Blair King – Director, IR Patrick Harshman – President and CEO Carolyn Aver – CFO.

Mark Sue – RBC Capital Markets Victor Sze – Raymond James Financial Tim Quillin – Stephens Incorporated James Kisner – Jefferies LLC Brian Coyne – National Alliance.

Welcome to the Q1 2014 Harmonic Earnings Conference Call. My name is Heather and I will be the operator for today’s call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Blair King. Blair, you may begin..

Thank you, Heather. Before we begin, I’ll take a moment to introduce myself. My name is Blair King and I joined Harmonic in early February as the company’s Director of Investor Relations. I’m pleased to be here and look forward to working with all of you. And with that, welcome to Harmonic’s first quarter 2014 earnings call.

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’ve also provided slides which you can see by going to the Investor Relations page on harmonicinc.com and clicking on the first quarter earnings 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 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-K report in the forward looking statement section of today’s earnings 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 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 earnings press release which we posted on our website filed with the SEC and 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 on a recorded version of this call on our website. And with that I’ll turn the call over to Patrick..

Thank you, Blair. And thank you everyone for joining us today and turning now to our slide 3. And today we reported our results for the first quarter of 2014, reflects solid progress on our strategic and financial growth agenda. Revenue was a $108 million up 6% year-over-year. International customers accounted for 50% of revenue, as U.S.

customers go back to 50%. Business from our Cable customers contributed 41% of revenue, while Broadcast and Media customers represented 34%, following the record 42% in the fourth quarter. And Satellite direct-to-home and Telco customers represented 25% of revenue in the quarter.

Our first quarter bookings of a $126.3 million were up encouraging 15% year-over-year representing the strongest bookings quarter we have had since the second quarter of last year. And with that book-to-bill was roughly 1.2, the level we haven’t seen since 2010 and a positive indicator of our ability to return to mid-to-single digit growth this year.

Our backlog and deferred revenues stands at a healthy $126.4 million since we entered the second quarter, supporting our confidence in the rest of the year. Gross margin for the quarter was a strong 53.3% reflecting continued healthy margin trends in the blended business.

Non-GAAP earnings were $0.03 per share and cash from operations was $11.2 million that maintained our focus on the operating expense and cash management. And significantly regarding our buyback program we repurchased 4.4 million shares in the quarter for approximately $29 million.

And Carolyn will provide further details and commentary in these operating results in just a few minutes. Turning on to slide 4, I’ll provide a little bit more business and market color on the quarter.

Driving our year-on-year revenue growth was growing momentum with cable providers, up 14% and that in large part by our Edge business which was up 40% year-on-year.

And in particularly by the early success of our NSG Pro CCAP Platform, we see these results as validation of our strategic focus in this market and increasingly competitive differentiation the NSG Pro Platform offers.

In the first quarter, we also saw year-on-year improvement in the demand from Satellite direct-to-home and Telco pay-TV service providers, well 15% from the first quarter of last year.

We are now seeing some of the fruits of our efforts in developing the next generation of industry leading compression technologies and some service providers begin refreshing their encoding base with our newest MPEG-2 and MPEG-4 encodes. Here our near-term strategy has been to bring significant bandwidth efficiency innovations to the market.

And with our total Video Processing fills up 9% year-over-year, we’re increasingly making technical and commercial progress in this regard.

And turning to Broadcast and Media now to a record 2013 we experienced a slow start to 2014, with revenue down 7% primarily due to software demand in Europe and associated Production & Playout product revenue was down in the quarter, also in part due to slower European order flow.

And however, we were encouraged by a rebound in EMEA orders in March, enabling us to exit the quarter with a regional book-to-bill ratio greater than 1. Also of note our Production & Playout products report NBC’s successful highlights factor for the Sochi 2014 Olympic Games during the quarter.

And we continue to see growing market interest in our Spectrum ChannelPort solution calling high profile and successful deployments with customers such FOX Sports 1 and British Telecom Sports. We remain committed to leveraging the foundation we have created in Broadcast and Media to deliver future growth.

And finally here from me geographical perspective, our domestic business with a 50% of revenue for the quarter, up 27% over the period a year ago. As noted earlier this relative strength was largely due to successful of the Cable Edge products, the NSG and new NSG Pro.

In contrast our international business was down 8% with EMEA proving challenging early in the quarter as I noted just a moment ago. So let’s turn to slide 5 now, well I want to return to our overarching objective of creating shareholder value.

As a reminder, our value creation agenda is comprised of three components, executing on our strategic growth plan, continuing focus on capital structure optimization and ensuring strong supporting corporate governance and management. And capital structure we remain focused on generating and returning cash to shareholders.

And during the quarter we repurchased 4.5% of our shares outstanding and since the inception of our stock repurchase program in early 2012, we reduced our share count by approximately 24%, repurchasing over 27 million shares for approximately $167 million.

With respect to corporate governance and management, we additionally brought Blair on Board as Director of Investor Relations. Blair with his extensive WallStreet experience as a Senior Sell Side Research Analyst and he covered Harmonic for many years in his capacity.

And prior to his experience as an analyst, he worked in our industry for over a decade in a variety of disciplines including finance, marketing and sales. And so Blair, we are pleased to welcome you on Board and I encourage all of you, our shareholders to get you on board. So let’s now turn our progress executing on our strategic growth plan.

Moving to slide 6, let’s first talk about our progress towards addressing what we see is roughly $1.6 billion market opportunity for us at the Converged Cable Edge. Notably an opportunity representing more than five times the traditional Edge QAM market we’ve addressed with our legacy and market leading product.

That some of you may already know these large opportunities driven by our Cable customers planned disruptive transition to a flexible all IP converged video and data access network. The Phase I release of our entry into this larger adjacent market is our downstream converged cable access product, the NSG Pro, CCAP Platform and downstream linecard.

The fourth quarter was our first volume production shipping code for the NSG Pro and in February in Infonetics Research showed a bit Harmonic captured nearly 19% of the total CCAP downstream port shipped during the quarter.

We’re encouraged by this early position in the market and I’m pleased to report that the momentum for NSG Pro accelerated throughout the first quarter contributing to the upswing in our Cable Edge business. And as we enter the second quarter our pipeline of new Cable Edge opportunities as continued to grow.

So let me here highlight two drivers that are underpinning this early success, the first is our competitive advantage from the technology and design perspective. We believe the NSG Pro office cable operators more downstream capacity than any other competitive product in the market today.

Fundamentally offering the economics of adding new revenue generating services to the networks. Our designs unique mirage and density and flexibility is critically important to cable operators, as they balance the cost of adding capacity we are seeing the unabated increases in the consumption of bandwidth intensive video services.

Now the Eco technical and operational importance is Harmonic’s industry leading capability and integrated downstream narrowcast to video and modular CMTS or DOCSIS QAMs in unified TCAP platform. Our NSG Pro today uniquely unable allocation of unicast video and IP data traffic across the RF Spectrum and service closing network required.

Our technology and expertise here is unique, valuably duplicated by our competitors and undoubtedly a strong contributor to our early success. So on with a highly differentiated new product, the second important factor driving our whole success is growing demand.

On one hand we see internet-based over the top video delivered over the cable network growing, with cooperative agreements between cable operators and over the top service providers, the bit rates and quality of these streams increasing, creating accelerating demand for scalable modular CMTS Edge forms.

On the other hand these cable operators deploy much more powerful and user friendly content navigation guides for accessing their own content. We also see consumption of traditional video-on-demand services accelerated and corresponding demand for Video Edge QAMs growing.

And we see both of these effects driving demand trend that can gain momentum throughout 2014. And with that said, with our Phase I product to release now well underway, we no longer plan to provide detail on individual Phase I audits.

So looking ahead Phase II of our program as CMTS compliant DOCSIS upstream upgrade capabilities to the same NSG Pro platforms we’re shipping today for downstream applications. To plan to deliver Phase II product into customer labs later this year followed by commercial availability in 2015.

We anticipate this strategy will further out to the economics of deployment for our cable customers and in term further accelerate the value proposition and margin performance for the NSG Pro.

And here it’s important to note that today’s CMTS market dynamics may clear the historical market share position held by incumbent CMTS providers being revisited by cable operators as they evaluate the next generation unified IP video service offerings.

So summarizing our Cable Edge business, we’re pleased with our CCAP program was all so far and we see good near-term demand trends. In terms of the full potential initiative we really just getting going, remain focused on delivering the full CMTS functionality of our platform and realizing the associated value for our customers and our shareholders.

Let’s turn out to slide 7 while I’ll update you on the indicators we see catalyzing progress towards the video processing [customers] [ph] driven by next generation video encoding technology. We previously discussed the progress of making towards significantly improving compression in video quality for legacy MPEG-2 and MPEG-4 AVC services.

We’ve also discussed the new HEVC encoding standard, delivering up to 50% bandwidth savings versus MPEG-4 and our progress in delivering HEVC capability.

Well I’m really pleased to say that we’ve got all this together in the public forum at NAB just two weeks ago while we launched Harmonic VOS, a virtualized software platform and architecture for the entire video processing ecosystem running on top of virtual machines on standard IT server hardware.

Within VOS, we also announced our new PURE compression engine, which enable significant new bandwidth efficiency improvements for MPEG-2 and MPEG-4 AVC together with HEVC and all the expenses.

The first [indiscernible] VOS is the Electra XVM product, the latest in our market leading electric series of video encoders, which contains a PURE compression engine as well as differentiated capabilities including graphics, branding and playout. It runs only in software, it’s a virtual machine.

The Electra XVM product is available today and has actually been in customer labs for several months. Harmonic VOS and the Electra XVM won best of show awards at NAB from TV technology united. And I can tell you we really felt that customer reaction was overwhelming faster to what we’re doing here.

Now realize I’m always scratching the surface and mentioning the broad capabilities envision from product VOS and the ongoing transition of our business to be more software oriented, the value to take more time here, we supposed to cover to this in more detail in our upcoming investor conference.

So turning on to slide 8, I’ll wrap up this portion of the call by touching on still anticipated technology cycles driven by 4K or Ultra high-definition television and over the top multiscreens. In UltraHD, we believe the market dynamics continue to gain stream with new television prices alluding further and consumer awareness rising.

Our Broadcast and Media customers tell us their content is increasingly producing 4K and in NAB we saw continue way with announcement some lower cost 4K cameras in production. Also at NAB, we demonstrated live HEVC encoding the UltraHD for the first time using VOS.

We also showed UltraHD a 30, 60 and 120 frames per second and creation of UltraHD channels on the fly together with our technology partners Broadcom, VIXS, Sigma Designs and Vigor. So we’re clearly innovating here that we’ve clearly carved out a strong market leadership position.

Nonetheless it remains unclear exactly when UltraHD channels will first go live in HEVC compression will be deployed in volume. Nonetheless I can tell you customer interest is clearly building and we see growing potential for both of these new technology cycles over the coming quarters. Turning lastly here over to the top in multiscreen video.

We’ve previously discussed Harmonic’s number one position in the relatively small multiscreen transcoding market, and how we see this functionality becoming more consolidated within the rest of the video processing flow over time.

With NAB we continue to demonstrate market leadership with the announcement of the new partnership with Encoding.com particularly focused on burst transcoding the cloud with them adopting our ProMedia technology.

And we also announced ProMedia integration with Adobe Primetime and we realize new customer wins in Cable, Telco and Broadcast during the quarter.

So, Harmonic reinvest in this new Electra XVM product also include multiscreen capability uniquely integrated with powerful graphics and digital video effects for creative and localized advertising and social media personalization, setting the new benchmark of capability and performance in this market.

And demonstrating for the first time, the powerful technology consolidation and video chain functions, so, we have been campaigning in the marketplace. And again, we’ll discuss this in more detail in our Investor Conference.

But here suffice it to say that we’re quite encouraged about the game changing potential over ways to innovations and announcements and overall continue strategic process. With that Carolyn, let me turn it over to you..

Thank you, Patrick. Let’s move to slide 9. Our net revenue for the first quarter was $108 million seasonally down from the $120.2 million for the fourth quarter of 2013 and up 6% from the $101.7 million for the first quarter of 2013. Our bookings were $126.3 million up 11% from Q4 and up 15% compared to the same quarter of last year.

Well in large part by the strength in our Cable Edge business and in particular by the NSG and NSG Pro products. Video Processing and Services & Support also contributed to the strength of the quarter. Our book-to-bill ratio for the quarter was 1.2.

Backlog and deferred revenue was $126.4 million at the end of Q1 compared to $114 million at the end of Q4 of last year. The increase in deferred and backlog is contemplative to the timing of recognition of deferred revenue and they pick up an order flow toward the end of the quarter.

Our non-GAAP gross margin was 53.3% this quarter, the decrease from 54.3% in the previous quarter and an increase from 51% in the first quarter of 2013.

The decrease in gross margin this quarter on a sequential basis, is largely due to a greater portion of our revenues coming from our Edge product line in general and an increase in the shipment of our NSG Pro product as we move through the early production unit more specifically.

The year-over-year improvement reflects healthy margin trends across all product categories including Cable Edge. We continue to see growing license sales into our existing hardware and the initiatives we have established to reduce cost through operational efficiencies and supply chain management are really paying off. Excuse me.

While many factors play into this transition including strategically focusing on innovative products and solutions that deliver differentiated value to our customers and the strategic decision to move away from commodity product categories. We have been focused on delivering more of our value in software and see this trend continuing.

Non-GAAP operating expenses for this quarter were $54.1 million covers down from $54.5 million in the fourth quarter of 2013 and $55.2 million in the first quarter of 2013.

The decrease in operating expenses, reflect a strong focus on expense management that rebalance the needs of our business with our commitment to drive operating leverage on mid-single digit top-line growth in 2014.Headcount was 1,042 in Q1 compared to 1,032 in Q4 and a 1,096 a year ago.

Non-GAAP net income for this quarter was $2.8 million or $0.03 per diluted share compared with net income of $8.3 million or $0.08 per diluted share in the prior quarter, and a net loss of $2.7 million or $0.02 per diluted share for the first quarter of 2013. Moving to Slide 10, let’s take a look at our revenue category breakdowns for the quarter.

Our U.S. business generated 50% of our revenue in the quarter primarily driven by our Cable Edge business. International declined to 50% principally a result of lower revenues in the Europe portion of our EMEA region. Emerging markets remain generally healthy in the quarter.

From a product view, Video Processing as a percentage of revenues remained relatively flat at 43% compared to the first quarter of 2013. Production & Playout decreased as a percentage of revenue from 22% in the first quarter of 2013 to 16% in the current quarter.

This decline in Production & playout is principally due to a slow start to the year in Europe, although as Patrick noted earlier, our bookings in the region exiting Q1 were stronger than our revenue that was recorded in the period.

Our Cable market and our Satellite and Telco market each increased 2% compared to the year ago quarter to 41% and 25% of revenue respectively.

The Broadcast and Media market represented 34% of revenue in the current quarter compared to 38% in the first quarter of last year or only 10% customer for the quarter for the first quarter of 2014 with Comcast at 20% of revenue. Now turning to slide 11, you can see we continue to drive a strong balance sheet.

We ended the quarter with a cash balance of $147.7 million down $22.9 million from the previous quarter reflecting approximately $11.2 million of cash generated from operations in the quarter offset by $29.1 million viewed for share repurchases which I’ll discuss in more detail momentarily.

Our receivable balance was $77.5 million and our DSOs were 65 days up from last quarter’s 57 days. Inventory was $30.3 million down by $6.6 million from the prior quarter. As a result, our inventory returns were 6.7 times for the quarter. Capital expenditures for the first quarter of 2014 were $3.4 million.

Moving to slide 12, I’d like to update you on our share repurchase activities during the quarter. In the quarter, we repurchased 4.4 million shares for a total of $29.1 million.

This brings our total shares repurchased from inception of the program to-date to 27.7 million shares for a total of $167.3 million and brings our shares outstanding beyond the $95.7 million. At the end of Q1, we had $52.7 million available from our board authorized program for continuing repurchases.

Turning to slide 13, as we look into the second quarter of 2014, we expect our revenue to be in a range of $113 million to $123 million. While this represents only modest year-over-year increase over the second quarter of 2013 at the midpoint. We also want to provide a framework for you to think about revenue growth for the remainder of the year.

We believe the customer demand trends we saw in Q1 coupled with our backlog and deferred revenue as well as our bookings forecast provide the base for our target of mid- single digit revenue growth this year. Non-GAAP gross margin in the second quarter is expected to be in the range of 52.5% to 53.5%.

This range takes into consideration the margin impact we expect from increasing revenues for our new NSG Pro Cable Edge Platform. As with previous generations of new form platform, our initial shipments are more hardware-centric and lower margin. Over time, we expect to sell increasingly high volumes of form licenses as network traffic scale.

We are also expecting ongoing manufacturing and supply chain cost reductions as the new products matures and we had higher volume threshold. The NSG Pro margin improved in Q1 as expected and we anticipate further improvements as we move into Q2 and beyond.

Due to this and other ongoing strategic initiatives, we continue to anticipate gross margins for the year to be in the 53% or better range. As we bring the new strategic products, Patrick discussed earlier to market, we are leveling off our R&D investments and moving some investment focus into the go-to-market activity.

We also continue to focus on optimizing our general and administrative costs. Our plan is to give all of this within a flat operating expense structure for the year. We target in our non-GAAP operating expenses for the second to be $54.5 million to $55.5 million.

Finally we anticipate our non-GAAP tax rate for 2014 to be 21% subject to our domestic versus international split. I would like to direct your attention to slide 14.

In conjunction with our earnings release today Harmonic separately announced our Analyst and Investor Day at the NASDAQ MarketSite building in New York City on May 15th, from 9.30 AM till 2.00 PM.

We look forward to sharing with you the most interesting trends, opportunities and technologies impacted our industry and market as well as our vision, strategy and product roadmap for transforming the way video its distributed and consumed on a global stage.

Before I turn the call back over to Patrick, I would like to add my welcome to Blair to the Harmonic team. I really believe his experience and enthusiasm for our business will make him a valuable addition.

Patrick?.

Alright thanks Carolyn. So in summary, during the quarter we delivered results that demonstrate clear progress and getting back to growth advancing our strategy and building shareholder value.

Our progress reflects both our focused execution and our customers confidence in Harmonic and our ability to continue to deliver industry leading innovation and business partnership.

Looking ahead to the second quarter and the remainder of the year we expect to continue to execute on our growth strategy and innovate to capitalize on coming ways of Cable Edge in video and structure market expansion. Well also growing on market share and global customer base and thereby driving expanded value for our customers and our shareholders.

And with that, we’ll move to the question-and-answer portion of the call..

Heather, could you please instruct the audience on how to ask question please?.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is going to come from Mark Sue from RBC Capital Markets. Please go ahead with your question..

Thank you, good afternoon.

If we look at the interest and just the uptake of the new products, maybe if you could get a sense of kind of how the fear my trend as we progress through the quarters for the large uptake in 2015 maybe as it relates to CCAP and the broader family that would be helpful? And then just a separate question, just kind of how we should think about the operating margin trends as we progress through the year or so? Thank you..

I’ll take the first part on product trends. We’re encouraged by the response to our downstream CCAP platform the NSG Pro, clearly being well received and clearly there is good demand trends out there in the market with more over the top video we managed and growing success, I would say growing take rates of the traditional video-on-demand streams.

So we see those demands continuing to move forward and so we have a positive outlook for the Cable Edge business throughout the rest of this year, although we’ll be trialing and testing in customer labs on two way CMTS device before the end of the year we don’t expect any revenue so let’s say 2015 and beyond historic mark..

Patrick any thoughts the number of trials NAB that has expanded and how we should think about the trials before revenues next year?.

There is nothing, there is nothing really no worthy there. We have that with all of our major products to work closely with several of our largest customers and I wouldn’t expect this to be any different. We’ve received good coaching and guidance up to now with the Phase I of our CCAP NSG Pro release and well we’re continuing to follow the same path.

Depending the video its largely an alleged story, we’re encouraged by the uptake that we see on then for latest MPEG-2 and MPEG-4 compression activity there, candidly we’re relatively to a year ago we’re just appointing the UltraHD and HEVC further a lot.

And we don’t expect large amounts of revenue from those initiatives this year, the growth that we see will largely be based on the current encoding standards.

With that being said, very much like to a CCAP we – the potential and the customer interest and the thirst for this over time is very clear and, beginning of the share to say yes to this recent NAB show becomes clearer and clearer in minds and I think in the marketplace that UltraHD is clearly up and is going to drive a very substantial investments and upgrade cycle.

We think we’re seeing early deployments in the back-half of this year following that volume until 2015..

Okay that’s helpful. Thank you and good luck..

Our next question is from Simon Leopold from Raymond James Financial. Please go ahead with your question..

Hi guys. This Victor Sze in for Simon Leopold. You mentioned the introduction of the DOCSIS component, with your new CCAP offering as part of the Phase II.

Can you tell us a little more about this product is there anything spoken too much about and some recap for me and how does that work exactly in your CMTS component into your Edge compact or you are partnering with someone for this, can you just tell us little more about that?.

We are on the road to building a full 2A CMTS/CCAP if you like that will be introduced to the market in 2015. The CCAP spec is got two dimensions, one is a downstream spec that’s the first reach that we bought on, but we – our design, our strategy from the get go has been to deliver a platform that can support two-way DOCSIS capability.

And that’s still the path we’re on and we’re pretty pleased with the progress we’re making. Asked about partnership, we big part of our ramp up in R&D expense last year was associated with planning this program.

We certainly hired a number of the experts from outside of the industry in terms of in addition to drafting several of our own best to brightest into this initiative, but it’s a scaled up initiative that we are that we – we’ve been investing and working with our key customers on for some time.

The Phase I of this program that we announced is being shipped now, we’re delivering and now it’s the chassis, the switching infrastructure of the downstream linecards or a 100% CCAP compliance and well it remains to be delivered as the upstream functionality and that’s what I spoke to earlier would be delivered into our customers labs later this year..

So the product is going to compete directly with the incumbent CMTS vendors, correct?.

That’s correct..

I mean is that, I mean how do you kind of view that confirming seems like that market is, it seems like that market is pretty well – well established with some of the larger incumbents when do you see penetration with the market as a challenge?.

We see a great opportunity Victor, first of all in terms of the starts the fluidity of the market, there is a big disruption coming as cable operators convert to all IP video. We see a lot of change out there and I think even if you look at what’s happening in the market today, you can see shifting market share going on, one point.

The second point is our architecture has some really unique differentiable advantages. The downstream portends that we spoke; we think we uniquely in the industry have a strong leadership position in; it’s going to be crucially important to turn the entire cable plant into unified IP deliver path. We think we got a very strong [EMEA] [ph] position.

And we’ve also, although endorsed by cable operators and cable hubs now we’ve also really innovated in helping the industry think about a new fundamental architecture in the way routing is handled and if you haven’t seen that I would point you to the white paper posted on our website that we jointly published with Alcatel-Lucent the talks about the very significant indigence to the cable operators of the – routing piece of that.

And here I would highlight that we are not endeavoring to become a routing player ourselves, we think that this architecture makes much more sense for the industry and we’ve been working closely with people like Alcatel-Lucent like Juniper on a so-called [indiscernible] architecture.

And then the first I would say to you, I just go back to the comments in the – in the opening part of our presentation, Infonetics has started to track downstream CCAP uploads and deliver just in the fourth quarter of last year, they are already attributing 19% of the market to having been captured, market in recent days but having captured by Harmonics.

So that thinks a very early data point, but that coupled with our historic strength in the Edge QAM space lead us to be, I think no way over confident but to be optimistic, but this is a large $1.5 billion to $2 billion market that we can participate in and you know we can capture meaningful share..

I just have one last question, is this just kind of – it just imply that the industry is kind of leading towards one particular architecture, I guess the integrated architecture specifically more so then the modular architecture is that kind of, how things are kind of?.

I wouldn’t say so, there is a lot of – there is a lot of discussion about a variety of different architectures that are out there. And there is a number of different players just housing at different points of view, we’re talking all the time with our largest and closest cable customers.

They are looking at a variety of different architectures out there. Well suffice it to say we feel this is a major investment that the company is making, we feel very strong with the architecture pursuing gives us a great opportunity to participate..

Okay, great. Thank you..

Thank you..

Our next question is from Tim Quillin from Stephens Incorporated. Please go ahead with your question..

Hi, good afternoon. So Cable Edge revenue was obviously up quite bit year-over-year, I’d think I don’t if its coincidence, but the amount that it was up quarter-over-quarter was roughly the same that revenue from Comcast was up quarter-over-quarter.

But I’m – and I think you said that order flow was pretty good throughout the quarter, but how do I think about the sustainability, I think if you extrapolate first quarter numbers across the year you get to a record year and Cable Edge always over the past several years, it is that – is that how you are thinking about the year or was there something this quarter that was maybe more of an increase driven by a single customer that maybe won’t as strong throughout the year?.

Tim, the visibility to the second half is far from perfect nonetheless the demand trends that we see are multi-customer and we believe are sustainable for multi-periods.

I’ll remind you that last year was not a strong year on the Edge and so in part we’re seeing a return to focus on investment here and also there is some very well dynamics that are playing out that are that I don’t think are just above or fashion the pant.

The transport of over the top video services putting pressure on networks the quality, the bit rate of those video service has been delivered out through the cable network those are all, it’s a very big effect.

On the other hand we’re still early days in terms of the rollout of some of these new attractive more powerful, more compelling user guides that are remind clearly going to drive the sustained increase in the on-demand traffic we’re seeing on the cable network.

And the first thing I would layer on to that is that we’re on the market with a pretty exciting and pretty compelling with the product, the NSG Pro.

And while we – what we delivered in the first quarter was a mix of previous generation this new generation of production is very clear to us this is a strong positive reaction to this new product and we believe that are competitive differentiation for this Edge QAM or downstream capability is growing and so on top of increased demand we think our competitive situation, competitive positioning is growing strong..

And as customers deploy NSG Pro right now with downstream capabilities and then you introduced upstream capabilities can you talk about how seamless that is to an upgrade to the installed base so in other word we won’t necessarily see a low in orders as people await Phase II of CCAP?.

Well as a standalone device downstream we see – a lot of opportunity for not just this year but for while into the future. That being said, delivering upstream capability opens up a whole new chapter to well a whole new adjacent market and being able to proper participate in the full two-way CMTS market as we just discussed.

So I see it as a [indiscernible] of the opportunity not really replacement of the opportunity and expansion of the opportunity and so for that perspective I don’t see any real disruption to our business.

Here I see an expansion of the business and I think one that can be quite compelling to our Cable customers particularly as they it is a more aggressively over the next couple of years pursue this vision of all IP video deliver..

Okay and then on Production & Playout it sounds like there was a little bit of a mix singles in the market where Europe was weak, but bookings came on stronger at the end of the quarter do you I don’t think this is never you would expect to grow this year, but you would see improved results over the course of the year from what we saw in 1Q?.

I would expect so, it was certainly a weak quarter from our Production & Playout point of view and to just summarize we see that this in part due to timing and the way Q1 and certain job of these got off to a very slow start and so we don’t expect that to be repeated and that’s what we expect to be and also to perform better in that production plant area in the coming periods..

Okay and then just a couple of questions on the softwarization of your business if that’s a word, but number one question is do you have any changes to your long-term gross margin outlook given the impact or potential impact of VOS and the slow introduction of products that will reside on that platform? And then the second question is that there is – is there any analogous trend that you might see on the Cable Edge side, so as there some competitors talking about virtual CCAP and some competitors talking about software defined cable.

I’m wondering if there is a softwarization or virtualization process that might go on in the Cable Edge side over time as well. Thanks..

Tim I’ll take the first part of that, obviously over many years as more business goes towards software, we could imagine even greater than mid 50s gross margin. Our strategy is certainly as over the years to continue on the video side for sure to continue to drive in that direction.

At this point, we’re not changing that mid 50s target and certainly as we’ve been talking about that in the improvement we’ve obviously known we’re coming out with these products. So at this point no change in the long-term but obviously as more of our business turns that way we would expect that to continue to increase..

And I think I’ll come back to the second part of the question Tim is regarding what’s happening in the cable side, there is a certain analogy there. We introduced actually what we call cable OS with the NSG Pro product when we first announced it at the end of 2012.

And we do see over time the ability to separate the control functionality from the underlying hard processing capability in our hardware. That being said, the cable access business is fundamentally at its core – there is it’s not software that’s running on top of Intel, this is the modulation RF technology et cetera optical interfaces.

Since so we inherently, it’s got an inherent hardware aspects to it or quality to it. So we certainly see gross margins also continuing to improve as they have in the edge area. It’s more a virtue of just the density of capability and the corresponding licensing strategy that we have associated with that hardware.

And it’s a different technology [indiscernible] the true ability to deliver product exclusive a software as we are planning with this VOS announcement where we have delivered just really software to our customers to have them run on their data centers but don’t expect that ever to happen on the cable side..

Yes. That makes sense. Thank you very much..

All right. Thank you..

Our next question is from James Kisner from Jefferies LLC. Please go ahead with your question..

Thank you. And Blair welcome to Harmonic. So just turning to the questions, first on the softness you guys saw in EMEA, I believe you just said you just characterize it has a slow start. When we look it was a pretty big down quarter for international and production in playout, it was pretty precipitous decline there.

I’m just kind of wondering if – can you kind of point to anything you think the interest in the region around Ukraine had impact or was it was macroeconomic concerns you think entering the year.

Is there any way to kind of characterize it whether certainly it was in large projects that may have slipped, I think you mentioned deferred revenue? Can you give us a little more color on that softness, will be helpful..

Yes. Absolutely. So couple of things we alluded to. One, the booking in the quarter was more in line with our existing business was – revenue was what was low. And there is a few reasons for that. One is, as you mentioned deferred revenue, we tend to do more projects work in Europe, than we do in some other regions.

And the way those projects happen to fall from a completion and the ability to recognize revenue this quarter rest of those fell in terms of the revenue we’d recognized and more of the bookings had a project basis to them and until we’re deferred.

So a piece of it is just, I wouldn’t read anything into that other than the way those deals happen to fall in 2009. And then there was definitely a more backend nature to their booking and that just caused some of that – some of those orders to be pushed out in the next quarter.

I would not read any – we don’t see any real macroeconomic issues there that impacted it..

Okay. That’s helpful. And I don’t know, if you extent – and you guys attribute the edge strength to both the NSG Pro and the traditional video on-demand.

And I know that traditional video on-demand was pretty interesting just given what your large customers have been saying about large transactions going up with the improved user interface recommendation engine.

I kind of wondering you might help us sort of parse out the relative impact, I mean maybe your customer talking about 20%, 30% increase, I’m just wondering why it’s more than half of the increase sequentially on edge, NSG Pro shipments to the extent you kind of dimensionalize in any way that would be helpful..

Let me clarify, some things James, the NSG Pro, the downstream functionality we are delivering support to both modular CMTS and traditional VOD. It does it in a dramatically enhanced much gentler fashion. The hardware has the capability of supporting almost the entire cable spectrum with those services which is a big climbing step forward.

That being said, what we – the product from a downstream configuration supports both of those applications.

So the mix that we saw in the quarter between who went with NSG Pro and who went out with the Legacy product, it was less to do with application and more with who is excited about the new platform and who is going with the new platform versus who is going and kind of adding on with the existing platform.

Coming at it from a different dimension, I would say roughly equal in terms of the increase in demand that we saw from the – over the top video traffic, monitor CMTS kind of activity as we saw from the traditional VOD. So the both air and the top level and approximately equal proportion in terms of driving the demand..

Okay. That’s helpful. Yes, that’s helpful. Also wondering let’s turn back to VOS again, so I mean, you guys have had software base, I would say more transcoding, I think the ProMedia, I just kind of want to delineate to the extent possible versus ProMedia software base, I guess really transcoding maybe this is the first that actually includes encoding.

But, I just want to compare and contrast your prior software offering versus your VOS. And I guess I’m also just kind of curious – do you envision kind of all customers going there, or do think primarily it will be hosting kind of application initially just kind of your thinking more detail on VOS would be helpful. Thanks..

Okay. To see it right. We have had software products before – both products that we shipped exclusively as software particularly our file based transcoding product, our ProMedia Carbon as well as products that we shipped on top of Intel appliances.

What’s really different with VOS is that it’s a platform encompassing not just specific product functionality, really the whole end-to-end range of what we do in video encompassing playout, graphics , digital video effects, captioning, encoding, transcoding the whole end-to-end realm.

And it’s specifically designed to be delivered as software to run on our customers’ data centers.

And importantly unlike the ProMedia Carbon supporting both file as well as live programming particularly with our large customers James, we see a growing interest in from an operational perspective, doing more and more of what they do the unified fashion on third-party servers to constitute in the homogeneous data center environment.

And so this is not for everybody at least in the near term. But I would say that there is a real resonance for certain of our larger customers, if you are really having a broad vision of both capital as well as operational efficiency advantages gained from driving more of the functionality in a virtualized environment.

When announcing VOS, we had a press conference in Las Vegas at NAB and it was attended by an executive from Fox.

And it’s a good example of a larger key player in the industry who is speaking very eloquently and I think forcefully about a vision getting to a virtualized environment for really the end-to-end production and delivery aspect of what they are doing and truly that vision that we are pursuing and I think it’s that vision that we are uniquely positioned as a company to deliver..

Okay. That’s helpful. All right, thanks, I will pass it..

Heather, we have time for one more question..

Okay, great. We have Brian Coyne from National Alliance. Please go ahead, ask your question..

Hey, guys good afternoon thanks for taking my questions. Two quick ones, a little bit sort of perhaps longer term focused.

You guys have talked a little bit about certainly on the cable edge, the opportunity very incremental as operators – cable operators moved towards CCAP, $1.5 billion perhaps more per year versus call it maybe $300 million, $400 million a year on sort of the traditional cable edge.

I guess, can you help us understand, do you see that delta maybe, $1 billion or $2 billion, $3 billion, is that purely incremental to what your current adjustable market is for cable edge or sort of what happens to the existing call it Edge QAM business for lack of a better term as cable operators move toward that.

I mean obviously, you’ve got a big group of DDS customers and another as well.

So if you can perhaps give us some context there?.

I think it’s a good question, and nobody knows exactly what’s going to happen, Brian. But we got our own model and also with several I think possible industry analysts who have published model. And the one that I would point you to in particular that we and I think much of the industry relies on is that of Infonetics.

Kind of a chase, yes, we believe that what’s called 1.2 or whatever it is, is indeed incremental. That is not to say that the absolute value of the Edge QAMties or the CMTS piece doesn’t change over time. But the way we look at it today is a distinct Edge QAM market and the CMTS market. We just address the smaller Edge QAM part.

These get mashed together in some way over the next several years. And with the direction we are headed, we have the opportunity to address the entirety of it. And indeed, we think that’s a substantially larger opportunity, why we are focused as we are on, and why we are investing the way we are ..

Okay, great. That’s helpful. And then I guess just following up obviously you referenced a couple of times the sort of flash perhaps even declining R&D as you maybe shift some more dollars toward go-to-market. Again, help us understand I think is that, obviously, you have invested you said last year in the sort of the second release of the NSG Pro.

How confident are you in that relative to sort of the additional engineering that’s got to go into sort of completing call it full CCAP or release the upstream linecard?.

We have an overall budget of nearly $100 million in R&D. And so I think we believe that as we focused our resources, the ability to invest on the growth initiatives where we need to. If not just say that – it’s not to say that expenses will stay at these levels forever. We are trying to balance top line growth with operating margin leverage.

And definitely continue to invest in the growth areas. And so I think we are doing all three of those things..

That’s good. And I guess just the last back on VOS, obviously pretty meaningful in terms of big market shift here. Can you give us a little color on what you are doing with customers it’s obviously, you said it’s been in testing with customers or sort of rolled out at least initially your labs with customers.

How is that going and sort of way, do you think sort of the near term prospects for customer adoption..

So there is lot of excitement it is simply coming out of the public announcement at NAB. Frankly, we are juggling probably more near-term interest than we had anticipated which is not to say that we think that there is a big spike in revenue.

Moving from managing a head end of standalone appliances to operating in a data center environment, it’s a pretty big shift. So what we are trying to do is, we are trying to lead in the market and particularly with those customers that have the wherewithal, the desire, capability on their side to really work their way through this kind of transition.

So I anticipate that we will continue to work closely. I anticipate that we will have our first sales in the next couple of periods and exit the year with some real good momentum in the first real revenue under our belt. That’s not to say that I see a transformation of the business model before the end of the year by any means.

I think because it is a pretty disruptive change to the model, it will take some time. But, I think that we have a real opportunity here to be leading not only from our technology point of view, but also from a deployment expertise point of view.

And that’s certainly one of our goals and one of the reasons why we are working as close as we are with some of the key thought leaders in the marketplace. We will keep you posted on the progress that we make..

Okay, great. Thanks Patrick. Good luck..

All right. Thank you, Brian..

Thank you.

Patrick, do you have any closing remarks?.

I hope that come across that we are excited about our business. That we are happy to be back rolling again and that the outlook in the near term is positive.

And the outlook in the longer term is also positive as we think about the fundamental shift in the marketplace and the investments that we are making really towards long-term growth and creating long-term shareholder value.

So we are appreciative of the support that you are giving us and we are going to continue to work hard and innovate and that we are hopeful that you will be able to join us at the Analyst Day in mid-May. We look forward to delving into these topics in more detail. So until then, thank you very much and good afternoon..

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