Harmonic Inc.
Q3 2014 Earnings Call Transcript

Published: 29 Oct 2014

[Operator:]

Welcome to the Third Quarter 2014 Harmonic Earnings Conference Call. My name is Jennet 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. Mr. King, you may begin.

[Blair King:]

Thank you, Jennet, hello everybody. With me in our headquarters today in San Jose, California is Patrick Harshman, our CEO; and Carolyn Aver, our CFO. I would like to point out that in addition to the audio portion of this call; we have also provided slides which you can see by going to the Investor Relations page on harmonicinc.com and clicking on the third quarter 2014 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 report 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 other forward-looking statements. Please note that unless or 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 posted on our website and filed with the SEC on our Form 8-K. We will also discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in the press release and the remainder of the information will be available in a recorded version of this call on our website. With that let me turn the call back over to you, Patrick.

[Patrick Harshman:]

Thanks, Blair. And thank you everyone for joining us today. Turning now to our Slide 3, today we reported our results for the third quarter of 2014, reflecting a continuation of the external market turbulence we discussed last quarter, but also the margin trajectory as we expected as we entered the year. With this in mind I’ll first review our results for the quarter and then take a step back to discuss overall market dynamics. While we believe much of this market turbulence is in fact an encouraging sign for pending new infrastructure investment and while Harmonic is positioned with significant earnings upside as we look ahead to 2015. So revenue in the third quarter was just over $108 million, down 1% sequentially and slightly above the midpoint of our guidance range. Our Radio business improved modestly, up $3.5 million from the prior quarter while as expected our cable edge business declined little over $5 million off of a record second quarter. In terms of customer verticals, business from our service provider customers represented 62% of revenue, while Broadcast and Media grew to 38%, reflecting the modest improvement in our video product business. Our third quarter bookings of $97.8 million were down 14% sequentially. Now some of you may recall, third quarter has been and once again, our seasonally lowest service renewal quarter. So as a result we typical exit the third quarter with a book-to-bill slightly below 1.0, as we did again this quarter. Nonetheless, year-to-date book-to-bill remains above 1.0. Backlog and deferred revenue was consequently $116.6 million, down from last quarter again due largely due to seasonality and our service bookings. Gross margin for the quarter was a very solid 53.6% reflecting healthy margin trends in both, our video and cable edge business. Earnings were six pence cents per share aided not only by our gross margins but also by our continued focus on operating expenses. Cash from operations was just under $1 million due to the unusual timing of some payments which are not expected to repeat in the fourth quarter. Significantly we repurchased just under 5 million shares from the quarter or nearly $32 million. In total, we’ve reduced our share count by over 30% since we began our buyback program in the second quarter of 2012. And Carolyn will provide further details and commentary on these operating results in just a few minutes. We’re turning now to Slide 4, let’s take a closer look at our business and the market color that we saw in the fourth quarter. Our service provider revenue remains up 4% for the year led by 50% – little over 50% growth on cable edge business although service provider revenue for the quarter as a whole was down 10% when compared to the prior quarter. In the third quarter turbulence in our video business caused by both macroeconomic issues and technology transition driven parts was compounded by the anticipated reduction in cable edge sales, up a little bit less than Q2 as I just mentioned. Additionally we did begin to see certain service provider customers slow some investment spending in connection with consolidation activities. When we anticipate these activities, it may intensify in the coming months unless there are four factors into our conscious outlook for the fourth quarter. Turning to our Broadcast and Media vertical, in the third quarter we were pleased to see revenue advance from the prior quarter, up 17%, primarily due to stronger demand from several of the world’s largest leading companies, and here we were encouraged by a short rebound in the associated production and playout product orders. And finally from a geographical perspective, the Asia Pacific region was a clear bright spot in the quarter growing about 15%, further reflecting improved revenue contributions from our broadcast and media vertical. Revenue from the Americas was flat against the second quarter, as improved video revenue, again led by broadcast and media offset the climb in our cable edge business, which has again for the year driven the year-to-date we’ve seen in the Americas, about 3%. And while the EMEA region again remained very challenging, revenues were down about 13% sequentially. Our broadcast and media vertical here too performed relatively well in the quarter but we also saw modest improvement from our cable customers in the geography. And importantly, we exited the quarter with slightly better bookings in the region and strong customer engagement following the sales organization in Europe, Middle East, and Africa that we conducted in June. Nevertheless, Russia, Africa, and the Middle East remain a big concern for us, year-to-date we’re down more than $20 million from 2013 in these three sub regions. And so we remain cautious of the softening macroeconomic and geopolitical climate in the broader EMEA region. And despite these chopping business conditions we believe our strategy remains sound. Our technology and competitive fundamentals are positive, our margin structure continues to improve, our cost structure is aligned and improving, we generated cash and used this to significantly reduce our share count, and consequently we’re very solidly positioned to accelerate earnings growth in 2015. So let’s turn to Slide 5 and I’ll update you on what we’re seeing in a related but distinct video and cable edge businesses. As many of you will recall, the video business was our problem child in the second quarter, and while we experienced modest sequential improvement throughout the third quarter, the overall market dynamics were largely unchanged. Domestically we continue to see an industry coming off of the high definition and Type IV and take to find ways and appall us before investing in HEVC, Ultra HD 4K, and data center base for delivery infrastructure. The past quarter we’ve grown incrementally more confident than Ultra HD 4K services will become real starting in 2015, and that these will be delivered through this option of HEVC compression. We’ve also seen continued industry momentum towards network function virtualization based on core video chain functions being re-engineered and collapse to run on Intel processors leveraging industry standard servers and virtualized data center best practices. Inspired by the vision of virtualized video infrastructure and very often their own IT network experiences, our customers around the globe are now grappling with the very real operational transition and technical staff training issues associated with making this video virtualization move a reality. We see this work and associated investment pause as very much the combi for the store, and let me be clear, we are real driver here, very focused on pushing the market forward. Related to this dynamic, over-the-top services are also a clear area of focus for our industry. In the recent months we’ve seen our vision of integrated over the top taking hopes as the initial load [ph] over-the-top infrastructure start to give way to unified head ends that enable simultaneous origination and delivery of linear broadcast and multi-screen servicing’s. Now it’s been a long road to hold with relatively modest revenue contributions till date in the over-the-top area for us but we’re encouraged by the over-the-top business and architectural trends we’re seeing and the significant operational efficiency gains we’re positioned to enable in the marketplace. And growing focus on operational efficiencies is also driving more customers to broadly turn their attention to the notion of total cost of ownership of their entire video workflows, and we see this reaffirm in our long held strategy of end-to-end solutions and horizontal function collapse which we have enabled through both internal R&D and acquisition leading to our VOS and NAB in April of this year. And now finally regarding the third quarter video market dynamics, again customer demand continues to be sluggish throughout much of the Europe, Middle East, and Africa region. Although we saw some improvement in parts of Europe, for other regions where geopolitical weakening macroeconomic conditions prevail, remain soft. While we anticipate these conditions to weigh on our near term results, we remain actively engaged with our customers and believe we’re well positioned to capitalize on pent up demand as circumstances begin to normalize. So with this in mind, let’s now turn to our video business execution where marketplace challenges have not slowed our focus on strategic progress. First I would like to take a moment to introduce you to Bart Spriester. Bart joined our team in September as Senior Vice President of our Video business. Previously Bart was Executive Vice President and General Manager for North America and before that Chief Technology Officer for Encompass, a long time Harmonic customer and partner. He has also served in a number of capacities for Cisco, most recently as its Vice President and General Manager of Digital Media Networks. Bart comes to us with a deep understanding of our industry, inclusive of managed services, extensive customer relationships, and a solid track record of translating strategic vision into changeable results. Bart has already made tremendous strides in charting the strong course towards executing our strategy in the two months where he has been with us. And I look forward to taking our video business to the next level through Bart’s leadership. From a go-to-market perspective, Bart joins us at the time where our video business is reaching a key inflexion point. Some of you might recall the first orderable instantiation of VOS was Electra XVM. Electra XVM is also the latest iteration of our market leading Electra series of video encoders, it contains our pure compression engine, as well as differentiated graphics, branding, and playout capabilities, and here we’ve made tremendous and now demonstrable video quality and compression games, evidenced by a recent string of high profile shootout wins spanning MPEG-4, MPEG-2, and HEVC compression against all of our key competitors signing a new benchmark capability and performance in the marketplace. Additionally, at IBC in Amsterdam last month we announced the second orderable instantiation of VOS functionality which we call ProMedia X, and this integrates our market leading packaging and original server capabilities for over-the-top into the VOS platform. As a result, VOS is now uniquely capable of enabling many broadcast and over-the-top media processing with production playout capabilities, blending software and virtual machines. And also, for those of our customers with little bit flow on their respective transition today in operations, preinstalled on servers, by us for those of more traditional deployment opportunities. Now adding or underlining this progress I’m quite pleased to say we were able to announce SKY Italia as our first customer adopting VOS for its new internet TV service, leveraging the scale and total cost of ownership advantages of VOS, as well as our powerful service and support capabilities. And while SKY Italia is our only publicly announced customer on VOS, I can tell you we’re actively driving the pace of adoption across the industry. While we still have much work to do, we do see customer adoption momentum accelerating for the balance of this year and into next year. Also in IBC earlier this month, and aligned with our strategic vision and increasingly important industry trend towards integrated systems and solutions, we announced the Polaris suite of playout management tools for our production playout business providing the first settlements of the media orchestration that will be needed for dramatically simplified workflows in the future. Through Polaris we aim to enhance the completeness, differentiation, and growth of our production playout suite of products. As part of this initiative we announced a minority investment in VFLIC [ph], a key technology ingredient in go-to-market partner and the software control and orchestration area. And along these same lines you would also recently made two another mono-strategic investments in partner companies, VJU and Coding.com, core both leveraging our VOS technology to offer innovative cloud-based services. We’re pleased to see our technology being leveraged by these innovative businesses as we advance our cloud leadership into cloud-based managed services, and as we advance by the scope of our addressable market. Also with that on video let’s not pave it to our cable edge business where we really have driven strong growth through the first nine months of this year. Today we remain in the very early innings of a multi-year investment cycle by cable operators worldwide to unleash much more powerful and user friendly content navigation guide for accessing their own content, driving accelerated consumption of traditional video-on-demand services, and by extension demand for narrowcast edge QAMs [ph] or the advent of cooperative agreements between cable companies and over-the-top service providers, paired with the delivery of new 4K streaming services, unlike of network same as on others. Stream quality and bit rates are increasing creating further demand for scalable downstream edge bandwidth. These trends continue to accelerate the shift to CCAP enabled architectures. As many of you know, CCAP is the term used by the industry to describe a flexible, all IP converged video and cable network. And here Harmonic remains the forefront of this multi-year investment cycle representing an eventual addressable market, roughly $1.8 billion a year, more than six times the traditional edge core market which historically is wraps. Now as I shift to CCAP we’re also seeing growing momentum for distributor CCAP A solutions as cable operators extend their fiber asses networks further enhancing the theme of enabling flexible cost effective network capacity. In light of this momentum, we continue to find ourselves well positioned in the industry, particularly with our recently announced NSG Exo, specifically architected to leverage the virtues of deep fiber network by simplifying operations and reducing cost for cable operators. For all of that as background, let’s talk more specifically about our progress executing our cable edge plan and our outlook for continued growth in this area. Over the past two years we’ve strategically executed a well-defined road map to penetrate the centralized industry related market opportunities inherent within the CCAP framework. And today we’re uniquely addressing these architectures with new platforms developed in close collaboration with our customers. From a centralized perspective, we successfully have been seeding the market with our powerful new platform, the NSG Pro, which we started shipping late last year. And here our momentum in the market is strong, our product is unique and the demand trends associated with both VOD and over-the-top streaming service continues to fuel sustainable investments [indiscernible]. Specifically I’m very pleased to report our NSG Pro revenue was again strong in the quarter, and continues to contribute meaningfully to the over 50% year-over-year growth in the cable edge business. Our platforms unique marriage of density and flexibility is clearly delivering value to cable operators as they balance that cost of adding network capacity with unabated increases in the consumption bandwidth consensus services. And of equal technical and operational importance, this industry leading capability of integrating downstream VOD and DOCSIS services in a single unified CCAP platform. So again, I’m very pleased with the only footprint we’ve established in this market, we remain quite optimistic about our centralized CCAP opportunity in this regard. Equally encouraging in the third quarter was the fact that we sold our first software licenses on this platform to activate previously deployed hardware, and this is the razor blade analogy we’ve discussed with you previously, and consequently we saw our cable edge gross margins improve in the quarter. Turning now to two-way CCAP, for those of you who did not attend the SET show in Denver last month. I’m also very pleased to inform you we successfully demonstrated DOCSIS upstream capability within our industry profile, and we remain on-track to deliver this functionality to customer labs this year. On the other hand as I noted earlier, our new NSG Exo is a distributed CCAP platform, quote from initial deployment was full two-way DOCSIS capability. This distributed approach to CCAP extends our ability to penetrate the CCAP market. In doing so the product provides the means for cable operators to cost effectively add network capacity or further reducing operational complexities of more traditional DOCSIS deployment scenarios. Today we are actively engaged in trial activity with Tier-1 operators, and we’re seeing mounting customer interest and limited involvement from competing technology companies resulting in a real opportunity to drive incremental share gain in the overall CCAP space. In recent months we’ve increased focus in this still small but fast growing segment of the CCAP market and now anticipate incremental revenue to ensue over the coming months. So in summary here, as I look across our video and cable edge businesses, I think it’s clear that we’re really raising the bar in innovation. We’re crisply focused on executing our roadmap strategically defining Harmonic’s technology leadership even further in advance of the powerful market transitions we’ve discussed, within both our video and cable edge businesses. I freely acknowledge there is still plenty of work ahead of us but I think we’re encouraged by our early new innovation successes and we continue to see meaningful progress being made every day. And on that note and moving to Slide 6, I’d like to briefly review some of the tangible validations of our latest innovations. When we saw exiting the IBC Show in Amsterdam and the SET Cable Show in Denver, both held in September, now I’m not going through all of these but importantly VOS and its associated Electra XVM, we’re recognized that both IBC and SET were best of show CSI and Broadcast product of the year awards. The NSG Exo also received a CSI Award and the multi-channel news innovator award. So all these products are really yet to hit their full ramp, the industry recognition they’ve received serves as a strong leading indicator of their innovation, their competitive positioning, and really positioning for future success. Now let’s turn to Slide 7. I’ll conclude my comments, by stepping back and highlighting for you my view of the fundamental value of our business. And in my view, Harmonic is better positioned strategically than any of the time in the company’s history but we stand tall with commanding share leads in nearly every market we serve. Within video, new and existing customers are increasingly eager to embrace our virtualized video processing platform, it uniquely encompasses media network functions from production all the way through distribution, and nearby enables us network elasticity and this serve as philosophy for our customers or also representing the industry’s lowest total cost of ownership, well positioned. On the cable side, we’re also uniquely armed with fresh innovative centralized and distributed CCAP solutions for the ultimate conversion to full IP-based service delivery. Now in total, following several years of investment and closed collaboration with both our media and service provider customers, we purposely find ourselves on solid technology and strategic clamp, and we believe we’re merely retracting [ph] the surface of monetizing the full potential in these investments. And as we continue to unleash our unparalleled intellectual property and strategic focus to further classify processing functions, and also deferred developed features and functionality on our CCAP platforms. Although all value proposition and competitive position becomes even stronger in the marketplace. Perhaps for the most significant importance, when all of this to bear under the umbrella of an exceptionally well respected brand and deep customer relationships with uniquely both the well pleading media and service provider companies. Look as reflect on 2014, particularly our financial performance, it’s certainly not lost on us where our video business is down over $40 million so far. That said roughly half of this decline is attributable to specific market geographies experiencing extraordinary economic and geopolitical unrest. As this conditions improve and we do believe they will overtime we’re well positioned to capitalize on the underlying demand trends in those specific geographies. On the other hand, technology driven transitions account for the balance of the [indiscernible]. And here it is my view that the shifts and technology historically amplify growth and economic gains, and let’s just look back 18 months ago when we first announced our CCAP enabled product to the market. As a result our cable customers part purchases are heritage edge.com products, and many of you will remember that our cable edge business was pressed for most of 2013. While today our cable edge business is back on track, we’re in the very early inning to the multi-year investment cycle in the IP data network convergence. Despite the turbulence in our video business, as we lead our customers through planning cycles and operational adaptions to incorporate our VOS or trade in HEVC technologies, we have a clear view to installing success and strong demand trends ahead in the video business. Our strategic direction remains focused and intact, and we’re leading the marketplace with competitively advantaged new and powerfully disruptive technologies that appeared with – now growing in real pipeline in compelling business opportunities. So therefore looking ahead, we’ve maintained a view for both our video and cable edge businesses to contribute meaningfully to our future success, and we see a clear path to deliver strong earnings growth in 2015 and beyond. With that Carolyn, let me now turn the call over to you to talk more about the results of the quarter and our financial outlook.

[Carolyn Aver:]

Thank you, Patrick. Let’s move to Slide 8. Our net revenue for the third quarter was $108.1 million, in line with our expectations. Net revenue was down from $122.9 million for the third quarter of 2013, and from $109.6 million for the second quarter of this year. Our video business was up $3.5 million sequentially, led by a rebound in our production and playout products. This was offset by an expected decrease in our cable edge business of $5.4 million which had a record quarter in the second quarter of this year, services were up [ph]. Our bookings for the third quarter were $97.8 million, down 16% from a year ago and down 14% sequentially. Virtually the entire sequential decrease in bookings is due to a reduction in services and support bookings. Again, I’d like to remind you that the third quarter is always our seasonally lowest quarter for support renewal contracts, and it was again this quarter. Our book-to-bill ratio was 0.2 in Q3 as it has been for each of the last two years. Our year-to-date book-to-bill remains above 1.0 at 1.04. Backlog and deferred revenue was $116.6 million at the end of Q3 compared to $123.6 million at the end of Q3 of 2013. Gross margin was 53.6% this quarter, an increase from 50.1% in the previous quarter and from 50.8% in the third quarter of 2013. The increase in gross margin on a sequential basis is principally due to a greater portion of our revenues coming from our video business in general, and more specifically an increase in revenue from our production and playout products. Additionally we had a continued improvement in the gross margin of our cable edge business led primarily by the NSG Pro which has now reached its targeted standard cost, as well as our first firm-ware licenses into NSG Pro footprint to enable new capacity and previously deployed. Operating expenses for this quarter were $51.2 million, down from $53.7 million in the third quarter of 2013 and $52.5 million in the second quarter of this year. We continue to prudently add expenses in the quarter and came in slightly below the low end of our guidance range. From a year-over-year perspective, the decline was approximately $2 million reduction in R&D expenses as we have moved through two major platform transitions over the last year. Our headcount was 1,040 in Q3, matching the prior quarter and down from 1,063 in the third quarter of last year. On a non-GAAP basis net income for this quarter was $5.1 million or $0.06 per diluted share compared to $1.8 million or $0.02 per diluted share in the prior quarter, and $7.1 million or $0.07 per diluted share for the third quarter of 2013. Now moving to Slide 9, let’s take a deeper look into our revenue. There were really three major trends that are impacting revenue for us this year, one positively and two negatively. First, as Patrick mentioned, in cable the worldwide demand for narrowcast QAMs continue to gain momentum driven by strong increases and VOD usage, and increasingly higher bit rate supplied OTT Video services resulting from the cooperative agreement between carriers and over-the-top service providers. This cared with our new NSG Pro has driven 52% year-to-date revenue growth in our cable edge business. The strength in our edge business drives our service provider revenue which is up 4% year-to-date. The second trend is the decline in our EMEA revenues of 21% for the first nine months of this year compared to the same period a year ago. As you know, emerging markets have driven substantial growth for us over the last few years and while Latin America and APAC have performed in line with our expectations this year, Africa, the Middle East, and broaden Eastern Europe have been challenged. Each of these regions has experienced macroeconomic and geopolitical issues and their revenue has fallen significantly over the course of this year. Having said that we’re at a point now where we believe we’re skipping along the bottom in each of these region. The EMEA revenue decline significantly contributes to the 20% year-to-date decline in our video business revenue and it’s split almost evenly between video processing and production and playout on a percentage basis. Also affected by Europe is revenue from our broadcast and media customers which has declined 18% from the record high set in the same nine months a year ago. As a result through the first nine months of this year, the broadcast and media verticals account for 34% of that, down from 40% through the first nine months of 2013. The last factor impacting our revenue is the spending cost ahead of the industry’s move to Ultra HD and HEVC compression. And this is undoubtedly compounded by our customer’s transition to next generation video processing corresponding with the law and our software based VOS platform in April of this year. Here we’ve seen both new and existing media and service provider customers to lay projects to rethink their video processing architecture on a global scale, further aggravating the year-to-date decline in our broadcast and media revenue which is largely offsetting the success we’ve exhibited with our cable edge products that are service provider vertical. Now turning to Slide 10, you can see we continue to drive a strong balance sheet. We ended the quarter with a cash balance of $97.2 million, down $37.2 million from the previous quarter reflecting $31.7 million used for share repurchases which I’ll discuss in more detail momentarily. We generated just under $1 million of cash from operations in the quarter and we have the unusual timing of a number of payments. Our receivable balance was $75.6 million and our DSOs were very low, 64 days, down from last quarter’s 67 days. Inventory was $32.5 million, up by $2.3 million from the prior quarter. As a result, our inventory returns were 6.2 times in Q3 compared to 7.2 times in the second quarter. Now moving to Slide 11, I’d like to update you on our share repurchase activities. In the quarter, we repurchased 4.9 million shares, this means our total shares repurchased from the second quarter of 2012, when the program began, to 36.3 million shares with a total of $225 million. At the end of the Q3, we had $75 million available from our board authorized program for continuing repurchases. While we expect to continue our repurchase trend, we do anticipate our purchases will moderate in the fourth quarter. Significantly, we’ve returned approximately 160% of cash from operations to shareholders in the form of stock repurchases since the second quarter of 2012 bringing our shares outstanding at the end of the third quarter to $88.4 million. Now turning to Slide 12, we believe the trends in tightening our revenue this year will likely continue into Q4. We continue to see both customer verticals pausing investment as they carefully evaluate transitioning through the next generation of video processing network and the prevailing macroeconomic and geopolitical climate within the EMEA region remain a concern. We’ve also grown incrementally more cautious with customer consolidation activity. So as we look into the fourth quarter of 2014, we expect our revenue to be in a range of $96 million to $106 million. Gross margin in the fourth quarter is expected to be in the range of 52.5% to 53.5% based on a similar product mix to Q3. And for the fourth quarter of this year we have targeted our operating expenses to be within the range of $50 million to $51 million as we continue to manage our expense level. Finally we anticipate our non-GAAP tax rate for the fourth quarter to be 21% subject to our domestic versus international split. While those represent a disciplining disruption to our 2014 financial growth agenda, we want to provide a framework for you to think about 2015. It’s too early, especially with deferred turbulent market conditions to give specific guidance beyond our usual long quarter. However, I will say we see 2015 as an up year for revenue. In fact we anticipate each of our product categories to show revenue growth for 2015. From a gross margin perspective, the NSG Pro margin has improved since we began shipping the product unlike fourth quarter of 2013. Within a full year at the current gross margin, and our expectations for our software based VOS platform to contribute to our revenue mix next year, we continue to anticipate gross margin improvements in 2015. We have, and we’ll continue to balance the needs of our business with market opportunity and we’ll continue this activity into 2015. Therefore we anticipate operating expenses to be $10 million to $15 million lower for the full year 2015 than they will be for 2014. That said while these operating adjustments will drive improvements to the company’s overall operating performance, they are margined here to accelerate and expand our leadership in next generation video and cable edge networking, and we look forward to bearing the fruits of these changes in the quarters ahead. Finally, we anticipate our non-tax rate for next year to remain at 21%. We believe that this framework will enable us to provide meaningful year-over-year earnings growth on even modest revenue growth for 2015. With that, I’ll turn the call back to Patrick for his closing remarks before we open the Q&A.

[Patrick Harshman:]

Thank you, Carolyn. I’m just summarizing, as you’ve just said through the technology transitions and macro disruptions in passing our topline performance, in near term outlook for the fourth quarter are disappointing. Well we can’t control the macroeconomic environment around us, we can’t control our competitive position and cost structure, and that’s exactly what we’re doing. And I can tell you our internal execution and focused determination will wretch it up even higher for the months ahead as we exploit our competitive advantages to drive top and bottom line growth. What remains undoubtedly clear is that Harmonic’s stand on solid strategic growth were equipped with innovative and competitively differentiated new technologies positioned in areas where our customers plan to invest and are actively engaged with us. And internally, we’re driving an operational framework that balances market opportunity with investments in support of the earnings growth we expect in 2015. We very much appreciate your support, and we’re looking forward to continuing to deliver, and we continue to talk to you. And on that note, let’s open it up for – to your questions.

[Operator:]

Thank you. (Operator Instructions) And our first question comes from James Kisner. Please go ahead.

[James Kisner:]

Thank you. The first question I had was just on the European weakness, since kind of wondering if this could be partially related or amplified by your kind of historical exposures, if I recall, you’ve had some good business in Russia and Germany, two areas, sort of highlighted as week by just they macro indicators and just near. Is that fair, is that the areas you’re seeing more weakness?

[Patrick Harshman:]

Certainly. Yes is the short answer James. Certainly Russia has been the most acute for us, we call that Russia, Africa, and the Middle East, and a little bit more broadly, Eastern Europe. And Russia has been the area of most acute year-over-year decline.

[James Kisner:]

Okay, great. And I was just hoping to scrub a little bit, you said that you’re more cautious on customer consolidation activities. I’m just wondering if that’s a function of just – you’re on judgment or are customers settling to you that you should perhaps be ready for some disruption and – just any kind of texture around that and perhaps how long that particularly component might persist?

[Patrick Harshman:]

We’ve got a big customer base worldwide and we’re exposed to several in process mergers or acquisitions between different service provider customers James. And although I wouldn’t call the impact significant on the third quarter, we were exposed to certain delays on sort of projects. So more than anything else is what we’ve observed and we have observed. In private, we didn’t observe anything and to be fair, we have not seen any impacts specifically on cable edge business. But in the video area, we’ve seen a couple of things, situations playout, they give us cars to be cautious as we head into the fourth quarter.

[James Kisner:]

And I guess just wondering a follow up there, what do you think the prospects are post these consolidation activities further you to be a sort of snap act or perhaps a heightened level of investment, is it fair to say that acquisitions targets perhaps are going to be receiving incremental investment by their – perhaps, better funded parents. Is that something you guys view as possible? Thanks.

[Patrick Harshman:]

We do it, it is possible, probable, and we see it as a real opportunity. I mean let’s face it, a lot of these deals are around the scale and consolidation very much related to content and who can negotiate, who can deliver most compelling content packages, who can negotiate the best deal. So a lot of this activity, we see both from the U.S. and in Europe, it revolves very much around video content. And we’re well positioned, and then I’ll note that the reflection in a number of the situations that playout that we’re in comments with players on both sides of the equation, and so we often in our history have sold through a consolidators as they up their game – as they up their anti in the competitive entity. So I would say that we’re optimistic about the other side of the balance, particularly Russia.

[James Kisner:]

Okay, thank you very much.

[Patrick Harshman:]

Thank you.

[Operator:]

And our next question comes from Simon Leopold [ph]. Please go ahead.

[Unidentified Analyst:]

Hi guys, this is Victor chewing for Simon Leopold. Last quarter you noted that the transitioned virtualization was driving a slowdown in video. Can you just give us an update regarding that trend and is there still a factor driving weakness? I know Patrick you mentioned that the environment hasn’t changed too much and that was an issue for you in 2Q but can you just give us maybe an update on what the impact is there?

[Patrick Harshman:]

Yes, it’s difficult to quantify Victor but it’s certainly is impacting us and the overall situation hasn’t changed. You talk to most Chief Financial Officers and Chief Technology Officers or customers, they believe in the merits of virtualization. I think Howard [ph] plays out on the ground, it’s a little bit more complex and those discussions depending on the customer take more or less time. We’ve got certain sophisticated customers who are ready to roll and we’re very pleased to be able to announce SKY Italia and we think we’re going to be seeing more wins in the near future. On the other hand there is some other customers who are intrigued, they are trying to get it but they want to study it, they want to figure it out. I think it’s the process. I would point out though that through that process we are developing capability and our actual property, not only the core video technology but the operationalization of that technology which I think is pretty important, pretty powerful, pretty valuable in the context of a broader communications landscape it is moving towards virtualized infrastructure over the next several years. Go ahead.

[Unidentified Analyst:]

Is the virtualization, is that more prevalent within some geographies?

[Patrick Harshman:]

To some extent, say it’s more of a developed market phenomenon or events markets, so – that’s why only the U.S. is number one and I’d say Western Europe is number two, but that’s not to say that there isn’t interest in other geographies but proportionately its strongest in the U.S. and Western Europe.

[Unidentified Analyst:]

Okay. And maybe just a general sense of how the transition impacts gross margin going forward.

[Patrick Harshman:]

It’s totally a positive for gross margin. We exposed at our Analyst Day where we really unvield the strategy for the investor community that we sensed a great opportunity to really capture more value and continue what has been a good track record of gross margin improvement overtime. We don’t expect the entire product line to flip a 100% to virtual machines overnight, we expect it to be a migratory process and through that process we expect our gross margins to expand.

[Unidentified Analyst:]

Okay. But that wasn’t really a factor that drove upside in the gross margin this quarter, right?

[Patrick Harshman:]

That’s right, that’s right.

[Unidentified Analyst:]

Okay. Great, thank you.

[Patrick Harshman:]

Alright, thank you.

[Operator:]

(Operator Instructions).

[Patrick Harshman:]

Alright, it seems that there is no more questions, we know it’s a busy day but we do very much appreciate everyone spending the time with us today. And I guess I’m hearing that there is one more. We’ve got, Brian?

[Operator:]

Yes, we have a question from Brian Coyne. Please go ahead.

[Brian Coyne:]

Thanks. I thought I queued up a lot earlier, I’m surprised not to hear myself in the queue, I apologize. Thanks for taking the same, just a couple of ones. Patrick, I’m hoping you can clarify I think on your response to James earlier with regard to some of the softness you’re seeing from potential M&A activities. Did you say that you haven’t really seen change in the order trend on the cable edge side? And maybe just perhaps a little bit more detail of what you’re seeing if in fact the delays or sort of the fold up seem to becoming more in the medium broadcast segment of your business. If I got that right?

[Patrick Harshman:]

So let me – yes, I do need to clarify, I was referring to the cable edge product area. In the cable edge product area, we’ve seen pretty healthy demand and no visible one way or another impact to demand for our cable edge products. In our video product category, which we sell into all service providers, cable operators, satellite, telco operators, we are exposed to a number of different deals and there – I don’t want to overstate it by any means, I don’t even want to suggest a meaningful impact to Q3. But we saw a couple of instances across a couple of different of these pending mergers where deals were put on ice, in the video demand in particular. And observing that, seeing that playout in the Q3 has caused us to be incrementally more cautious as we head into Q4.

[Brian Coyne:]

Got it, that helps, I appreciate it. Looking ahead a little bit further, if you could take out your crystal ball for the first half of 2015, I mean I understand your view about revenue growth for the full year but let’s say assuming that perhaps some of the delays from consolidation result if in fact those might end up being sort of more of a binary event in the first part of next year. Do you think that your business might be flat year-over-year in the first half of 2015?

[Patrick Harshman:]

Absolutely. I mean, you’re right, we don’t have a crystal ball but we’re hopeful to see growth in the first half of the year Brian. I mean look, we’ve been battered around by the degradation of business in certain geographies we talked about. As Carolyn said in her remarks, we think we’ve hit bottom there. So we don’t see that there is any real further deterioration possible there, and frankly, we see much more upside or opportunity than downside elsewhere. Cable edge business is on a roll, our service and support business has continued to grow. And on the video side, we’re making strides everyday around technologically and around the discussion process that around work utilization, every single day brings one announcement about Smart TVs that are capable of supporting Ultra HD, we’re actively engaged in a number of HEVC trials set in the like [ph]. So I don’t want to overstate it for you, I think it’s an evolutionary recovery here but I think it is a recovery that will show demonstrable progress sequentially over the next three quarters. So yes, we can imagine and in fact, we’re hopeful to see growth in the first half of 2015.

[Brian Coyne:]

Got it, that’s great. Couple of if I could, I get suited along the same lines. On VOS, if you could maybe talk a bit more about your sales cycle there, that’s obviously an important part of your view towards 2015 and I know it certainly but how if I compare it to maybe more traditional hardware/software solution fail, and then pause overtime and do you think you can move the business towards being impressed a little bit more returning in nature unless project or build out dependent?

[Patrick Harshman:]

Okay, so let’s face those two things separately. It’s obvious it very much depends on the customer, I mean just forgetting our specific underlying technology Brian, when we engage on a video opportunity with new customer we see deals get closed in weeks and we see them getting closed in nine months, and it’s everything in between. So in that context it’s a little bit hard to assess now what kind of additional delay is the virtualization introducing, certainly we’re not seeing any virtualization deals getting closed in a matter of weeks. That being said, we’re seeing increasingly sophisticated customer, so we’re doing virtualization in other grounds [ph] and they are ready. And so I think we’ll see some fast moving customers, I think we’ll keep the number of customers ready to move forward – quickly expand over the next couple of quarters. That being said, it’s also true that the number of customers are really figuring it out and couple of moments ago I think that’s creating an opportunity for us to bring additional values and we’re really developing a natural property there, the operationalization of this technology in addition to just the deployment of it. So it caught the market by surprise when we came out and said we could do what we could do at the NAB show in April, and it’s been a process since then. Last quarter we said, listen, for a number of reasons, not the least of which is that, we expect a couple of choppy video demand quarters. We’re very much in the mix of that, we don’t see it lasting forever and we’re hopeful we’re going to punch out the other side here in the quarter or two. To the second part of your question, we’ve not communicated a broader model or plan for getting into recurring revenue but I would point out the part of our overarching strategy of moving to immigrated, functionally trapped software virtual machine platforms if it does open the door to a number of new business models. And whether that’s us delivering a service or whether it’s a strategic partner, it creates the opportunity to participate in the market, to expand the addressable market and to exchange and interact with customers, different commercial approaches. And we’ve got a lock before we run here, I’d put that in a little bit more malign category but make no mistake, we’re positioning ourselves to grow the business and change the business for the positive in some very fundamental ways by engineering this overarching technology transition. So we’re focused on the technology transition, in getting that out in the field with the current business model today but you will see us going forward – I think getting more creative and responding to our customers in the way they want to do business.

[Brian Coyne:]

Great, that’s very helpful. I think against channel if I could, a question on cash in your share buyback, if I heard you right I think you said you’ve got about $75 million remaining on the availability, I believe you’ve got just under $100 million in cash on balance sheet, and net of course of expected positive cash flow. Can you talk maybe, briefly about your strategy around cash management in 2015.

[Patrick Harshman:]

Yes, I think to your point we certainly expect that we’ll continue to be strong generators of cash and so we think that will be a growth there. We have $75 million left, we anticipate that we’ll consume that $75 million over the next quarters. So we think both of those things will happen. This quarter given the investments that we’ve made and where our cash balance is, we expect it to be more moderate but we certainly think as we go into cash generation over the next several quarters we’ll continue to buy.

[Brian Coyne:]

Great, that’s all I had. Thanks, guys.

[Patrick Harshman:]

Alright. Thank you very much Brian, and we’ll end it there. Thank you very much everyone for joining us. Please note that we’re very focused on executing the business, both in the fourth quarter, and in 2015. We do think we’re on very solid strategic ground or excited by the strategic progress, balance that versus very real challenges in the marketplace. But on balance this business has got a lot of growth capability, we put real leverage into the model from an earnings perspective, and we’re committed and excited about getting after that. So thanks very much for joining us today and we look forward to our next opportunity to update you on our progress. Good afternoon.

[Operator:]

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.