Harmonic Inc (HLIT) 2016 Q4 法說會逐字稿

Welcome to the Q4 and Full-Year 2016 Harmonic Earnings Conference Call.

My name is Candice and I'll 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, and please note that this conference is being recorded.

I'll now turn the conference over to Blair King, Harmonic's Director of Investor Relations.

Blair King, you may begin.

Okay, thank you, Candice.

And hello, everyone, and thank you for joining us today for Harmonic's fourth quarter and full-year 2016 earnings conference call.

Again, my name is Blair King and with me at our headquarters in San Jose, California are Patrick Harshman, our CEO and Harold Covert, our CFO.

Before we begin, I'd like to just point out that in addition to the audio portion of this call, we will have provided slides for this webcast, which you can also see by going to the Investor Relations page on harmonicinc.com and clicking on the link to our preliminary fourth quarter and full-year 2016 results.

Now turning to our slide two, during this call, we will provide projections and other forward-looking statements regarding future events or the future financial performance of the Company.

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

We refer you to documents Harmonic filed with the SEC, including our most recent 10-Q and 10-K reports in the forward-looking statement 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've 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.

So with that, I'll now turn the call over to our CEO, Patrick Harshman.

Patrick.

Thanks, Blair.

And thank you everyone for joining us today.

So, let's turn to our slide 3. Our fourth quarter revenue was $114 million, up 12% sequentially and 31% year-over-year, our strongest revenue quarter in three years.

Underlying this topline result, is a story of two business segments at different points of transformation.

Further along is our video business, which delivered revenue growth of 14% from last year and 45% year-over-year, excuse me, from 14% from last quarter, 45% year-over-year, while our still pre-CableOS Cable Edge business performed as expected with revenue down 10% sequentially, and 37% from a year ago.

Combined bookings were $117 million, up 20% from the third quarter and 16% from a year ago, driven principally by our video business.

As a result of greater than one book-to-bill for the fourth out of the last five quarters, backlog and deferred revenue remains at a new record level of $188 million, up 4% sequentially and nearly 60% from the fourth quarter of 2015, underscoring the continued shift of our video business toward software services and recurring revenue.

Gross margin was 56%, up over 3.5 percentage point sequentially, further highlighting this ongoing software and services transition of our video business.

And putting it all together, EPS was $0.08, highlighting the earnings power of our video business as we approach full integration of Thomson Video Networks, albeit offset by the continuing short-term loss of our Cable Edge segment, as we invest heavily in our CableOS launch.

So with that summary, let's take a closer look at our video business and turn to slide 5. The first key message here is that we're driving profitable growth on the video side of the house delivering sequential top and bottom line improvements in 2016, and finishing on a real high note with record fourth quarter performance.

Video segment revenue grew to $105 million.

Gross margin exceeded 57%, and segment operating margin expanded nearly 700 basis points to 13.5%, demonstrating the viability of the double-digit operating margin target we've established for this business.

The second key message is that our video business transitions to software over-the-top and cloud continue to gain momentum thanks to a small part to the addition of Thomson Video Networks.

Sales of our software-based video client just grew over 200% year-over-year.

And during the quarter, eclipsed for the first time, sales of legacy hardware-based appliances.

And one of the key drivers of the software appliance growth is increasing demand for new higher quality live over-the-top services.

In fact, enabled by our renovations over the past year and over-the-top video codecs and compression efficiency, over-the-top license sales were also up over 200% year-over-year, because over-the-top formats accounted for over half of the total profiles we deliver to the market in 2016.

Most of this over-the-top business was done as traditional perpetual license CapEx.

The fourth quarter saw us continue to expand our new cloud-based software-as-a-service model, including signing on an additional Tier 1 account.

And recall that we announced our first Tier 1 cloud customer on our previous conference call.

So important context for the video revenue, bookings and deferred revenue numbers we were reporting, is a modest, but growing recurring revenue stream.

And carrying this momentum forward, the third key message is that our video business outlook for 2017 remains positive.

While we anticipate an exaggerated sequential first quarter decline due to both the strength of the fourth quarter and the fact that several new first quarter deals will be recurring revenue rather than traditional CapEx, the fundamentals of our video business are healthy.

Our innovation and service engines are strong.

Our full-year book-to-bill was a record 1.1.

Our backlog and deferred revenue stands at an all-time high as the business transitions to be more software and services centric.

And we're building new recurring revenue streams, leveraging the industry's most advanced cloud-based video processing capability, all of which means we're executing on our long-term strategy to drive sustainable video business earnings growth.

Okay, with that, let's now turn our Cable Edge business on slide five.

I'm pleased to share a significant fourth quarter progress on our CableOS growth agenda.

First, here we achieved our first GA product release of CableOS, meaning, we now have a high-performance software-based CMTS available for sale in the marketplace.

Second, we made our first revenue shipments of this product and so the product deployed into a live commercial environment delivering DOCSIS broadband service to paying European cable subscribers.

And third, we further expanded our Tier 1 customer engagements during the quarter, expanding both centralized software and distributed CMTS architectures, or deepening our software feature set and operational know-how.

We're demonstrating strong industry leadership here and our innovations and progress continue to garner serious Tier 1 customer engagement.

Now at the same time, global demand for legacy EdgeQAM technology continues to decline, and consequently, our Cable Edge segment experienced its lowest revenue quarter on record.

The flip side of the CableOS coin is that cable customers look ahead to all IP video services.

The combination of weak legacy product demand and heavy new product investment will continue to weigh on our combined financial results until CableOS revenue starts to ramp later this year.

Now at this point, I want to assure you that our confidence in the ultimate success of CableOS continues to grow, and our corresponding outlook for 2017 and beyond remains unchanged.

A multichannel news article published just today, citing new market research in which over 60% of cable operators say, they will be deploying virtualized CCAP and/or distributed access architectures by the end of 2018, certainly bolsters our view that conditions are right for us to be entering this market.

With that in mind, through the first half of this year, we're focused on successfully executing and scaling our early commercial deployments and driving successful volume field trials of both centralized and distributed virtualized software DOCSIS architectures.

With high visibility field activity and credibility expanding over the next several months, our plan is to then begin to ramp CableOS design wins and shipments in the back half of the year, setting the stage not only for return to profitability of our Cable Edge segment, but also a leading market position in 2018 and beyond.

So in summary here, we believe we're uniquely well-positioned to be a leading player in the new $2 billion plus CCAP market.

We're executing as planned.

We remain committed to successfully turning our CableOS innovations into a powerful new growth engine for our business.

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

Thank you, Patrick.

We want to thank everyone for joining our call today.

During my discussion, I will cover three topics.

First, our financial results for Q4 2016 and the full year of 2016.

Next, our financial goals for Q1, 2017, and then our financial performance aspirations for 2017.

Before discussing our Q4 financial results, we would like to start with some opening comments.

For Q4 2016, we achieved financial results for both revenue and EPS ahead of our financial guidance.

This was primarily due to completing certain video projects that represented approximately $4 million of revenue and $0.03 of associated EPS that we recorded in Q4 that were initially planned for Q1 2017.

This event, combined with Q1 typically being our weakest quarter from a seasonality standpoint, will be reflected in our financial guidance for Q1 2017.

Although our financial guidance for Q1 will be below Wall Street expectations, we think that it is reasonable to consider Q4 2016 actual financial results in conjunction with our Q1 2017 financial goals.

When this approach is taken, it provides a more realistic picture of our business momentum.

With our current momentum, we remain committed to our 2017 financial aspirations that we provided during our Q3 earnings conference call in November of 2016.

During Q4 of 2016, we essentially completed the integration of TVN.

We are now operating with fully integrated functional areas such as R&D, sales and G&A.

Just as important, our IT systems are integrated with one Harmonic interface for our customers.

From a financial standpoint, we exceeded our goal to obtain $20 million of synergies from the Harmonic plus TVN combination on an annualized basis starting in 2017.

And we are well positioned for the combination to be accretive from a non-GAAP operating profit standpoint, plus interest expense related to our convertible notes within one year of closing the acquisition.

Now turning to our financial results.

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

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

Bookings for Q4 2016 were $116.9 million compared to $97.3 million in Q3 2016 and $101 million in Q4 2015.

For 2016, bookings were $441.1 million, which consisted of $384.5 million for video and $56.6 million for Cable Edge compared to $372.2 million in 2015, of which video represented $290.8 million and Cable Edge $84.1 million.

The increase in year-over-year video bookings of 33% represented both organic and inorganic growth.

The decline in Cable Edge bookings of 31% was accounted for by the drop in bookings for legacy products as we continue the transition to our new CableOS products and services currently underway.

Bookings and shipments for these new offerings are planned to ramp in the second half of 2017.

Non-GAAP revenue for Q4 of 2016 was $113.8 million versus $101.7 million in Q3 2016 and $86.6 million in Q4 of 2015.

The sequential increase reflects the continuing improvement in our video business and certain video projects highlighted earlier.

In addition to the sequential improvements, the year-over-year increase includes the benefit of the TVN acquisition that was closed on February 29, 2016.

Non-GAAP video segment revenue for Q4 2016 was $104.8 million versus $91.7 million in Q3 2016 and $72.4 million in the same quarter last year.

Non-GAAP Cable Edge segment revenue for Q4 of 2016 was $9 million versus $10 million in Q3 2016 and $14.2 million in the same quarter last year.

In Q4 2016, we did not have any 10% customers.

For 2016, we recorded non-GAAP revenue of $408.4 million compared to $377 million in 2015.

In 2016, non-GAAP video revenue was $353.5 million compared $291.8 million in 2015 or an increase of $61.7 million or 21%.

This increase was mostly accounted for by the TVN acquisition.

Non-GAAP Cable Edge revenue for 2016 was $54.9 million compared to $85.2 million in 2015 or a decline of $30.3 million or 36%.

This decline reflects a decrease in bookings discussed earlier.

Non-GAAP gross margin was $63.8 million for Q4 of 2016, $53.4 million for Q3 2016 and $47.6 million for Q4 2015.

Non-GAAP gross margin as a percent of revenue for Q4 of 2016 was 56.1% versus 52.5% in Q3 2016 and 55% in Q4 2015.

The sequential and year-over-year increase in gross margin was the result of a higher percentage of video revenue overall, with favorable software content.

In 2016, non-GAAP gross margin was $217.8 million compared to $205.4 million for 2015, or an increase of $12.4 million.

This increase consisted of higher video non-GAAP gross margin with a meaningful offset accounted for by Cable Edge.

Non-GAAP video gross margin for 2016 was $196.2 million compared to $167.6 million in 2015 or an increase of $28.6 million.

This increase was mostly due to the TVN acquisition.

Non-GAAP Cable Edge gross margin for 2016 was $21.6 million compared to $37.8 million in 2015, or a decline of $16.2 million.

This decline was mostly due to the decrease in Cable Edge bookings and subsequently revenue previously discussed.

Non-GAAP operating expenses for Q4 of 2016 were $54.2 million compared to $52.9 million in Q3, 2016 and $46.7 million in the same quarter last year.

The sequential increase was primarily related to higher commission expense.

The year-over-year increase was related to the TVN acquisition.

For 2016, our non-GAAP operating expenses were $215.4 million compared to $193.5 million in 2015.

The TVN acquisition was a reason for the increase.

Our non-GAAP operating profit for Q4, 2016 was $9.6 million compared to $0.4 million in Q3, 2016, and $1 million in Q4, 2015.

The sequential and year-over-year increase was primarily related to higher video revenue overall with favorable software mix.

For 2016, our non-GAAP operating profit was $2.4 million compared to a profit of $11.9 million for 2015.

This decline was due to lower Cable Edge revenue and gross margin.

Non-GAAP EPS for Q4, 2016 was $0.08 versus a loss of $0.01 in Q3, 2016 and $0.01 EPS in Q4, 2015.

This improvement was related to our video business.

For 2016, our non-GAAP EPS was a loss of $0.04 compared to EPS of $0.10 in 2015.

The decrease in EPS was primarily due to the decline in revenue and gross margin for our Cable Edge operating segment, which accounted for our non-GAAP EPS loss of approximately $0.13 in 2016.

We had 80.1 million shares of non-GAAP common stock outstanding as of the end of Q4, 2016 versus 78.1 million as of the end of Q3, 2016 and 85.6 million as of the end of Q4, 2015.

Now turning to our balance sheet.

We ended Q4, 2016 with $62.6 million in cash and short-term investments compared to $52.7 million at the end of Q3, 2016, and $152.8 million as of the end of Q4, 2015.

The $152.8 million included net proceeds of approximately $75 million for the issuance of our convertible notes in December of 2015.

We issued $128 million of convertible notes and purchased $50 million of our common stock concurrently as well as paying $3 million in related fees.

In 2016, we used approximately $83 million for the acquisition of TVN and incurred approximately $21 million of cash outflow related to TVN restructuring and integration expense.

To summarize, we ended 2015 with $153 million in cash and short-term investments.

From this amount, deduct $83 million that we paid for TVN and $21 million of restructuring and integration expense incurred in 2016.

This calculation nets to $49 million of cash.

As of December 31, 2016, we had $62.6 million in cash and short-term investments.

Therefore, if you subtract $49 million from $62.6 million, we generated approximately $13.6 million non-GAAP cash flow from operations in 2016.

Our days sales outstanding at the end of Q4 2016 were 70 days versus 89 days at the end of Q3 2016 and 73 days at the end of Q4 2015.

Our days inventory on hand were 68 days at the end of Q4 2016, compared to 65 days at the end of Q3 2016 and 90 days at the end of Q4 2015.

At the end of Q4 2015, we had $188.4 million of backlog and deferred revenue, compared to $181.1 million as of the end of Q3 2016 and $120.1 million as of the end of Q4 2015.

Our backlog and deferred revenue reflects the changing nature of our business as we transition to project-oriented software products and services and a lower level of bookend shift business.

Approximately 75% of our backlog is projected to be converted to revenue within the rolling one-year period.

Staffing at the end of Q4 2016 was 1,376 compared to 1,412 at the end of Q3 2016 and 989 for the same time last year.

The year-over-year increase was related to the TVN acquisition.

We expect staffing to decline as of the end of Q1 2017.

Now, turning to our financial goals for Q1 2017.

As suggested in my opening remarks, we think that is it reasonable to consider Q4 2016 actual financial results in conjunction with our Q1 2017 financial goals.

The following are our Q1 2017 financial goals.

Non-GAAP revenue, $87 million to $95 million, which includes video revenue of $80 million to $86 million and Cable Edge revenue of $7 million to $9 million.

Non-GAAP gross margin as a percent of revenue, 53% to 54%, which includes video gross margin percent of 54% to 55% and Cable Edge gross margin percent of 38% to 40%.

Non-GAAP operating expenses $52 million to $53 million.

In addition, I would like to highlight two points regarding non-GAAP operating expenses.

First, our peak non-GAAP quarterly operating expenses in 2016 occurred in Q2 with approximately $58 million of expense.

Second, we believe that our operating expenses in 2016 will be relatively flat on a quarter-over-quarter basis, if you take the midpoint of our Q1 2017 non-GAAP operating expense range into consideration.

Non-GAAP operating loss of $2 million to $6 million.

Non-GAAP EPS loss of $0.04 to $0.08.

Non-GAAP common shares of stock outstanding approximately 81 million shares.

Cash and short-term investments at quarter-end $60 million to $65 million, which includes payment of approximately $4 million for TVN integration charges incurred in 2016.

Non-GAAP effective tax rate 15%.

Now, I would like to highlight our key financial performance aspirations for 2017.

These are the same aspirations that we communicated during our Q3 2016 earnings conference call.

First, our target is to increase non-GAAP video revenue on a year-over-year basis.

This statement is based on normalizing our 2016 non-GAAP video revenue.

Our non-GAAP video revenue for 2016 would have been approximately $15 million higher with a full-year of TVN non-GAAP revenue.

Therefore, our normalized 2016 non-GAAP video revenue was $353 million as reported, plus $15 million or $368 million.

That is the base from which we plan to grow in 2017 and pursue double-digit non-GAAP operating profit for our video operating segment.

Next, our goal is to achieve an annualized run rate for non-GAAP Cable Edge revenue of approximately $100 million in the second half of 2017 propelled by shipments of our new CableOS products and services.

With this revenue run rate, we plan to pursue our goal of achieving double-digit non-GAAP operating profit for our Cable Edge operating segment as we exit 2017.

Based on this goal, we believe that our Cable Edge operating segment will not be a non-GAAP drag on overall EPS in 2017 as it was in 2016.

We will report on our progress and related action plans as we pursue our financial aspirations during each of our earnings conference calls in 2017.

I will now turn the call back over to Patrick.

Okay, thanks Hal.

Let's turning to our last slide, slide 10, we want to close by emphasizing the transformative progress we made in 2016 and how it sets us up well for an exciting and pivotal 2017.

Specifically, we have one overarching objective and that is to build on the momentum created by our video and CableOS software innovations to significantly improve the long-term profitability and cash flow of the business.

In video, objective number one is to increase value by driving continued revenue growth and margin expansion, catalyzed by the ongoing conversion of the market to software-based over-the-top platforms.

And objective number two, we'll grow market share and strengthen our financial model by further advancing our leadership position in cloud, software-as-a-service offerings and 4K.

With the successful integration of Thomson Video Networks largely behind us, we're creating improved operating leverage in the business, as evidenced by our fourth quarter segment results.

We're now focused on bringing it all together over the course of this year to deliver objective number three, double digit operating margin in the business.

On a standalone basis, our video segment is a strategic, market-leading and profitable business with compelling upside.

And on the Cable Edge side of the house, we enter the year with the industry's first fully software based CMTS on the launch pad.

With much product development heavy lifting behind us, objective number one is successfully scaling early commercial deployments and several advanced high-volume field trials.

And here, I can tell you, the year is off to a good start.

At the same time, there's growing industry buzz around what we're doing.

And objective number two, we have the pedal to the metal to ensure new design wins with additional Tier 1 operators.

And as Harold just outlined, objective number three continues to be to exit the year with both $100 million annualized run rate and a competitive market position that will enable a compelling growth business well into the future.

So, while the first quarter is looking a little softer following a strong fourth quarter, we want to emphasize that our broader targets for 2017 remain unchanged.

We're moving full speed ahead, leading the charge in software-based video processing and cable broadband delivery and we continue to see tangible new momentum and results as we've shared with you here today.

Our entire organization is excited, confident and we're laser focused on the continued execution of our strategic video and Cable Edge growth initiatives and on driving a sustainable new phase of profitable growth and shareholder value creation.

So with that, let's now open up the call to your questions.

(Operator Instructions) George Notter, Jefferies.

I guess, I wanted to start off by asking some questions on the CableOS side.

I know from prior conversations with you guys that there is still a lot of future development that was going on the CableOS platform and you had minimally viable product, I think it was the term that you used and you're going to continue to kind of build out the feature set.

I guess, I was curious where exactly are you in that development and when you get to a threshold where you feel like it's more broadly available and applicable to your customer set?

Thanks.

So, George, thanks for the question.

We feel that we've [past] that threshold.

You're correct, and remembering but whatever was three or four months ago, we were closer to, I would call it the minimal viable product phase.

We made tremendous progress over that time.

And that is what has enabled us to have our first [GA] launch of the product and in fact to be in production with the cable operator, a major cable operator in Europe today.

So, I would call ourselves feature complete with just the hesitation they are after us that particularly in the world of virtualized CMTS software is somewhat new and there's a lot of ideas -- evolving ideas about the broader ecosystem.

So we have a product that works well and we think delivers on the features you would expect in an off the shelf CMTS today.

That being said, there is some additional future development ongoing.

That's really almost towards a 2.0 functionality in the context of a virtualized system.

So really what we have over the next four months between now and mid-year, George, is it's less about feature development and it really is more about making sure they are operationalized, that we're ruggedized, that we've demonstrated the solution really at significant scale and volume.

And that's the work that we're embarked on now.

Got it, okay.

And then if I heard you correctly, you were talking about the Cable Edge segment is exiting this year at $100 million revenue run rate, if I remember correctly, from last quarter that was also the same commentary.

So, is that correct?

And then also obviously the legacy platforms here are rolling off, I guess that puts more weight on your CableOS platform in terms of how you think about the revenue contribution.

And I guess, I'm wondering what's changed that makes you more positive on the CableOS revenue contribution, if the math is right here.

Thanks.

Yes, first -- your first point, George, I think you're correct in saying that this is the same picture that we had during our last earnings call, we think we can exit this year 2017 again, and the back half of the year with a $25 million annualized run rate based on the information that Patrick provided about the progress and the rollout that we're pursuing right now, we think that's a pretty solid number.

Your second point about the legacy product drop off in Q4 again, it was $9 million and we think in Q1, we're going to be roughly in the same range about $9 million, although the mix of that's going to start changing, CableOS is starting to pick up, again with the first shipments in Q4, we think we'll build on that, but the real momentum will start in Q2 and beyond.

So we think, we're in good shape from a revenue standpoint and as we indicated in our last earnings call, we believe that the CableOS products are going to have a higher software content, so we feel good about the margins.

Again, the real impact will be in the second half of the year, but that positions us then to exit the year with the double-digit operating profit for our Cable Edge business as we roll into 2018.

Got it.

Okay, that's helpful.

And then on the $25 million quarterly run rate, is that -- do you think you can achieve that run rate just with the customer that you're shipping at or shipping to commercially right now, obviously, in addition to the legacy products but -- or does that require turning on additional cable operators for GA and for revenue prior to year-end?

It's not a high number of customers, but it is more than one customer, and we're currently shipping to more than one customer, and we expect that will continue.

Again, we're not looking for dramatic uptick, we're looking for a few solid Tier 1 deals to happen for us in the back half of the year and then we think we have the opportunity to build on that and getting more Tier 1 customers as well as the fast followers that we think will happen once the Tier 1 guys really start pursuing with the new products.

Okay, fair enough.

Thank you very much.

Steve Frankel, Dougherty.

Good afternoon.

Maybe we could start with just how many CableOS trials are going on today and what is the pipeline look like for other companies that may trial over the next couple of quarters?

It's not an exact number that we want to disclose, but let's call it several and there's multiple like here in the Americas and there's multiple in Europe right now.

As Harold just highlighted, our focus is on quality, I would say, over quantity, we think that there are certain large influencers in the marketplace and our strategy is really around doing a great job, improving our metal with the influencers and then capitalizing on that with what you might call or I think what Harold just referred to as fast followers in the market.

Okay.

And switching gears a little bit, what was the organic growth in the video business in the quarter and the year?

Again, we've seen as Patrick highlighted, a continuing strength in our business and if you take our core video business, the organic piece of it, we actually had year-over-year growth and it's a pickup in over-the-top activity as well as just our continuing shift from the hardware orientation the ASIC based approach we have before to software and off-the-shelf hardware.

So just general health across all of our geographies.

Okay.

And when do you think 4K becomes meaningful driver to this business?

That's the -- it sound like the internal question.

It's certainly creeping in and becoming more and more present.

Our server platforms now are supporting our 4K and we're seeing growing demand for that.

And indeed, there is growing activity around the 4K delivery, in fact, there was a news item just today about a 4K system being delivered by [SCS], I think Frontier is the latest customer they've signed up, and as you know from previous press releases, we're part of that ecosystem.

So we don't expect it to be a huge kind of hockey stick driver, at least our guidance doesn't contemplate that in the video business, but we think it's starting to pick up momentum and it's certainly something we've got our eye on in terms of upside, but from a volume perspective, we wouldn't expect to see that before the second half.

And video margins obviously step down in Q1 because of the revenue that got pushed, is there anything other than volume you need to get that business to double-digit operating margins and keep it there?

I think -- in Q1 as I mentioned, we had those projects that we actually closed in Q4 that we had initially planned for Q1, those had a pretty good software content to them and that resulted in the step down for Q1, but if you look over the balance of the year, we believe that our software aspect of the whole mix will continue to be strong.

So we think we're at a run rate now to generate the double-digit operating profit and we just need to concentrate on the top line, we have good control over the product mix and good control over the OpEx related to our video business.

So really, it's ramping the top line in line with our financial aspirations for 2017.

Okay.

And one last one maybe just a brief update on where you think you are competitively in CCAP, I saw the same article you referenced that everybody is interested in virtual CCAP.

Who else is positioned to deliver that technology today?

And where do you think you fit in competitive stack today?

You've got a couple of very good companies through the established players, and I think that they've -- this is, I've read it in the public press that they are acknowledging, now that the market is going to pivot that way.

They're talking about a transition over several years and leveraging their existing platforms to facilitate transition.

So, just as you would expect an incumbent to say.

So, I think relative to that we're the, a little bit the upstart.

We're not devolving from anything.

We are out in the market with a completely software-based more than that, a completely virtualized CMTS stack.

We think, we're pretty far ahead technologically and we're starting to prove that out, as I said earlier in volume in the field.

So it will be interesting.

I think to some extent, it's not that different than the virtualization trends you've seen in parts of the telecom market, from that broader perspective to some regarded, it's little surprising, it comes so late to cable, but we are here now.

And I'd say in sharp contrast to, when we even announced this product back in October, I think, now the rest of the industry is acknowledging, it's not a question of if, but when, which is good news from our perspective.

And we're running hard as the insurgents with the -- what we think is a real leapfrog position, but time will tell and we think it won't be that much time.

We're very focused, as I said, on proving this out to greater scale over the next several months.

Tim Savageaux, Northland.

Couple of questions and congrats on a strong Q4.

Given that you've kind of reiterated pro forma growth target for video in 2017, I was interested by some of the anecdotal commentary around strengthen in the cloud business licenses for over the top.

And I wonder, if you can comment on the dynamics that we might expect in terms of revenue growth and gross margin as we look at video for 2017 and I guess more specifically, is it reasonable to expect maybe I guess, revenue growth from the lower end and margin growth on the higher end I guess given some of these dynamics around cloud and more software-based sales and maybe along those lines if you could characterize kind of the size of that software business if you will or cloud business or whatever metric that might be appropriate to maybe give us a sense of those dynamics?

Yes, so let me start and then Patrick can chime in after that.

We've been going through two transitions in our video business.

The first one is going from the ASIC-based hardware environment that we were in the past to software and off-the-shelf servers.

We think as Patrick indicated early on, we're well into that and we've absorbed the impact of that and that's embedded in our numbers now.

The other transition, which we -- is just starting now and it's going to take, I think, longer than the hardware transition is the cloud-based approach.

And our business is picking up there.

As that becomes a more important part of our business just from a number standpoint, we're going to give you metrics to start measuring that.

We think, the combination of those two will help us to basically grow the topline in 2017, as well as get our gross margin overall back in the 57% range that we had prior to 2016 when we absorbed TVN.

So, we're making good progress there, Patrick talked about the initial deals that we've had.

It's still not a big number relative to our overall number, but it's going to be an important part of our number and it's got the recurring revenue aspect to it, so it's an real important characteristics.

So again, we'll put out more metrics as we close more deals along that track.

So, Patrick, I don't know if you want to add anything additional on that?

No, I think that's right.

Maybe I'll just remind also in our -- in the earlier comments to reiterate, in fact, we see a modest effect, even in the first quarter.

While the software things -- outlook on the first quarter is primarily as you outlined Harold associated with traditional seasonality as well as order timing in the first quarter.

The third effect is the fact that we do expect to see several million dollars of cloud business close this quarter that otherwise would have been CapEx that we would have recognized this quarter and instead this will be revenue that we'll recognize ratably over time.

So as Harold said, the good news is it's not the whole business flipping 50 or greater percent, so it's not a body blow or dramatic transition, but it is something that we think it's going to build over time.

And of course, as that layers in quarter-over-quarter, we think, we will start to see some positive benefits from the deferred revenue flowing through by the time we get to the end of the year, and that's certainly one of the reasons why we remain confident in our full-year outlook for the video business, despite what maybe optically looks like a somewhat softer first quarter.

And again just to add kind of a final point, I think as we indicated and certainly if you run through our numbers for 2017, we are going to have top line growth based on our plan.

And again, we believe that we can get our gross margin back in line.

So that says, these two transitions that are underway are really helping us both from the top line and a gross margin standpoint.

Understood.

And thanks.

If I could follow-up with one more question.

And it's I think interesting and impressive actually that you saw new 10% customers in the quarter.

But I would like to get some color on maybe where you saw some of the strength from a bookings perspective.

It looks like at least service provider revenues were up pretty strong although you do have some positive comments with regard to streaming and over the top as well.

So I wonder if we can infer that you're more traditional linear pay TV customers continuing to move into streaming type applications or perhaps if you could provide any additional color across the various categories, cable, satellite, telco if you will, or geographies from a customer perspective?

Well, frankly the strength in the video business was pretty broad-based.

And that is both geographically, we had a good Americas quarter, but we also had a particularly good Europe, Middle East and Africa quarter, this past quarter.

But it was also pretty broad-based from a customer type perspective.

As you've just hypothesized, indeed we had a good quarter with our service provider customers.

And that is, telco, cable, as well as satellite and particularly with the terrestrial guys, a good amount of that was associated with new streaming platforms, which is exciting for us to see.

That being said, particularly in the US, we had a good quarter also with the broadcast and media crowd.

But there again, we see a kind of a convergence of the technology, a fair amount of that business was also streaming over the top related.

So, fairly broad-based and really that's been part of the theory of what we've been striving for with the video business.

Matthew Galinko, Sidoti.

Congrats on the strong exit 2016.

I was hoping you could provide maybe a little bit more color on the structure of those recurring deals that you talked about 2016.

Are they multi-year commitments, are they single-year, are there minimum contracted values, just how should we think about, how those deals are being put together and are they representative of how you're intending to go forward with more of those sorts of deals?

Yes, let me start and then again, Patrick can chime in.

The deals have different flavors.

In general, they're multi-year deals, but for the most part they're usage based.

So the amount of revenue could vary again depending on the usage on a quarter-over-quarter basis.

And I think the general structure that we're going to have going forward is to try to look in minimum periods for the deal from a timing standpoint as well as minimum commitments.

But again, fundamentally, they're multi-year usage based deals.

Yes, that's it.

Great.

And I think you touched on this, but if maybe could if you could just -- could we just go back over your comments on more of your video sort of the profiles, your video revenue this quarter relating to top formats as opposed to your traditional linear sort of expect a similar mix in 2017 and going forward or how do you think about that?

Yes, so the comment was we saw strong growth, 200% year over year in terms of the number of over-the-top related licenses that we sold into the market.

And indeed I also commented that the over-the-top formats or profiles actually for the first time exceeded those of the, let's say, the traditional broadcast type.

The world is moving towards over-the-top and that's both for the new players as well as the traditional providers.

I think that's all pretty clear.

So we think that this trend will continue.

What's exciting from our perspective is that in many ways the over-the-top services are joining the big leagues.

I mean, you may have noticed also I think published earlier today, Reed Hastings' comments from Mobile World Congress talking about the importance of video quality and regardless of the size of the screen that the over-the-top content is being viewed on.

And the way we look at it, these over-the-top services are going to serve everything from a ultra-high definition television set to a tablet to a smaller mobile screen.

Regardless the consumer expectation is going to be of excellent video quality, and it's going to put tremendous pressure on the network bandwidth.

And so, we think our leading codec technology puts us in a great position for this, the convergence of -- live TV delivery over these over-the-top networks.

Great.

Maybe just one final question relating to those cloud deals.

Are you finding them fairly competitive to get to the finish line and from start to finish, if you can give us some idea of how long it's taking to go?

Yes.

I think the question would be better answered -- better served to answer before -- six months from now, just when we've got greater statistics.

A little bit like CableOS, we're not going after every account here, we're really targeting influential players where we see the right business model to flip from CapEx to cloud.

And so therefore, frankly as Hal alluded to just a moment ago, each of the situations we've been successful in so far, has had a little bit of a different flavor.

That being said, I think that the convergence of our, let's say, excellent traditional video technology, now packaged up in a cloud-ready format, it's unique in the marketplace and we're definitely finding competitive differentiation through this combination.

Victor Chiu, Raymond James.

I just wanted to drill a little bit into your Cable Edge business.

I think you guys touched on it earlier a little bit, but are there specific factors that are driving your visibility and optimism towards the $100 million annual run rate for the second half of the year, because I guess, the guidance seems to imply some pretty extraordinary sequential growth, I guess, in the latter half of the year.

So, I guess what things are driving you to be competent in that guidance, in keeping that guidance?

Yes, let me start and I'll pass it to Patrick.

We went through a fairly extensive planning process for 2017, and based on that planning process, which is heavily integrated to interaction with our customers, we believe that based on the trials that are going on right now and feedback that we're getting from them, and they're anxious to move forward because this saves them a lot of money and enhances their position with their customers, that the ramp that we talked about will occur in the back half of 2017, again primarily based on our R&D progress, as well as customer feedback.

Patrick, I don't know if you want to --

No, I think that's exactly, yes, so we're certainly not making any projections in a vacuum.

We're closely engaged with several customers as I said, actually spanning both the Americas and Europe.

And based on the progress we're making, the feedback we're getting, we've built the business plan that we have a high amount of confidence in.

And I guess -- I wanted to ask quickly about the pull-in.

Was the pull-in of the revenue in the fourth quarter related to -- by any chance related to the warrant agreements that you entered into with some of your customers?

Yes.

Okay.

And I'm sorry.

I'm sorry.

I didn't want to cut you off, go ahead and finish your --

And if it is, is it possible that you could see a recurring pattern towards the end of the year again, if this is a pattern that we should kind of expect to be seasonal perhaps maybe going forward?

Okay.

First of all, I wouldn't characterize them as pull-ins, we didn't intentionally pull them in, we completed our project and based on completing that project that put us in the position where we fundamentally had to recognize revenue and record it.

We're likely to have that situation continue on a quarter-over-quarter basis, because again, as we've indicated, our business is going more to project-oriented activities and it's hard to tie down the exact date that a project closes on.

So if it flips from one way to another, it may end up in another quarter.

And these projects had nothing to do with our CableOS activity.

In fact, they were in our video segment not in our Cable Edge segment.

And so, therefore, there was no connection to the warrant agreement that you --

Yes, no connection at all.

Okay.

So it wasn't [going down].

Okay.

Thank you.

Thank you.

And I'm showing no further questions at this time.

I'd like to turn the conference back over to Mr. Harshman for closing remarks.

Okay.

Good.

I'll just wrap up by reiterating that we are pleased by the growth and profitability in our video business and the underlying competitive momentum that we're generating there, particularly around our software-based initiatives.

And for us, as you've heard this afternoon 2017 is all about continuing to drive this forward.

On the other hand in the Cable Edge side of things, while the short-term financial outlook remains challenging, the real story here is all about executing this CableOS volume, field trials and early commercial deployments to the first half of the year.

And of course, then we're really looking forward to the back half of the year and to start the meaningful multi-year volume ramp of this new business.

We appreciate very much your support, your feedback and we look forward to keeping you all updated and speaking with you again soon.

Thanks very much everyone.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.

Everyone have a great day.