Harmonic Inc.
Q4 2014 Earnings Call Transcript

Published: 30 Jan 2015

[Operator:]

Welcome to the Fourth Quarter and Full Year 2014 Harmonic Earnings Conference Call. My name is Eric, 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, Eric, hello everybody. With me in our headquarters in San Jose, California is Patrick Harshman, our CEO; Carolyn Aver, our CFO and Peter Alexander, our CMO. 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 fourth quarter and full year 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 the actual results to differ materially from those contained in our projections or forward looking statements. Please note that unless or otherwise indicated that financial metrics we provide you on this call are determined on a non-GAAP basis. These items, together with corresponding GAAP numbers and a reconciliation to GAAP, are contained in today's press release which we have posted on our website and filed with the SEC on Form 8-K. We will also discuss historical, financial and other statistical information regarding our business and operations. Some of this information is included in the press release and the remainder of the information will be available on a recorded version of this call on our website. With that, let me turn over to you, Patrick.

[Patrick Harshman:]

Thanks, Blair. And thank you everyone for joining us today. Turning now to our Slide 3, we reported our results for the fourth quarter of 2014, results to reflect good progress on our strategic and financial agenda, but also continuation of the market turbulence we've discussed on recent calls. Revenue in the quarter was $108 million, essentially flat from the third quarter. Video business improved modestly, up about $5 million sequentially. While as expected our cable business declined approximately $6 million all in very strong quarters. Our services revenue grew approximately $1 million from the third quarter. Business from our broadcast and media customers represented 32% of revenue, while service providers accounted for 68% of revenue underpinned by rebound in service provider demand for video products. From a regional perspective, the Americas [cable] [ph] business in the quarter contributing 56% of revenue. While EMEA in the Asia Pacific region accounted for 25% and 19% respectively. The financial highlight of the quarter was strong bookings of $121 million up and encouraging 24% sequentially and 7% year-on-year driven again by the Americas, but also by a modest rebound in the EMEA. Correspondingly, we had a solid book-to-bill ratio of 1.1 and we exited the quarter with materially increased product and services backlog. Gross margin in the quarter was 54.1% reflecting both our product strategy and our continuing strong competitive position in the market. Earnings were $0.06 per share and cash from operations was approximately $20 million. So let's turn to Slide 4 for a broader view of 2014. Looking back on the year, 2014 was characterized by both significant accomplishments and disappointments. And our revenue of 434 million, 6% below last yea's revenue is certainly a disappointment for us. That being said, the performance of our cable edge business was a highlight with revenue of $95 million up 38% year-over-year and with materials strategic progress at our CCAP agenda. From the other hand, our video business declined nearly $60 million or 19% to $248 million. Roughly half of this decline was tied to market geographies experiencing extraordinary economic or geopolitical unrest. More specifically Russia, Africa and pockets of the Middle East all of which contributed materially to 2013, were down approximately 30% year-on-year compounding overall softness throughout Europe. These challenging market conditions were further compounded by a global video technology spending pause ahead of the key technology transitions we targeted for growth. Consequently from a geographic perspective, the Americas were up 3%, while EMEA and Asia Pacific declined 22% and 6% respectively relative to 2013. Beyond topline performance, an important part of the 2014 story is our strategic focus on higher gross margin products and thereby building more operating leverage into our business. Encouragingly, despite a steep mix shift toward our historically lower margin cable edge products, our overall gross margins improved to 52.8%. In addition, funneling two years of R&D investment growth, we crested a hill on several key investment initiatives. We were able to pull back modestly on spending. The bottom line result for the year was non-GAAP earnings of $0.16 per share and $47 million of cash generated from operations. On a positive book-to-bill for the year, we entered 2015 the backlog and differed revenue of $129 million, a 13% higher than a year ago. Further strengthening our foundation for earnings growth and value creation, we maintained an aggressive buyback program repurchasing 14% of shares outstanding over the course of the year. And 32% of shares outstanding since commencing the program in 2012, all while maintaining a strong balance sheet as we entered 2015 with a cash balance of approximately $105 million. So our 2014 was a disappointment from a topline perspective. We head into 2014 with further improved gross margin trends, reduced operating expenses, and significantly lower share account, positive bookings momentum and with transformative new products, all in which combined to establish a strong foundation for sustainable profitable growth. So with that let's now turn to Slide 5, where I'll provide an update on our video business in the quarter. As I touched on just a moment ago, the video business has been our problem child over the past few quarters. Now all market dynamics remained largely unchanged, we saw modestly improved results in the quarter, at the same time accelerating progress in our strategic new VOS video platform. Specifically we secured very important new VOS wins with Tier 1 Pay-TV operators in North America. We are also growing our pipeline of new VOS opportunities. These wins along with several other high profile trials and shootout successes, our major milestones on the path for validating the viability virtualized video infrastructure for Tier 1 operators looking for both improved business ability and a more efficient operating model. Our second key highlight of the quarter was continued new over the topline with both media companies and service providers. Over the top progress included an important sales of new 4K file transcoding software to one of the world's leading over the top streaming services. Also in the quarter we announced a new product for the Polaris media orchestration suite. Our new Polaris play brings integrated playout management capability to our spectrum channel port platform advancing our competitive position here. And more generally, since our announcement of the Polaris media orchestration suite in the third quarter, you see new momentum in our production playout business and growing deal pipeline with new and existing broadcast and media customers. Our North America was the main driver of the video business in the fourth quarter and we were encouraged by a modest rebound in activity in EMEA in growing interest there in our newest products. That being said, the fourth quarter also provided continuing evidence that many customers both large and small. Looking forward to 4K, Ultra HD and Network Function Virtualization and therefore continuing to hold off our major new video infrastructure investments and upgrades until this new technology waves are more mature. So with that, let's turn to Slide 6 and look ahead at the key themes that will drive our video business in 2015 and where we’re focused on executing to drive growth. With CES kicking off the year, we're already starting to see improved demand trends on the horizon for 4K Ultra HD and we increasingly view Harmonic as well positioned to capitalize on the industry's expected multi year investment cycle in 4K production, playout and delivery of both traditional liner and over the top services. Now while many elements of the 4K Ultra HD ecosystem are coming together from content creation to setup box silicon to 4K TV sales, its important to note that the industry transition to Ultra HD remains still on the early stages. We believe Ultra HD revenue opportunities will mostly be limited to smaller strategic projects over the first half of the year as the ecosystem provider scale deployment matures then leaving in turn to acceleration of larger deployments in revenue. We are also seeing growing interest to network function virtualization for core video infrastructure. As our customers are increasingly turning their attention toward IT paradigms and general and Harmonics VOS platform in particular. To leverage both our newest innovations and video quality and compression and the horizontal function collapse efficiencies a lot by our platform. A recent wins will help advance industry understanding us and confidence in as new virtualized software approach. So the good news is that we’re seeing some of the forward lift on the technology transitions that impacted our video business last year. We are not entirely out of the words, and remain mindful of the potential for fuller customers and macro economic turbulence. And on that point, a number of our customers remain in the midst to consolidation activities. And while we saw no real material impact in 2014, we are cautious about potential project delays particularly in the first half of 2015. Having said this, in many instance we’re the incumbent supplier to both sides of the equation and see ourselves punching through the other side in a significantly stronger position as the combined entities amplify investment to drive their competitiveness in the industry. And finally regarding key video market dynamics, from a macroeconomic perspective, the EMEA region may continue to present challenges especially with the strengthening dollar. We are generally given approximately half of our businesses done overseas, we are mindful of the potential global headwind associated with the much stronger dollar. That being said, we continue to be actively engaged with our customers technically and commercially and believe we are well positioned to capitalize on pent-up demand as circumstances stabilize. So with that background, the market let me peep it now to the milestones from which to measure our video business progress this year. With respect to VOS platform, I can tell you we intent to hit the market even harder further reducing and ultimately eliminating elongated sales cycles and continuing to secure key customer wins. As our systems already deployed with subsets of the full suite of the functional models, we tend to leverage the flexibility of VOS with license sales and added functionality. Further excluding our unique horizontal technology mix to transform our customers operations, and in the process take even more market share. Turning to 4K Ultra HD, despite modest near term revenue opportunities for live Ultra HD services, our target is to establish clear market leadership in the technology transition, particularly in the context of the market shift to next generation software based architectures. And then finally we are very focused on making hay of our investment in [indiscernible] in associated Polaris family of products with scale or maybe orchestration system sets further capitalizing on the power of our innovative channel port technology. So summarizing the 2015 video business outlook, our total transformative product development activities have progressed really quite well. External visibility is slowly improving with respect to key technology transitions that we targeted for growth. Yet we remain mindful of pockets of challenging macroeconomic conditions with the strong U.S. dollar and unprecedented level of consolidation within our customer base. And we also enter 2015 coming up an encouraging fourth quarter with strong bookings and backlog and with several new Tier 1 customer wins in our new strategic product areas. So putting it all together, we are targeting and well positioned to deliver turnover revenue growth, continued gross margin expansion and expansion of our video business value. So let’s now turn to Slide 7 for an update on the quarter in our cable edge business. Over the past two years we’ve been investing and executing on a strategy to become a key player in the emerging centralized and distributed CCAP earnings. We always still have ways to go, we are excited about our financial and technical progress and more confident than ever that our cable edge business is positioned at truly transformative growth. Regarding centralized CCAP and deployments of our NSG Pro platform continue to grow. In the fourth quarter our NSG Pro bookings for past 45 million since the product launch late 2013 and this underpinned the 38% year-over-year growth over our overall cable edge business. And while most of these deployments have been in the U.S., a clear highlight of the fourth quarter was new NSG Pro wins with a couple of Tier 1 European cable operators. On the technology innovation front, an additional highlight is what we believe to be the industry’s first deployments of truly converged downstream DOCSIS data and NFV video traffic to a common NSG Pro platform. This is the convergence envisioned by the authors of the CCAP architecture. And finally and very significantly, we begin to fill trials and then received our first order through our NSG Exo distributed DOCSIS CMTS. That is our first order for full DOCSIS CMTS technology, a very critical milestone in our strategic CCAP agenda. In a particular significance one of these orders was with the Tier 1 service provider. So now look back at Q4 let’s turn to Slide 8 and talk about the 2015 outlook for our cable edge business. Following the strong year on cable edge, this is in product line, we anticipate most of the same market dynamics will continue to drive sustainable demand and opportunity. On one hand as cable operators continue to deploy much more powerful and user friendly content navigation guides, consumption of traditional video on demand services is accelerating and by extension driving demand through video edge QAMs. On the other hand with Internet based over the top video services on the rise, and with some of this content becoming rendered in 4K, the bit rates of these streams are increasing further driving demand for scalable modular CMTS downstream ports. And with heightened competition in general amongst service providers to deliver multi data rates, cable operators are looking ahead and pushing the envelope and enabling broadband access technologies including next generation CCAP. For this reason we now expect more aggressive move to DOCSIS 3.1 which enables greater bandwidth efficiency later in 2015 and certainly in 2016. Additionally there is growing momentum for distributed CCAP solutions. This is most evident in areas where cable operators were extending fiber access networks to codec wired multi dwelling buildings and small businesses and in support of denser Wi-Fi architectures, DOCSIS application for which our new NSG Exo is particularly well suited. And finally regarding cable edge business dynamics, our cable customers consolidation activities are ongoing presenting some investment uncertainty in the coming months but we believe significant mid to long term growth opportunity. With this environment and armed with our powerful new cable edge platform we continue to see the market as opportunity. So let's now turn the milestones by which we’ll measure our cable edge strategic progress throughout the year. First we remain focused on and well positioned to extend our NSG Pro centralized CCAP platform footprint domestically and internationally. We’ll continue to report on our progress in this regard. Second, we’re going to work to scale our new NSG Exo distributed DOCSIS 3.0 CCAP product line. Expending our addressed market and gaining valuable DOCSIS 3.0 CMTS experience as we go. And third, in light of shifting mid term demand to DOCSIS 3.1, we are shifting our NSG Pro centralized CMTS development priority to DOCSIS 3.1 but the intention of being in customer lab later this year. With the tremendous growth of our NSG Pro platform footprint, we’ve seen a large opportunity in a capitalized and the industry transition to DOCSIS 3.1. And here again we’ll keep you priced of our product development and customer valuation progress. So look, while organic knowledge there is plenty of work ahead of us. I can tell you that meaningful, technical and promotional progress is being made daily. We entered 2015 solidly positioned to advance our share in the CCAP market and resolve to deliver exceptional value to our customers, and our shareholders in this regard. Specifically in 2015 we anticipate continued revenue growth with the overall market demand trends. As well as continuing margin improvements associated with our increasingly differentiated CCAP product portfolio. Okay, let’s turn to Slide 9 where I will conclude my comments by highlighting the fundamental value of our business. As I mentioned to you all a quarter ago, there is no doubt in mind that Harmonic is better positioned strategically than at any other time in this company’s history. We stand tall with share leads in nearly every market we serve following several years of investment and close collaboration with both our media and service provider customers uniquely positioned to capitalize on key industry trends around virtualized video, 4K over the top and CCAP. Supporting our readiness to capitalize on these strategic investments and drive sustainable growth and our industry leading innovation capacity, natural property, our service expertise, total cost of ownership value proposition and our global brand and reputation. We entered 2015 with positive momentum across our video and cable edge businesses, several strategic wins in the fourth quarter, expanding gross margins, carefully controlled operating expenses and a significantly reduced share accounts all of which establish a strong foundation for delivering strong earnings growth in an a price value creation across the year ahead. And with that Carolyn, let me now turn the call over to you to talk more about the results and our financial outlook.

[Carolyn Aver:]

Thank you, Patrick. Let's move to Slide 10. Our net revenue for the fourth quarter was $107.9 million, above the high end of our guidance range. Net revenue was down from $120.2 million for the fourth quarter of 2013, and roughly flat with $108.1 million for the third quarter of this year. Our video business revenue was up $5.3 million sequentially, led by improved demand for our video processing product. This was offset by an expected decrease in our cable edge business of roughly $6 million, as cable operators digested previously purchased network capacity. Services were up modestly to $24.1 million. Our bookings for the fourth quarter were $121.1 million, up 7% from a year ago and up 24% sequentially. As Patrick mentioned, this represents a solid bounce back from the low Q3 booking. Our book-to-bill ratio was 1.1 to 1 to the fourth quarter and 1.06 to 1 for the full year. Backlog and deferred revenue was $128.7 million at the end of fourth quarter up 10% sequentially and up 13% on a year-over-year basis gaining good momentum as we entered the New Year. Gross margin was 54.1% in the quarter also above the high end of our guidance and an increase of 50 basis points from the third quarter of this year and down just slightly from 54.3% in the fourth quarter of last year. The sequential increase in gross margin is principally due to a greater portion of our revenues coming from our video products business. Notably for the full year, gross margin was 52.8% up 20 basis points from 2013 despite a strong mix shift towards our lower margin cable edge products during the year. This improvement principally reflects our continued strategic focus on innovative products and solutions to deliver differentiated value to our customers and the significant operational efficiencies we’ve built into our supply chain and manufacturing processes. We will continue to press hard on these initiatives and you will see this trend continue. Non-GAAP operating expenses in the fourth quarter of $51.6 million, was slightly higher than anticipated up from $51.2 million in the third quarter of 2014 and down from the $54.5 million in the fourth quarter of 2013. In the quarter expenses ran slightly above planned as we made strategic go-to-market investments which we do not expect to repeat in future quarters. We continue to prudently manage our investments, to build leverage in our business and remain on track to further reduce expenses by $10 million to $15 million in 2015 when compared to our operating expenses incurred in 2014. This reduction mostly on operational functions with a roughly even flat, between R&D and SG&A. Our headcount was 1,028 down from a 1,040 in the third quarter and down from 1,032 a year ago. On a non-GAAP basis net income for the quarter was $5.3 million or $0.06 per diluted share compared to net income of $5.1 million or $0.06 per diluted share in the prior quarter, and net income of $8.3 million or $0.08 per diluted share in the fourth quarter of 2013. Moving now to Slide 11, let's take a deeper look into the revenue trends in the fourth quarter. Service provider revenue was up 8% sequentially led by 9% growth in video product, offsetting the sequential decline in our cable edge products. In the fourth quarter international macroeconomic jitters persisted. However, the turbulence in our business caused by next generation video networking is modestly and customer consolidation impact suspending was less than predicted. Despite the sequential dip in the cable edge revenue in the quarter, we are entering 2015 with healthy bookings and good momentum in our new product initiatives. And we are encouraged by the rebound in our video processing products across all geographic regions. In the fourth quarter broadcast and media revenue declined 14% of our significantly improved third quarter results reflecting continued weakness in Western Europe. Nevertheless, the momentum we experienced with several of the world's leading media companies in North America during the third quarter extended into the fourth quarter and we exit the year with good momentum through our production and playout products. Finally from a geographic perspective, revenue from the Americas was up 1% versus the third quarter as improved video revenue led again by many of the world's largest Pay-TV customers offset to decline in our cable edge products. While EMEA remained challenging with revenues down 3% sequentially, our service provider vertical here too performed well in the quarter as several Tier 1 carriers began to more aggressively embrace our new strategic product initiatives. Importantly we exit the quarter with slightly value booking in the region and strong customer engagement. Nevertheless, Russia, Africa and the Middle East remain a concern and we continue to be cautious of the softening macroeconomic and geopolitical climate in the broader EMEA region. The APAC region declined 1% as softer demand for our table edge products offset strengthening demand for our video processing and production and here too the extraordinary strength of the U.S. dollar causes us to be more cautious in our outlook as Patrick outlined in his earlier comments. There was not 10% customer in the quarter. Moving now to Slide 12, let’s review the broader set of revenue trends in completing the full year. Similar to our discussions with you a quarter ago, there were really three primary trends which impacted our revenue in 2014. The first of which was positive and the remaining two were negative. First worldwide demand for narrowcast edge QAMs continue to gains momentum held with our strategic initiative to enter the CCAP market and subsequent introduction of our NSG Pro platform, our cable edge business was up 38% for the year when compared to 2013. In large part the strength of our service provider revenue up 4% in 2014. The second trend is a decline in our EMEA revenues of22% in 2014 versus a year ago. This was in part due to a substantial slowdown in the emerging market regions where we have driven strong in prior years. While APAC and LATAM performed largely as we expected, Russia, the Middle East and Africa were challenged. Each of these regions faced softening, macroeconomic environments and heightening geopolitical concerns as the year progressed. As a result, our revenue were down 30% in 2014 from 2013 in these geographies. While we anticipate these conditions to persist, we also continue to believe that at this point we are skipping along the bottom in these regions with respect to bookings and remain thoroughly engaged with our customers. Nevertheless the EMEA revenue decline contributed significantly to the 19% decline in our video product revenue in 2014 when measured against 2013. Within our video business, revenue from our video processing products declined at nearly twice the rate of our production and playout products. Pockets of Western Europe also impacted by softening macro economic conditions further contributed to the EMEA decline. This principle impacted demand trends from our broadcast and media vertical which declined 21% off of a record high in 2013. While the year was certainly challenging we’re encouraged by the momentum we have established in our broadcast and media vertical as evidenced by the sharp increase in bookings in the fourth quarter. 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 architectures corresponding with the launch of our software based VOS platform in April of this year. Here we saw 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 2014 decline in our broadcast and media revenue while largely offsetting the success we experienced with our cable edge products and our service provider vertical. The last two factors were the principal cause of our revenue decline in our video business and the lower than expected operating margin for that business. Now moving on to Slide 13, we continue to drive a healthy balance sheet. We ended the quarter with a cash balance of $104.9 million, up $7.7 million from the prior quarter reflecting $19.8 million of cash generated from operation, a $3 million investment in Encoding.com leveraging the past leadership in cloud and managed services and $6.7 million used to repurchase shares, which I will discuss with you more in detail momentarily. Our receivable balance was $74.1 million and our DSOs were 63 days down from last quarter’s 64 days. Inventory was $32.7 million up slightly from the prior quarter. As a result, our inventory returns were 6.1 times in Q4 compared to 6.2 times in the third quarter. Now moving to Slide 14, I’d update you on our share repurchase activity. In the quarter, we repurchased 1 million shares, which brings our total shares repurchased from the second quarter of 2012 when the stock repurchased program commenced, so [ph] 37.7 million shares for a total of $231.3 million representing an average price of $6.20 million. At the end of Q4, we had $68.7 million available from our board authorized program for continuing repurchases. Significantly we’ve returned over a 140% of our 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 fourth quarter to $87.7 million, a 32% reduction over that same timeframe. Now let's turn to outlook on Slide 15. We believe similar trends impacting revenue in the fourth quarter will likely continue into Q1. Our demand in some geographies remain sluggish due to choppy macro economic conditions our customer are more broadly adopting next generation video processing networks. Sales cycles encompassing our new product initiatives have started to accelerate and we’re entering the year with the strong backlog and deferred revenue. We therefore expect our revenue to be in the range of a $100 million to a $110 million. Non-GAAP gross margin in the first quarter is expected to be in the range of 52.5% to 53.5% due to a slightly stronger expected mix of Cable Edge revenue. For the first quarter of this year we have targeted our non-GAAP operating expenses to be within the range of $0.5 million to $51.5 million. I would like to remind the first quarter is a seasonally high quarter for operating expenses with payroll taxes increasing over $1.5 million from Q4. We anticipate our non-GAAP tax rate for the first quarter to be 21% subject to our domestic versus international split. Looking beyond the first quarter we want to provide you with an update on how to think about our business for the balance of the year. While we entered the year with encouraging backlog and order growth across our blended business remindful of the softening macro economic conditions and pockets of EMEA and APAC region. As a result we’re expecting low single-digit revenue growth in 2015, with the view of our video products returning to modest single-digit revenue growth aided by our Cable Edge product achieving mid to high single-digit revenue growth in 2015. From a growth margin perspective the NSG pro margin has improved since we began shipping the product at fourth quarter of 2013. Given a full year at our target gross margin and as we deliver more of our value in software while making continuous improvements our supply chain and manufacturing process we anticipate further growth margin expansion to 53% or better for the full year of 2015. We expect with respect to operating expenses, we have balanced the needs of our business with market opportunity and anticipate $10 to $15 million reductions for the full year of 2015 when compared to operating expenses in 2014. While we basis outlook upon single-digit revenue growth for the year were committed to achieving significant operating margin improvements in 2015 and we’ll manage our business accordingly as the year progresses. The objective as existing the year with operating expenses in the 41% to 42% of revenue range. Finally we anticipate our non-GAAP tax rate for the full year to be 21%, again subject to our domestic versus international split. We believe this framework will provide meaningful year-over-year earnings growth through 2015 and beyond. Before turning the call back to Patrick, let’s turn to slide 16. Consistent with our announcement at Analyst Day, Analyst and Investor Day in May of last year, we will be moving to segment reporting. It’s our intent that by doing so we will giving all of you a more detailed view of the relevant metrics in our business. We will include segment disclosures starting in our 2014 10-K including reconciliations of the reported earnings. Starting in Q1 we will include segment information in our quarterly earnings release. As such we will report revenue and operating margins for our video and Cable Edge business respectively. Since these segments will include services we will no longer be breaking services out separately. In addition as we’ve done for the prior three quarters we will provide detail geographic breakouts by moving from a U.S. international breakout to one which categorizes the Americas EMEA and APAC regions independently. We’ll also continue to report two customer verticals service provider and broadcast and Media. With that, I’ll turn the call back over to Patrick for his closing.

[Patrick Harshman:]

Thanks Carolyn. In summary 2014 was a year both significant progress on transformational initiatives and significant marketplace challenges. In video business we delivered a powerful message to the market with release of our VOS platform envision, with stunning video compression technology advances, we finished the year with the string of high profile strategic wins. As the market paused in anticipation of 4K Ultra HD into a value added transition to virtualized video processing we press forward investing and developing powerful new intellectual property, products, customer relationships and strategic partnerships. Similarly in our Cable Edge business we drove the continue deployment of our NSG Pro Platform. We accelerated the release of and received orders for our first DOCSIS CMTS or NSG Exo distributed CCAP product and we focused on mid term CCAP strategy and even bigger opportunity associated with DOCSIS 3.1. Nonetheless, 2014 was also characterized by challenging market conditions in several international geographies which is some of these challenges spilling into 2015. We can’t control the macro economic environment around this, we can’t drive focus innovations, productive customer engagements and optimized cost structure that’s exactly what we have done and we will continue to do. We are carrying more backlog in 2015 than we did a year ago and internally we are laser- focused on driving significant earnings growth, cash generation in 2015 and beyond. So with that let me say thank you for your continued interest and support. And let’s open the call for questions.

[Operator:]

[Operator Instructions] James Kisner is online with the question. Please go ahead.

[Unidentified Analyst:]

This is actually [indiscernible] for James Kisner. We had a question about Title II legislation and whether are you see it’s affecting your customer spending in anyway. If it’s actually the discussion of it, and if it’s actually enabled how it may affect customer spending, how do you see that? Thank you.

[Patrick Harshman:]

I don’t think we got a unique view here. I think we and most of by the industry share the perspective that the Title II is the long way to go and that it has the potential to negatively impact investments in the industry. That being said we think there is a lot of consensus around that and we’re optimistic that we won’t see that come to fruition. We are waiting along with the rest of the industry to see how this progresses.

[Unidentified Analyst:]

Okay. Regarding the pause the technology transition pause you were talking about the Ultra HD and 4K. So do you have any visibility into it? How long it may go on and do we see improving in 2015 or customers accelerating their spending?

[Patrick Harshman:]

Certainly around 4K Ultra HD we are encouraged and see positive sign. And I think the CEA show was a great example or great indication of building momentum in the industry. And so as I said couple of moments ago we see an increasing rate of trials and tests and some early smaller scale deployments in the first half of the year. Although, our guidance that Carolyn talked about doesn’t contemplate at a rapid ramp, we see after ramp in the back half of the year is significant upside. And we’ll just have to be watching it closely over the next several months to see how it plays out.

[Unidentified Analyst:]

Thank you very much.

[Patrick Harshman:]

Do you want to add anything?

[Peter Alexander:]

Sure. This is Peter Alexander. So the other thing that we started to see is pay-TV operators and broadcasters actually start to outline when they will begin persistent operating services some as early as the second half of this year and many going into next year. So that’s a more concrete sign that we will see that transition starting to happen later this year.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

The next question comes from Tim Quillin. Please go ahead.

[Tim Quillin:]

Good afternoon. I just want to dig in a little bit about the pick up in demand that you saw from service providers on the video side. Is that catch up from a relatively slow spend earlier on the year, are you seeing in coding upgrades that might look like preparation for 4K or what exactly are the products that those service providers are buying and why?

[Patrick Harshman:]

Thanks for the question Tim. There’s maybe a little bit of catch up in there and we did see some projects delayed out of second and third quarter. But we also saw a growing trend towards just operators availing themselves to the latest compression efficiencies even before Ultra HD 4K. We’re even pushing the envelope on really significantly enhanced compression both MPEG-2 and AVC MPEG-4. And I guess to your point in preparation for clearing up more bandwidth for Ultra HD as well as just making more bandwidth for additional content. We saw both of those are being drivers of the investments, service providers in the fourth quarter.

[Tim Quillin:]

Good. And then in terms of the Cable Edge business, you mentioned you thought there would be a greater mix of Cable Edge in the first quarter. What’s the anticipated seasonality when you think about mid to high single digit growth there on the Cable Edge, you had maybe some pretty strong revenue in the front half of 2014, does the growth look a little bit more backend weighted year-over-year or this year?

[Patrick Harshman:]

You know Tim, although with a down or a slightly decreased revenue quarter was actually a pretty good order quarter for the Cable Edge and that tells us that we’ll have at least a reasonable beginning into the year in the Cable Edge space. That being said, we’re excited about the new Exo product and the two way CMTS win that I described there and that something that we expect to pick steam over the course of the year. So I think about and I think you think about two kind of overlay dynamics, one there is certain cyclicality to the investments in the traditional downstream comp. We do see pretty good demand trends carrying forward. But that’s overlaid with what we hope will be growing NSG Exo, CMTS revenue over the course of the year.

[Tim Quillin:]

Okay. And then just one last question and I’ll step back into the queue. But you mentioned development and putting some development into getting ready for DOCSIS 3.1 which hopefully it will be late 2015, maybe 2016 is more realistic but what’s left to do right now in terms of preparation for you all?

[Patrick Harshman:]

Well, our big thrust up until now it’s been around DOCSIS 3.0 and that’s the basis of the product that we announced and we received our first orders for in the fourth quarter. Not early dramatic, 3.1 involves new silicon and it’s a fairly substantial incremental development program. So for that reason we expect, we don’t expect much 3.1 revenue in the year. We think its going to be mostly a development year and a customer valuation in trial and approval, on the 3.1 side and that from a revenue perspective it’s going to be 3.0 story in 2015.

[Tim Quillin:]

Okay. Thank you.

[Patrick Harshman:]

Thank you.

[Operator:]

And the next question comes from Brian Coyne. Please go ahead.

[Brian Coyne:]

Thanks for taking my questions. Got a couple for either Patrick or Peter and then a follow-up for Carolyn. First, I wanted to see you guys could talk a little bit about the last wins especially in North America that you mentioned. I know it's hard to compare apples-to-apples, but one of you speak a little bit to perhaps quarter size and margins for these deals, versus what you would – might traditionally expect to sell on sort of a hardware/software solutions basis? And then second question along these lines, it's a little bit more on the Cable Edge side, I'm wondering if you can speak to your success in the traction on with NSG Pro and Exo for DOCSIS applications, and sort of – if you see it, you know your orders in the progress that you're making there really is reflecting sort of upgrade of existing footprint, or do you feel like you're gaining share against other sort of incumbents perhaps more from the traditional CMTS side?

[Peter Alexander:]

Brian, this is Peter. Let me start with the question on VOS as oppose to VOS. And the nature of the deals received so far. So in many respects, the VOS went so far in very much like our historical business in that the customer’s initially for adoption wanted us to package the servers and do all the work in integrating the VOS into the server. So they end up in more like a planned transaction with us and they don’t necessary have to take on some of the skills around managing the servers to begin with. So very much the nature of the deals in the margin is associated with the - quite similar to what we've seen historically. We don’t believe that will be sustained over time, it does that actually help us drive adoption to those that are necessarily immediately wanting to go to the data centre architecture.

[Brian Coyne:]

That's great. And then on progress on NSG for DOCs?

[Patrick Harshman:]

The NSG Pro, the success to-date that I mentioned and orders received at $45 million that is all around downstream plan applications roughly evenly divided between traditional cable VOD and modular CMTS applications. And in both cases we see good demand trends. If you've seen the new user interface is, cable is finally joining or catching up with some of the Internet competitors. And I think it’s clearly driving, it’s more than I think it seems a good data, it’s driving higher VOD. So we see just more traffic , more transaction that’s driving, more need for more downstream QAM bandwidth and then another next thing is happening on the high speed data side again with over the top being real driver of more access bandwidth. As I highlighted in my comments, to one of the exciting things that happened over the quarter is for the first time we’ve seen not just in lab but actually in-deployment. We’ve got a couple of customers who are using common NSG Pro platform to channel both modular CMTS traffic and traditional MPEG Video. This really is the convergence envisioned by CCAP spec. So from my perspective, we continue to take very significant steps for. We are getting a broad footprint of the NSG Pro platform and now we have it being used in the downstream converged capacity. We’ve demonstrated the cable show late last year working two-way functionality in DOCSIS 3.0 and I have articulated here are real focused on getting to 3.1. And we really think 3.1 is going to be the point eventually and the larger opportunity to convert this large – frankly lightly populated based of NSG Pro platforms to DOCSIS 3.1 engines. In parallel with all of that, we've entered the distributed CCAP space and there as I mentioned we are very excited to have taken our first orders. And with the NSG Exo starting to get in the field, not only do we see an opportunity for incremental edge revenue but really we’re going to start turning our strides, our creditability, our experience, the point in real DOCSIS systems. And so we’re going to go in and start interacting with our customers not only with fantastic technology and a fantastic world map, services organization, testing environment that has really been proved out in the context of deployed DOCSIS services. So certainly in this case, hasn’t penned and it will not be built in a day but hope you see that we’re making steady significant steps in terms of really being a credible player in this business and really for significant growth.

[Brian Coyne:]

That’s very helpful. Is there a significant ASP or margin difference between the Pro and the Exo?

[Patrick Harshman:]

No, not really.

[Brian Coyne:]

In fully deployed formats?

[Patrick Harshman:]

Yeah it’s still early days for the Exo but no, our view right now is not materially.

[Brian Coyne:]

Okay. And just very quickly for Carolyn, I know you mentioned you had little bit more than $16 million still available under purchase authorization. The shares were 7ish or something like that, relative to your average price over the last remaining 37 and 300 million shares being close to 620. Does that change your sort of -- your view on how aggressive you might want to be with the repurchase or how do you think about that, thanks so much.

[Carolyn Aver:]

Sure. Well I certainly don't think we'll be as aggressive as we've been in some of the prior quarters where we repurchased several million shares in a quarter given relative some extensive stock price and our cash balances at this point. I think our goal is certainly to continue to repurchase. I think you could expect we'll probably do more of that at lower prices and somewhat less at higher prices, but with the goal that kind of averages out over the years. So we'll be active, but certainly I think for the year at a lower rate than we were last year and with some price sensitivity rolled into that.

[Brian Coyne:]

Understood, great. Thanks again guys.

[Patrick Harshman:]

Thank you, Brian.

[Operator:]

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

[Victor Chu:]

Hi guys, this is Victor Chu in for Simon. You highlighted the transition to software base solution for a few quarters now and I think most of this agree that that's a necessary strategy to position yourselves to capitalize in this trend, but what are some of these impediments that are preventing this mapping more quickly, I guess and like basically, I'm asking kind of what are making -- what's making carrier more resistant to the transition? What is preventing them from transitioning more quickly than you like?

[Patrick Harshman:]

I wouldn't say Victor that it's resistance as much as it's just new and so we've seen as we said elongated decision making cycles. Particularly for live video, the carrier is think about the Super Bowl coming us this weekend that's carrying millions of dollars and people want to make sure that the infrastructure they put in place is rock solid. And as you and I both know, sometimes from our own personal computer experience there is a concern about Intel or Windows. What we're doing is absolutely not Windows, but you can kind of understand as people come to this technology of fresh, they will have to really understand it and make sure that it's up to the reliability trends of the industry. And I want to assure you that we're absolutely certain and in fact the Tier 1 wins that we talked about in the fourth quarter really a testament to the fact that leading operators are really coming around. So I would say reliability, robustness, relative to historic live television or broad as industry technology is one question that's being addressed. The second was mentioned a moment ago by Peter is really the question of the best way to deploy it. Do you buy that from us bundled on our server as an appliance sort of in fact do you go even further and to take more of a data center model, which can actually yield even greater operational efficiencies, but requires our customers to bring to fore a different set of skills around virtualization, really IT skills, which historically for many of our customers have not really been merged with the traditional television video management. So it's a new environment and it's just taking I think a little bit of time for everyone to understand it, figure it out, decide how to go forward and make sure there is comfort going forward. You know that being said, it's going well. I think everybody gets it intellectually, most of our customers are reaping these benefits on the IT side of the house already and as I mentioned for us it's not just a story of kind of same old except for software, whereas part of this delivering dramatically improved video compression efficiencies and some real dramatic innovations in terms of kind of horizontal function collapse They’ll open up new avenues to service creation agility etcetera. And that's I think also unlocking or stimulating a lot of creative thinking on the part of our customers. So my perspective it is a little slower, but it's all good and we see -- we see the wheels starting to turn a little bit faster here as we head into the beginning of 2015.

[Victor Chu:]

So I guess to what degree could we think about the growth I guess as replacement versus an incremental opportunity for customers opening the market to a new set of customers and having this as incremental growth I guess rather than just kind of replacement I guess.

[Patrick Harshman:]

What I would say existing media and broadcast and service provider customers, I think it's more than replacement, but I guess at a high level it is replacement by bringing better technology to the market, we expect to gain better share. We don’t think this technology in itself is going drive our large customers to have more content to more channels but it is going to allow them to be more agile and move more quickly, or hopefully more innovative and drive better business returns. That being said, there isn't a newer class of over the top streaming customers that we have highlighted one important deal or 4K is streaming over the top not a long standing customers of ours. And I would there is no players are more inherently biased towards the data center kind of operational model. So this technology certainly positions us quite strongly with the – I would say the orientation of the mindset of new media players. And certainly new media players do represent an expansion of the market opportunity for us.

[Victor Chu:]

Okay, great. Just really quickly, I just wanted to get a little more color on your long term outlook. You’re forecasting single digit growth roughly for 2015, can you just maybe help us understand a little bit of the moving parts that contribute to the growth, I guess, which segments are you most optimistic about for 2015? Which areas do you think could be little more challenge for you?

[Carolyn Aver:]

Sure. We expect certainly the cable edge provided the business to continue to grow and I think I said in my comments mid-to-high single digit. And then we expect right now the video business to grow low-single digits. I think the reality is for both of those businesses, we have a view that that will grow faster than that but we have overlaid over that the sort of macroeconomic conditions that we’re seeing right in Europe with currency around the world. So we think the possibility for higher growth rates in both of those businesses over there. And for different reasons we’ll accelerate as we get through 2015 and end of 2016 but we have somewhat subdue view right now given everything we’re seeing from an macroeconomic perspective.

[Victor Chu:]

Does the cable operator consolidation have any impact on results, is it something that might pause for you guys perhaps in the near term or is that not as relevant to your particular piece of the budget?

[Patrick Harshman:]

We have not seen any impact to-date including in Q4. And our current guidance doesn’t contemplate any significant impact certainly possible though. But right now we’re not expecting that. I mean the things we do buy enlarge are responding to pressing needs of our cable customers and so we - at this point we are not expecting any substantial or significant disruption.

[Victor Chu:]

Okay. Great. Thank you.

[Operator:]

We have no further questions. I would like to turn it over to Patrick for closing remarks.

[Patrick Harshman:]

Okay. Well thank you everybody again for joining us. I certainly like to close by again highlighting the positive momentum that we’ve established heading into this year. In fact the key customers are telling me they want to do business with our company. We are strategically aligned with our customers, competitively advantaged with innovative new technologies, and committed to driving stronger new growth throughout the year. So thanks again everyone for being with us on call. And we look forward to keeping you updated on continuing progress. Good day.

[Operator:]

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