were well above our plan as well as being supplemented by TVN.
Bookings for Harmonic for Q1 2016 were $104.8 million and bookings for TVN for March were $4.8 million.
Therefore total bookings for Q1 2016 were $109.6 million.
Our backlog in deferred revenue at the end of Q1 2016 for Harmonic and TVN was $180 million versus $120.1 million at the end of Q4 2015 for Harmonic on a stand-alone basis.
The following are key elements that encompassed the $59.9 million increase in our backlog and deferred revenue.
We added approximately $27 million as a result of our Q1 2016 bookings being greater than revenue for the quarter.
$21 million of backlog and deferred revenue for TVN as of the end of the quarter and $12 million related to Harmonic deferred revenue.
Now I would like to provide some details regarding approximately $5 million of Harmonic backlog that potentially could have been recorded as revenue in Q1 2016.
Our business model is becoming more complex as a result of customer consolidation in our address markets in a higher content of international business.
Examples of increasing complexities consist of such things as more precision required for documentation including master service agreements, letters of credit, purchase orders and in file acceptances for delivered products and services.
Due to the situation just highlighted, we had approximately $5 million of backlog that we planned to record as revenue in Q1 2016 related to contractual customer commitments that remains in our backlog.
The projected gross margin associated with this revenue is approximately 80%.
We started implementing business process improvements to address our business model complexities in Q4 2015 and expect that they will be fully implemented by the end of Q2 2016.
As a result we anticipate recording the majority the aforementioned $5 million of revenue in Q2 2016.
Going forward with our business model transition to more of a software orientation, revenue recognition requirements are becoming more challenging.
Although we began taking the necessary steps to enhance our business model processes to accommodate these changes late last year, we will not have all the required enhancements in place until the end of Q3 2016.
One of the primary goals of our enhanced business model processes is to have a clearly defined method to identify the fair market value of service included in the booking.
Software revenue is generally recognized upon shipment and service revenue is generally recognized over the life of the service agreement.
When software and services are sold as a package, which is almost always the case, if the fair market value of the service cannot be objectively identified, total revenue for the booking upon shipment is generally recognized over the life of the service agreement.
Since our software revenue recognition business process enhancements will not be fully implemented until the end of Q3 2016, some software revenue targeted for Q2 and Q3 2016 will need to be recognized on a rateable basis instead of upon shipment.
Once the necessary business process enhancements have been implemented, remaining revenue that is being recognized on a rateable basis due to initially not having these processes in place can be fully recognized at that point in time.
So in effect in Q4 2016, we anticipate that revenue -- we will recognize revenue for the remaining parts for Q1 and Q3 2016 software shipments that were impacted.
We expect that this revenue will have a very high gross margin as a percent of revenue.
I will provide more details about this topic when I discuss our 2016 financial goals.
Finally for the month of March, we stopped shipping TVN products in the third week of the month to ensure that we had adequate time to complete the required conversion from French gap to US gap and to close our books for March including required TVN acquisition accounting.
Typically, approximately 75% of our backlog in deferred revenue should be recorded as revenue within one year.
The following is a description of our backlog and deferred revenue.
Backlog includes customer orders for products and services covered by a contract that meets all of our quality control requirements such as specific features and functions to be delivered, defined delivery timeframes, agreed upon prices and agreed upon payment terms.
The majority of our deferred revenue is for service agreements that have been invoiced to a customer and will be recognized as revenue on a rateable basis over the life of the service agreement.
On average, the term of our service agreements are 18 to 24 months.
Now we'll discuss our Q1 2016 financial results which includes Harmonic's stand alone financial results for the quarter and TVN's financial results for the month of March.
In regards to TVN, will we will provide revenue, gross margin and operating expenses for March.
Starting with our Q2 2016 earnings conference call and in our Q1 2016 SEC filings, Harmonic's financial results will include TVN on a fully consolidated basis.
We will provide selected pro forma financial information for Harmonic and TVN as a note to our financial statements in our SEC filings as required by GAAP.
During our earnings conference calls throughout 2016, we will provide a progress report for Harmonic plus TVN synergies and restructuring costs.
I will cover this topic in a few minutes.
Please note that our financial results and guidance discussed during this call are based on non-GAAP measurements.
These non-GAAP measurements reflect Harmonics traditional approach for reporting such information as well as taking certain purchase price accounting adjustments into consideration for TVN.
A table reconciling GAAP and non-GAAP measurements is included in our Q1 2016 earnings press release issued earlier today.
Bookings for Q1 2016 were $109.6 million of which TVN accounted for $4.8 million compared to $101 million in Q4 2015 and $97.3 million in Q1 2015 for Harmonic on a stand-alone basis.
Our bookings for the quarter exceeded our expectations on a geographic and product segment basis and there was no single customer or geographic performance that skewed our bookings results.
Total non-GAAP revenue for Q1 2016 was $82.5 million, of which TVN represented $3.5 million versus $86.6 million in Q4 2015 and $104 million in Q1 2015 for Harmonic on a stand-alone basis.
Time Warner cable represented 13% of our total revenue in Q1 2016.
For Q1 2016 non-GAAP video revenue was $65.6 million including TVN compared to $72.4 million in Q4 2015 and $69.3 million in Q1 2015 for Harmonic on a stand-alone basis.
Approximately $4 million of the $5 million revenue deferral previously discussed was related to video revenue.
Cable Edge revenue in Q1 2016 was $16.8 million versus $14.2 million in Q4 2015 and $34.7 million in Q1 2015.
Q1 2015 was a high point for Cable Edge revenue with significant shipments to one customer.
In 2014, Cable Edge revenue on average was $26 million per quarter.
Non-GAAP gross margin for Q1 2016 was 51% versus 55% in Q4 2015 and 53.9% in Q1 2015.
The shortfall in gross margin percent for the most part relates to the $5 million revenue deferral which has approximately 80% gross margin.
TVN's non-GAAP gross margin for Q1 2016 was approximately 42% on $3.5 million of revenue.
The difference between our target gross margin of 46% to 47% for TVN is related to the low volume of shipments in March and cost of revenue improvements planned for the second half of 2016.
Non-GAAP operating expenses for Q1 2016 were $50.4 million compared to $46.7 million in Q4 2015 and $49.9 million in Q1 2015 for Harmonic on a stand-alone basis.
TVN's operating expenses for March were approximately $3.7 million.
Our non-GAAP operating loss for Q1 2016 was $8.4 million compared to a profit of $1 million in Q4 2015 and profit of $6.1 million in Q1 2015 for Harmonic on a stand-alone basis.
For the most part, our Q1 2016 operating lost level as compared to our plan and financial guidance is related to revenue.
$4 million tied for the $5 million revenue deferral for Harmonic and $2.2 million tied to TVN's low revenue level for March.
Our non-GAAP EPS loss for Q1 2016 was $0.11 versus a $0.01 profit in Q4 2015 and $0.05 profit in Q1 2015 for Harmonic on a stand-alone basis.
Again, the difference in both cases is mostly the result of the revenue situation just highlighted and somewhat due to the lower level of shares of common stock outstanding at the end of Q1 2015 as compared to Q4 2015 and Q1 2015.
We had 77 million weighted average shares of common stock outstanding as of the end of Q1 2016 versus 85.6 as of the end of the Q4 2015 and 90.1 million as of the end of Q1 2015.
Now turning to our balance sheet.
We ended Q1 2016 with $76.2 million in cash compared to $152.8 million as of the end of Q4 2015 and $101.9 million as of the end of Q1 2015.
During the quarter, we incurred approximately $80 million of cash outflow related to TVN.
Our day's sales outstanding at the end of Q1 2016 were 105 days versus 73 days at the end of Q4 2015 and 67 days at the end of Q1 2015 for Harmonic on a stand-alone basis.
The increase in DSO is due to a higher content of international sales including TVN and billing service revenue for Q2 2016 on April 1, the last day of Q1 2016.
We typically bill service revenue for the quarter on the first day of the new calendar quarter.
We anticipate that we will improve DSO throughout 2016.
Our day's inventory on hand were 94 at the end of Q1 2016 compared to 91 at the end of Q4 2015, and 59 at the end of Q1 2015.
We anticipate that we will improve day's inventory on-hand throughout 2016.
At the end of Q1, 2016 we had $180 million of backlog and deferred revenue compared to $120.1 million as of the end of Q4 2015 and $122.2 million as of the end of Q1 2015.
Staffing at the end of Q1 2016 was 1,418 compared to 989 at the end of Q4 2015 and 1,008 at the end of Q1 2015.
We added approximately 430 people as a result of the TVN acquisition.
Now we'll discuss our financial guidance.
For Q2 2016, the following are our financial goals.
Revenue, $103 million to $108 million.
We estimate by the end of Q2, 2016 we will have approximately $4 million of deferred revenue that is being recognized on a rateable basis.
Gross margin, 50% to 51%.
During Q2, 2016 projected deferred software revenue, Cable Edge revenue with a low content of license revenue and a full quarter of TVN revenue will put pressure on our gross margin as a percent of revenue.
Operating expenses, $55 million to $56 million.
Operating loss $1 million to $3 million.
EPS loss, $0.02 to $0.05 based on approximately 78 million shares of common stock.
For the full year of 2016, we continue to anticipate that we will achieve the 2016 financial goals that we discussed during our Q4 2015 earnings conference call in February 2016.
Which are as follows revenue, $400 million to $415 million.
Gross margin approximately 55% including the recording of high gross margin catch-up software revenue that we plan to record in Q4 2016 as previously discussed.
Operating expenses $208 million to $212 million.
Operating profit $14 million to $16 million.
EPS, $0.09 to $0.12 per share of common stock outstanding.
Cash at year end, 2016, $50 million to $60 million.
Just before turning the call back over to Patrick, I would like to give you a quick update on our targeted synergy savings on a global basis.
We remain committed to the following.
$20 million of annual synergy savings.
$5 million of synergy savings recorded in the back half of 2016 which is the equivalent of $10 million on an annual run rate basis.
Exiting 2016 with the actions fully implemented to achieve the aforementioned $20 million of synergy savings in 2017 based on our Q4 2016 annualized run rate.
As we progress throughout 2016, and we will provide a more detailed progress report.
And finally we continue to anticipate that restructuring charges related to obtaining our synergies goal will be $20 million which we expect to incur in 2016.
I will now turn the call back over to Patrick.
Patrick Harshman - CEO
Okay, thanks, Hal.
Turning now to our slide 11, I'll conclude by summarizing our strategic and execution priorities for the year.
We have a video businesses that is the market share leader in video encoding and related systems for the world's leading pay TV and media companies.
We're focused on increasing the value of this business and by leading the industry transformation to software-based video infrastructure and the next generation of high quality over the top services.
Through our acquisition of Thompson Video Networks our objective is to accelerate this technology strategy, expanding our global footprint and driving greater profitability this year.
The stronger customer demand and competitive wins we saw in the first quarter tell us that we're on track.
At the same time we're also investing in a Cable Edge business that is poised for significant growth with the release of our innovative CableOS platform.
While most of 2016 will be spent bringing this new CableOS product to market, positive customer response and a pending cable architectural shift causes us to be confident in the growth outlook for this part of the business.
And finally I want to confirm that our entire organization is focused on the execution of this strategic initiative and driving competitive wins that will translate in a top line growth and margin expansion and delivering on approximately $20 million of annualized global cost synergies through the Harmonic and Thompson combination.
Positioning the Company in 2016 with double-digit operating margin and a compelling future.
And with that, I would now like to open up the call to your questions.
Operator
Thank you.
We will now begin the question-and-answer session.
(Operator Instructions).
And we have a question from George Notter from Jefferies, please go ahead.
George Notter - Analyst
Hi guys.
Thanks very much.
I guess I've got a few questions here.
I guess I'm wondering if you can kind of go through some of the business process improvements that you're referencing that house up revenue recognition.
I guess I was just trying to understand what was really going on there.
I assume you were trying to change the way you write contracts with customers in order to make software recognition a little bit easier but I would love to be able to understand that and I've got some follow-ups.
Hal Covert - CFO
Yes, George, this is Hal.
First of all I would like to point out that this is a fairly -- there's a lot of moving parts to this so it's not an easy topic to understand so I think there's really two pieces.
The first one is because of the consolidation on a global basis, the precision required for master service agreements, purchase orders and other things that enable you to recognize revenue have to be very exact.
They have to be the same for affiliates, legal structures and so forth.
We have a pretty good bead so to speak on those and we think we'll have those well in hand and that was the primary issue related to the $5 million revenue deferral that we discussed.
And again that was very high gross margin, roughly $4 million of gross margin.
Again we'll have those we believe taken care of by the end of this current quarter.
The software piece is a little bit tougher because you really have to be able to establish the fair market value of service to enable you to recognize the software piece that goes along with that booking upon shipment.
And we believe that we understand the problem.
There's a fix that we're working, on so to speak, a fix in terms of changing our processes and so forth.
We're in the implementation mode for those right now.
It takes a couple quarters of a track record to demonstrate that you really do have an accounting term called VSOE which is Vendor Specific Objective Evidence and we think we'll have that in place by the end of Q3.
Now the good thing about this is that any software that you are recognizing on a rateable basis because you did not have the necessary evidence, you can in effect do a catch-up as soon as you establish the right process.
So we think as we exit Q3, we'll be in a position where any deferred software revenue that we had for the full year we can recognize all of that revenue that hasn't already been recognized on a rateable basis which will be the majority of it in Q4.
So that's what we're actually targeting to do right now.
Sorry if I kind of a long-winded answer but it's a bit of a detailed topic.
Operator
And our next question is from Greg Mesniaeff from Drexel Hamilton.
Please go ahead.
Greg Mesniaeff - Analyst
Yes, thank you.
On that subject of the growing complexity of revenue recognition.
How much of that is attributable to TVN and how much of it would have been the case had you not done the acquisition.
Hal Covert - CFO
Yes, I think the majority of it by far is just the transition to our software business model.
Essentially I would characterize it almost none of it is associated with TVN.
We do have some things we have to tighten up there but again by far the majority of this is related to software.
That's why out of the $5 million in revenue that we talked about earlier we can recognize a large part of at that point that was resulted to the business process clean-up.
And the software pieces, as I indicated in my script, we think at the end of Q2 we will have roughly about $4 million of software sitting in our backlog that we started to recognize on a rateable basis that we will be able to catch up in Q4 and we'll probably have another three or $4 million of Q3 so we're going to have a fairly significant catch-up in Q4 of software revenue that's very high margin.
But again the issue is really software, it's nothing else, Greg
Greg Mesniaeff - Analyst
Okay.
Got you.
And on the subject of the DSOs spiking this last quarter, is that again due to the acquisition or is that a combination of other factors?
Can you give us some color there?
Hal Covert - CFO
No, the biggest single significant factor was we billed all of our service revenue that was due in Q2 on April 1. Which is typically, we always like to bill on the first day of the current quarter that we're in.
That added about 15 days of DSO to our overall DSO.
So if we would have ended on the calendar quarter like a lot of companies do, our DSO would have been below 90 days.
And we believe that we can get that DSO below 80 days over the next two or three quarters as we improve our collection processes and so forth.
TVN added a few more days to our DSO because the majority of their business is international as opposed to kind of a 50-50 split for us.
So it did add some additional days but again the biggest factor was the billing of the service revenue on the first day of the new quarter.
Operator
And our next question is from Tim Savageaux from Northland Capital.
Please go ahead.
Tim Savageaux - Analyst
Hi, good afternoon.
Couple of questions here.
I wonder if you could first sort of address the sources of booking strength in the quarter.
I think you sort of mentioned it.
Sounded like it was pretty broad based but if you could provide any more color on either product or geography with maybe a particular focus on cable TV seeing that Time Warner is showing up here I guess for the first time in a while and how important that segment was to your booking strength.
Patrick Harshman - CEO
The strength was in fact broad based.
We saw it really across geographies.
From a customer point-of-view, as I mentioned, it was service providers.
Cable operators but also satellite direct to home and Telco operators who probably the single biggest engine of that.
And around video technology and associated service and support agreements.
And yes, we're pleased to see in particular, a resurgence of activity with large cable operators.
We had a reasonable first quarter and as we look ahead to the balance of the year, we see a pretty good pipeline of service provider projects and after they've been quiet for the better part of 18 months, I think it's overdue and we think we're well positioned as many of these large service providers get back to improving and upgrading their networks.
Tim Savageaux - Analyst
When you reference being quiet for 18 months, you're talking about the service providers in general or the cable guys in particular?
Patrick Harshman - CEO
The service providers in general.
I think the service provider spending has been somewhat lackluster through most of 2015.
We saw some improvement in the fourth quarter.
And we see that momentum rolling into the first half of this year.
Operator
And our next question is from Simon Leopold from Raymond James.
Please go ahead.
Victor Chiu - Analyst
Hi guys.
This is Victor Chiu in for Simon Leopold.
I just wanted to ask you about the $5 million of revenue that slipped out into Q2.
If that was just a timing issue and it just was pushed out.
I guess I would have expected the low end of your range to be a little bit higher so maybe can you kind of speak to what you're baking into the low end of guess of your revenue range and what the risks might be there for the low end to come out.
Hal Covert - CFO
I think first of all Victor, it was clearly just a timing issue.
It was all contractual customer commitments and for the most part it was just making sure that he we had the alignment that we needed between all the documents that I just mentioned.
The master service agreements, purchase orders and so forth.
That's going to come in for the most part in Q2.
That will be part of our revenue.
So if you look at our guidance, certainly our internal plan is to get to the high end of the guidance.
Roughly the $108 million that we talked about and before that, we were pretty much targeted where the street consensus was around $104 million.
And we think we're going to pick up $4 million of the $5 million which got us to the $108 million.
We pick that up then we're right back on plan from a revenue standpoint through the first half of the year.
And then as we were talking earlier on from a gross margin standpoint because of the software revenue recognition rules, it's going to take us into the second half of the year to get caught back up from a gross margin standpoint and our FX is right on target from our overall standpoint for the year.
So we believe that we are on a track to achieve our overall annual financial guidance that we gave back in February as well as just reconfirming now.
It's timing difference for the most part.
Victor Chiu - Analyst
Okay.
That's helpful.
Okay.
And I guess just given the incremental moving pieces I guess, what gives you confidence that you will be able to hit those targets?
I guess what led you to maintain those targets instead of adjusting the range I guess.
Hal Covert - CFO
Yes, I think there's really three things that are going on right now.
Number one, the $5 million which is an important part because of the margin level, that's contractual commitments that we have in place.
As Patrick mentioned earlier, the transition to our VOS product offering is well underway and we think by the end of Q2 we'll have about $4 million of revenue and fundamentally profit sitting in our backlog.
And then our video revenue in the first half of the year is going to be light because of these software issues that we talked about.
It's going to be made up by Cable Edge revenue which will have a lower gross margin because it doesn't have all the licensing associated with it that we think we'll pick up in the back half of the year.
And then the third element is TVN where we had light revenue in March because we basically cut them off early.
And we think that will pick up.
They're pretty much right on track with where we thought they were going to be for the year to enable us to get to $60 million of revenue that we gave as guidance.
And from a gross margin standpoint in particular in the back half of the year we're on track with our synergies so we think we're pretty good from an overall revenue and gross margin standpoint.
And as I indicated earlier, OpEx we're right in line with where we need to be there.
So I think those three or four factors give us a confidence level that we're going to hit the overall guidance for 2016.
Victor Chiu - Analyst
Great.
Thank you.
Hal Covert - CFO
And just one last point.
On our synergies, and I just want to point out again that our synergies of $20 million are on a global basis.
It's not simply just focused on TVN or France.
We've actually we believe made fairly good progress.
The integration process is well underway so fundamentally Harmonic operating as an integrated entity with TVN today.
For example we're going to discontinue some of our products.
They're going to discontinue some of their products and we're going to have a combined product offering.
We went a long way now to really operating as an integrated organization and that was a big part of the reason for doing the acquisition, the payoff that we expect to get.
Operator
Our next question is from Jeff Bernstein from Cohen Prime Advisors.
Please go ahead
Jeff Bernstein - Analyst
Hi, guys.
Couple of different questions.
First of all, just backlog is improving.
You are switching to software from hardware so there's sort of a headwind on the revenue side just from that switch.
Can you talk about kind of channel capacity growth as a metric or any other way we can sort of think about the actual growth in demand versus the pure revenue?
Hal Covert - CFO
Yes, let me start it and then Patrick may want to make some comments on the channel side of it.
Again, we're encouraged with $180 million backlog.
For example, I can look out into Q2, Q3 and Q4 and I know how much revenue we're going to get out of the backlog to help us in each one of those quarters.
We understand the split between the product and the service piece of it.
And the margin that we need for improvement as I highlighted earlier on, half of it as we complete Q2 if we hit the guidance which we talked about which we think we will, we will have more than half what we have to catch up in effect from a gross margin standpoint setting in the backlog.
Having that backlog gives us a lot more confidence.
In terms of channel structure and stuff like that, Patrick, I'll pass it over to you
Patrick Harshman - CEO
Okay.
Jeff, we see a couple different things going on in particularly, I think your question was related to the video side of the business.
Jeff Bernstein - Analyst
Correct.
Patrick Harshman - CEO
Historically we see cycles of replacement and upgrade with new compression technology and, as I alluded to earlier, we feel as though we've been kind of a couple years overdue on that and we are starting to see a new wave of that investment by service providers around the globe.
Really taking advantage of quantum leaps in compression efficiency.
And on top of that we see new channel ads particularly around new over-the-top kind of services, complementing with let's say the traditional pay TV platform.
And third, although it's definitely common in waves as well, there's a lot of the developing world that is pretty still immature from a digital video perspective and Latin America is a particular region of the world where we did see -- we have seen quite strong demand over the past six months.
Some parts of Latin America more than others.
But that creates a third driver in terms of demand behind the for the digital video products.
Jeff Bernstein - Analyst
That's great.
And then in terms of the added service products that you guys are introducing, I think they're embedded in the stock is some fear about your making this transition and I know for a live video, it may not be moving quite as quickly as it is for some other parts of video.
But can you just talk about what's going on there, sort of, who are your partners, who are your competitors in that particular part of the market and the outlook.
Patrick Harshman - CEO
Well, I'll do my best to be concise.
The truth is there is an element of it which is little bit the wild west and one way we think about it, we just think we do high quality video compression better than anyone else on the planet.
And if you are a service provider who is comfortable in the past buying an appliance for that, great.
But there's a lot of emerging companies that just don't do business that way.
Their whole platform is in the cloud and a big part of what we're trying to do is address that part of the market.
And, as many of those companies as they got started, they may not have had a need for really pristine kind of video or they might not have cared too much about bandwidth consumption.
But as those over the top services now as their business models call on them to hit the big screen TV in the living room, as they start to think about exponentially growing bandwidth costs, CDN costs and storage costs associated with start-up, excuse me, startover capacity, the whole notion of good looking video with a minimum number of bits starts to become relevant for these new over-the-top guys.
So our first target with our SaaS offering is more about expanding the addressable market and going after the part of the market that we have not been able to address historically with our appliance sales.
Now it's true that even within our existing customer base, there is a certain part of what they're looking to do, pop-up channels, special events, the Olympics, concerts, whatever, that are also well suited toward a cloud kind of offering.
But we also fundamentally look at that as market expansion as well.
Over time I think it's possible that this kind of business model could prove out to be more broadly applicable but I would say for the foreseeable future we see this as really an expansion of the addressable market, not as a replacement.
Jeff Bernstein - Analyst
And then the UHD and I guess high dynamic range should be drivers in the encoding business.
Are those actually happening yet or is that something that's still out in front of you?
Patrick Harshman - CEO
You know, it's happening but in a modest kind of way.
And to be candid, we feel a little bit like the boy who cried wolf on this.
And we are disappointed with the lack of real volume behind the ultra-HD but the market just hasn't happened.
Now with just about every major service provider on the planet there's one, two, to five, sometimes ten channels ongoing.
So there is the certain amount of revenue opportunity that's there.
But it's not at this point anything like the transformational opportunity we saw when HD came in.
That may still come.
And as you alluded to high dynamic range, it's something else that the people are starting to really dabble with.
And in fact, perhaps is more likely to be a broadly applicable technology because it's not only important for ultra high definition but in fact for high definition and even standard definition.
So there's a lot of media companies and service providers who are really experimenting now with high dynamic range and we're optimistic about this being layered in.
I think this is a feature or a license that comes on to a lot of existing technology.
Again, as opposed to a wholesale upgrade.
But you layer it on to your question, let's say gradually growing ultra HD opportunity.
You layer on a high dynamic range opportunity.
We're doing quite a bit of dabbling with virtual reality.
I think the new technologies are certainly intriguing.
They're certainly an area where we've established a leadership position.
We're not quite ready to call any other curve in demand, though
Jeff Bernstein - Analyst
Got it.
And then just a couple quick ones for Harold.
Just on the cash flow from operations front.
At the end of the year I guess we're probably going to do a little better on cash flow with some of the license revenue coming through.
But can you just talk about cash flow from operations and what you think the CapEx will be for the year?
Hal Covert - CFO
Yes, I think in general our stated goal was to have $50 million to $60 million of cash at the end of every quarter.
This past quarter we were above that and our cash this quarter I think we used more than we thought we were going to from an AR standpoint.
We think we can catch that back up and I'm pushing as hard as we can to stay above our guidance range of $50 million to $60 million and I think we can do that.
I think overall our CapEx for the full year is going to be in the $20 million range.
Historically we spent $3 million or $4 million a quarter.
We'll add a little bit more for TVN so we're not going to be dramatically different from that.
So again, $20 million to $25 million of CapEx is probably a pretty good number.
But cash is a primary focus and we want to make sure we have a significant buffer there relative to the $50 million to $60 million and we're on track to do that.
Jeff Bernstein - Analyst
Great.
Thanks very much.
Patrick Harshman - CEO
Thank you.
Operator
Our next question is from Matthew Galinko from Sidoti.
Please go ahead
Matthew Galinko - Analyst
Hey, guys.
Thanks for taking my question.
Hal, you alluded to TVN as one of the factors maybe inhibiting gross margin and I know in the past you maybe talked about potential to bring that more line with the rest of the business.
So just curious how that process is going for you?
Hal Covert - CFO
Yes, I think you have to take the first quarter and kind of set it aside as an aberration because we basically only have a few weeks in March and that was 42% so there was a lot of overhead issues, unabsorbed overhead and so forth.
We think in Q2 we'll start getting closer to the low end of our 46% to 47% guidance and then in particular it was always the case when we get back into the half of the year we think we're going to be able to start pushing towards the higher end of the 47% to 50%.
And it's primarily going to be related to cluster revenue improvements and other manufacturing activities.
So there are supply chain synergies, there's just volume synergies and so forth.
So a lot of that will come in the back half of the year.
So I think we're pretty well on track with our overall game plan.
Matthew Galinko - Analyst
Great.
And then we've had it looks like the conclusion of a couple M&A processes among American cable operators fairly recently.
I'm just curious if you could go into how that factors into evaluations and decision making on CCAP.
Patrick Harshman - CEO
Well, let me tell you in general we're pleased to see some of those processes coming to an end.
Certainly we saw delays associated with M&A across not only cable but with satellite and Telecom if you include Europe and the US.
So in general, we're optimistic that -- well we don't think M&A is done.
We're optimistic that we're going to see things return to normal with some of our largest customers.
And we think that will indeed create opportunities for both the video part of the business and of course with our new CableOS CCAP platform.
And in particular I would just say that we're close to our largest cable customers with what we're doing in the CCAP area.
We're getting a lot of good constructive feedback.
We're doing a lot of very good work in labs.
And we feel very well positioned.
And I won't be more specific about the different cable company's names but it's clear that high speed data and in fact new architectures including the distributed DOCSIS 3.1 that I mentioned earlier are going to play a prominent role for leading cable operators in the US and overseas.
And we're working hard to make sure that we're right in the middle of that.
Matthew Galinko - Analyst
Great.
Thank you.
Patrick Harshman - CEO
Thank you.
Operator
And our next question is from George Notter from Jefferies.
Please go ahead.
George Notter - Analyst
Hi, guys.
Thanks for the follow-up.
I guess I just wanted to ask about going back to the booking strength, you said that you billed for services on I guess April 1. I would assume that that impact really went into the backlog.
Is that correct?
I assume there was no [rev rack] associated with those billings?
Hal Covert - CFO
That's right.
I mean typically when you look at the deferred revenue it's contractual and it becomes deferred revenue when we actually invoice the customer so there is no [rev rack] issues around that
George Notter - Analyst
Got it.
And so was the strength in backlog in part driven by the services billings?
I guess I'm just trying to understand sort of what's really changed in terms of the demand trend or is this more related to this end of quarter kind of [stilling] exercise?
Hal Covert - CFO
No I think if you go back in our script, there were really three key factors.
The increase in the backlog.
There was $27 million from the bookings that we had over and above the revenue that we recognized.
We had $21 million from TVN and then we had $12 million of deferred revenue.
I would say that the backlog increase that we had was really a healthy backlog increase, not associated with one particular aspect.
George Notter - Analyst
Okay, thanks.
Hal Covert - CFO
All right.
Thank you.
Operator
And we have a question from Tim Savageaux from Northland Capital.
Please go ahead.
Tim Savageaux - Analyst
Hi.
I guess I had kind of a related question there and maybe we can take another crack at that.
It sounds like the services bookings would have contributed to that $27 million but either way, I guess you had mentioned you hadn't seen bookings sort of as strong since 2014 overall in the quarter.
It sounds like we can at least talk to an organic backlog of $160 million and maybe if we count for some overage in service billings, a bit less than that.
It looks like you haven't seen anything like that in more than a few years.
So I wonder if you could sort of maybe put the backlog strength or at least the organic backlog strength in kind of the same context you did as the booking strength and are we really looking at some sort of historic strength here or maybe a combination of a few one-time items may be helping us get there?
Hal Covert - CFO
I think Patrick may want to chime in on this too.
The biggest factor was the $27 million of around $110 million of bookings that we had versus the $83 million of revenue.
So that added a lot of strength to our backlog.
And that has the same balance between product and service that we've always had.
The other big piece that has the same kind of category in terms of the breakout was the $21 million that we added from TVN.
And we did have a good service bookings quarter in Q1 that added some additional deferred revenue.
So again, I would say it's very balanced between product and service and in particular the product piece of it is strong because of the make-up of that backlog.
The $5 million that we talked about previously, high margin, there's some deferred revenue in there over and above the $5 million that we have talked about that's being recognized on a rateable basis.
So I think in general it's a pretty healthy backlog and I don't remember in past quarters going way back but this is well above any backlog that we've ever had in the past.
I think even if you take the TVN piece out of it.
So it's a very healthy indicator for us going forward.
Patrick, I don't know if you wanted to add anything else on that?
Patrick Harshman - CEO
No, I think that's right.
Frankly it's just the other side of the coin of the strong bookings in this case.
I think the good news while we would have liked to see more of a waterfall in the revenue, the fact is these bookings were heavily video oriented with services associated with them.
Meaning there's high value there and that's really in line with the strategy we're driving.
So from our perspective if you look at the final health of the business, I think demand out there in the market is the number one indicator and demand are you succeeding competitively.
And we are were encouraged by the demand that we saw and we are encouraged by our competitive posture in the first quarter.
All of that translated into strong bookings as we've discussed.
Not as much of that cascaded into revenue during the quarter but that's okay from the perspective of the year.
It's right there for us to be recognized in the coming periods.
And we're excited about the fundamental strength that drove that success in the first quarter and also the fourth quarter where we also had a positive book-to-bill ratio.
Hal Covert - CFO
I think the other point that I made in my prepared remarks is our backlog is represented by contractual customer commitments with specified delivery dates for the part that we called out in that books to revenue in effect in the first year as well as feature functions and so forth so it's high quality backlog.
We do a lot of scrubbing on that to make sure it has all the right characteristics.
Patrick Harshman - CEO
Maybe one other thing, Tim and I don't want to overstate it, but it is worthwhile noting that in the, let's call it the organic Harmonic backlog, there is a CCAP component now which historically didn't exist either and of course that won't be recognized until we deliver that product later in the year.
But I want to I guess acknowledge, and I think it's goodness again there, that while it's predominantly driven by strength in video services and video software product, we're also seeing CCAP element of that.
So it's all in line with the strategy we're pushing.
Hal Covert - CFO
So just to support Patrick's statements but I would also add that the CCAP piece represents a single digit percentage of the overall backlog.
So we're very happy that it's there but it's not dominating our backlog at this point or anything else to prevent us from getting revenue.
Now we hope it gets to the point where it dominates as we head into the back half of the year bur we're not quite there yet.
Patrick Harshman - CEO
Indeed.
Tim Savageaux - Analyst
If I could possibly follow up on the world's longest bookings and backlog question, and sorry to interrupt there, I was trying to get underneath whoever is operating the kill switch there.
Would you care to make any commentary on whether you've seen that kind of booking strength maintain into the current quarter-to-date.
Hal Covert - CFO
Again I'll start and then I'll pass it to Patrick.
We don't really give guidance on bookings and so forth but I can tell you that based on the profile that we're looking at right now, it's not dramatically different than what we've experienced over the last few quarters.
I don't know if you want to add anything more.
Patrick Harshman - CEO
No, I think that's very well said.
Tim Savageaux - Analyst
Thank you very much
Hal Covert - CFO
It's a good solid book so far.
Tim Savageaux - Analyst
Okay.
Patrick Harshman - CEO
Okay.
Well thank you very much, Tim and everyone else who joined us on the call.
We're excited by the progress that we've made.
We're very focused on delivering against the objectives we've outlined and reiterated to you here again today.
Our full year plan continues to be well in sight and continues to be the operational and execution focus of the team.
We look forward to reporting to you on our progress again soon.
Thank you everyone.
Operator
Thank you, ladies and gentlemen.
This concludes today's conference.
Thank you for participating.
You may now disconnect.