Blair King - Director of Investor Relations Patrick Harshman - President and Chief Executive Officer Harold Covert - Chief Financial Officer.

George Notter - Jefferies Greg Mesniaeff - Drexel Hamilton Tim Savageaux - Northland Capital Victor Chiu - Raymond James Jeff Bernstein - Cowen Prime Advisors Matthew Galinko - Sidoti.

Welcome to the First Quarter 2016 Harmonic Earnings Conference Call. My name is Ana and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded. I will now turn the call over to Blair King. Blair, you may begin..

Thank you, Ana. Hello, everyone and thank you for joining us today for Harmonic's first quarter 2016 earnings conference call. Again, my name is Blair King. I am the Director of Investor Relations at Harmonic. And with me here at our headquarters in San Jose, California are Patrick Harshman, our CEO; and Hal Covert, our CFO.

I’d like to point out that in addition to the audio portion of this call, we have also provided slides for this webcast, which you can see by going to the Investor Relations Page on harmonicinc.com and clicking on the first quarter 2016 preliminary results call button.

Now turning to Slide Two, let me remind you that during this call, we will provide projections and other forward-looking statements regarding future events or the future financial performance of the company. We must caution you that such statements are only current expectations and actual events or results may differ materially.

We refer you to documents that Harmonic files with the SEC, including our most recent 10-Q and 10-K reports and the forward-looking statement section of today's preliminary results press release.

These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. Please note that unless otherwise indicated, the financial metrics that 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 also been posted on our website and filed with the SEC on Form 8-K. We will also discuss historical, financial and other statistical information regarding our business and operations.

Some of this information is included in the press release, and the remainder of the information will be available in a recorded version of this call on our website. So with that, I'll now turn the call over to our CEO, Patrick Harshman.

Patrick?.

Thanks, Blair, and thank you all for joining us today. I’ll start here with a brief summary of our first quarter results and then turn to updates and outlook for Video and Cable Edge businesses. Hal will then provide future color on the financial results and on our outlook for the second quarter and the full year.

And I’ll conclude our remarks by summarizing our strategic and execution priorities. So turning to our Slide Three, our first quarter was characterized by encouraging market demand particularly for our new software based products and services, but also revenue recognition delays, which impacted our current period results.

Specifically, new books were up approximately $110 comprised of about $105 million from the organic Harmonic business and $5 million from the March stub period of newly acquired Thomson Video Networks business, $105 organic Harmonic bookings represents 4% sequential and 8% year-over-year growth and highest quarterly booking delivered by our business since 2014.

Due to the increased mix of software services and CCAP orders and the injection of approximately $20 million of backlog from the Thomson business, our total backlog in differed revenue has grown to approximately $180 million, up over 60% from six months ago.

On the other hand, revenue was approximately $82 million, down 5% sequentially, as a lower percentage of new software and services bookings converted to revenue than expected. This delay in software and services revenue had a direct impact on gross margin 51% and EPS we’re recorded non-GAAP loss of $0.11.

Whoever disappointed in this first quarter revenue and earnings results, our strong order book and healthy market demand trends cause us to remain confident we will deliver on our full year financial targets. To better understand our reasons for confidence, let’s turn to Slide Four and take a closer look at our Video business.

The first key message here is that we’re continuing to see improving video infrastructure demand trends globally. Now as a reminder for most of 2015, we saw the preset spending in the phase of evolving television business dynamics, service provider M&A and significant technology transitions.

We’re following a healthier fourth quarter; it was good to see the demand momentum continue through the first quarter driven by resurgence and service provider projects that spend traditional Pay-TV and over the top services particularly live over the top services.

In the recently announced strong North America cable operator video business results and the growing trend of over the top services adding live programming, we future reinforce our positive outlook for video infrastructure spending.

The second key Video segment message is that we’re continuing to steady transition the business to be more software centric with converged traditional Pay-TV and over the top services playing essential role on our strategy.

Specifically, our first generation VOS platform continues to have strong market momentum recently surpassing 200,000 channels deployed. Pressing our advantage here, we’ve recently announced the further extension of this VOS technology for deployment in open stack based cloud environments.

And we also announced our own software-as-a-service offering based on this advancement. A new business development intended to both expand our addressable market and open the door to recurring revenue model. And the key message about our Video business is that integration of the acquired Thomson Video Networks business is going quite well.

We closed the deal in late February. We continue to be very impressed with the quality of the Thomson employees, technology and customer relationships, our global cost synergies and 12 months accretion plan is on track and our customers responding positively to our strength in the global presence and innovation pipeline.

So putting it all together here, the bottom line is that our full year video business growth and expense plan is firmly on track. So let’s not turn to our Cable-Edge business in Slide Five.

As a reminder our Cable-Edge strategy is to become a leader player in the roughly $2 billion CCAP market by delivering truly innovative new DOCSIS 3.1 technology that we call CableOS. Since our last update to you, we’ve continued to make material progress and our confidence in our CableOS program continues to growth.

So why are we confident? Well, first we’re continuing hit both our internal development milestones and third part and key customer testing milestones. And the prior performance is looking really good.

Second, one of the key attributes of our solution is that it seamlessly addresses both traditional centralized and emerging distributed DOCSIS 3.1 network architectures.

As we anticipated, there is now growth sentiment in the industry that the second half of 2016 and 2017 will see disruptive shift to distributed DOCSIS architectures and we are aiming to be at the right place at the right time as this shift takes place.

Which brings me to point number three, we’ve remained firmly on track to release CableOS and make our first shipments in the second half of this year. In the meantime, we expect global demand for our legacy EdgeQAM technology to be steady but down compared to historic highs.

And this exactly what we saw in the first quarter with revenue of approximately $17 million encompassing both augmentation of existing deployments and several new hardware chassis deployments. So as a reminder again, this means that our Cable-Edge business will continue to weigh on our total company financial results for the next couple of quarters.

But stepping back in the summary for this segment of our business, it really is all about CableOS. This is major program that does carry risk but tremendous upside. And our plan to turn to this into a growing several hundred million dollars per year business with full product launch later this year also remains firmly on track.

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

Thank you, Patrick. I want to thank everyone for joining our call today. During my discussion, I would like to cover two topics. First, our financial results for Q1 2016 and then our financial goals for Q2 and the year of 2016.

Just before getting into our financial results for the quarter, I would like to start with an opening comment and provide some key details regarding our bookings, backlog and differed revenue. We are disappointed that Harmonic standalone revenue and non-GAAP operating profit were not in line with our plan for the quarter.

As you will hear shortly, we had the potential to be within our financial guidance ranges for the quarter not including TVN’s financial results for March which were not included in our Q1 2016 financial guidance.

On a positive note, our bookings, backlog and differed revenue for Harmonic on a standalone alone basis for the quarter, we’re well above our plan as well as being supplemented by TVN. Bookings for Harmonic for Q1 2016 were 104.8 million and bookings for TVN for March for 4.8 million. Therefore total bookings for Q1 2016 were 109.6 million.

Our backlog and differed revenue at the end of the Q1 2016 for Harmonic and TVN was 180 million versus 120.1 million at the end of Q4 215 for Harmonic on a standalone basis. The following are key elements that encompass the $59.9 million increase in our backlog and differed revenue.

We added approximately $27 million as a result of our Q1 2016 bookings being greater than revenue for the quarter. $21 million of backlog in different revenue to TVN as of the end of the quarter and $12 million related to Harmonic differed revenue.

Now I’d like to provide some details regarding approximately $5 million of Harmonic backlog that potentially could have been recorded as revenue in Q1 2016. Our business model is becoming more complex as a result of customer consolidation in our address market and a higher content of international business.

The examples of increasing complexities consist of such things as more precision required for documentation including master service agreement, letters of credit, purchase orders and final acceptances were delivered products and services.

Due to the situation just highlighted, we had approximately $5 million of backlog that we plan to record as revenue in Q1 2016 related to contractual customer commitments that remains in our backlog. The projected gross margin associated with this revenue is approximately 80%.

We started implementing business process improvements to address our business model complexities in Q4 2015 and expect that they will be fully implemented by the end of Q2 2016. As a result, we anticipate recording the majority of the aforementioned $5 million in Q2 2016.

Going forward with our business model transition to more of a software orientation, revenue recognition requirements are becoming more challenging.

Although we began taking the necessary steps to enhance our business model processes to accommodate these changes, late last year we will not have all the required enhancements in place until the end of Q3 2016.

One of the primary goals of our enhanced business model processes is to have a clearly defined method to identify their fair market value of service included in the booking. Software revenue is generally recognized upon shipment and service revenue is generally recognized over the life of the service agreement.

When software and the services are sold as package, which is all most always the case, if the fair market value of the service cannot be objectively identified, total revenue for the booking upon shipment is generally recognized over the life of the service agreement.

Since our software revenue recognition business process enhancements will not be fully implemented until the end of Q3 2016, some software revenue targeted for Q2 and Q2 2016 will need to be recognized on a ratable basis instead of upon shipment.

Once the necessary business process enhancements have been implemented, remaining in revenue that is being recognized on a ratable basis due to the - is initially not having these processes in place can be fully recognized at that point in time.

So in effect, in Q1 2016 we anticipate the revenue - we will recognize revenue for the remaining parts for Q1 and Q3 2016 software shipments that were impacted. We expect that this revenue will have a very high gross margin as a percent of revenue. I will provide more details about this topic when I discuss our 2016 financial goals.

Finally, for the month of March, we stopped shipping TVN products from the third week of the month to ensure that we had adequate time to complete the required conversion from French GAAP to U.S. GAAP and to close our books for March including required TNV acquisition accounting.

Typically approximately 75% of our backlog in differed revenue should be recorded as revenue within one year. The following is a description of our backlog and differed revenue.

Backlog includes customer’s orders for products and services covered by a contract that meets all of our quality control requirements such as specific features and functions to be delivered, define delivery timeframes, agreed upon prices and agreed upon payment terms, the majority of our differed revenue for service agreements that have been invoiced to our customer and will be recognized as revenue on a ratable basis over the life of the service agreement.

On average the term of our service agreements are 18 to 24 months. Now, I’ll discuss Q1 2016 financial results, which includes Harmonic standalone financial results for the quarter and TVN’s financial results for the month of March. In regard to TVN, we will provide revenue, gross margin and operating expenses for March.

Starting with our Q2 2016 earnings conference call and in our Q1 2016 SEC filings, Harmonic’s financial results will include TVN on a fully consolidated basis. We will provide selected pro forma financial information for Harmonic and TVN as a note to our financial statements in our SEC filings as required by GAAP.

During our earnings conference calls throughout 2016, we will provide a progress report for Harmonic plus TVN synergies and restructuring costs. I will cover this topic in few minutes. Please note that our financial results and guidance discussed during this call are based on non-GAAP measurements.

These non-GAAP measurements reflect Harmonic’s traditional approach for reporting such information as well as taking certain purchase price accounting adjustments into consideration for TVN. A table of reconciling GAAP and non-GAAP measurements is including in our Q1 2016 earnings press release issued earlier today.

Bookings for Q1 2016 were 109.6 million of which TVN accounted for 4.8 million compared to 101 million in Q4 2015 and 97.3 million in Q1 2015 for Harmonic on a standalone basis.

Our bookings for the quarter exceeded our expectations on a geographic and product segment basis and there was no single customer or geographic performance that skewed our bookings results.

Total non-GAAP revenue for Q2 2016 was 82.5 million of which TVN represented 3.5 million versus 86.6 million in Q4 2015 and 104 million in Q1 2015 for Harmonic on a standalone basis. Time Warner Cable represented 13% of our total revenue in Q1 2016.

For Q1 2016 non-GAAP Video revenue was 65.6 million including TVN compared to 72.4 million in Q4 2015 and 69.3 million in Q1 2015 for Harmonic on a standalone basis. Approximately $4 million of the $5 million revenue previously discussed was related to Video revenue.

Cable-Edge revenue in Q1 2016 was 16.8 million versus 14.2 million in Q4 2015 and 34.7 million in Q1 2015. Q1 2015 was a high point for Cable-Edge revenue with significant shipments to one customer. In 2014, Cable-Edge revenue on average was $26 million for quarter. Non-GAAP gross margin for Q1 2016 was 51% versus 55% in Q4 2015 and 53.9% in Q1 2015.

The shortfall in gross margin percent for the most part relates to the $5 million revenue deferral which has approximately 80% gross margin. TVN’s non-GAAP gross margin for Q1 2016 was approximately 42% on $3.5 million of revenue.

The difference between our target gross margin 46% to 47% for TVN is related to the low volume of shipments in March and cost of revenue improvements planned for the second half of 2016. Non-GAAP operating expenses for Q1 2016 were 50.4 million compared to 46.7 million in Q4 2015 and 49.9 million in Q1 2015 for Harmonic on a standalone basis.

TVN’s operating expenses for March were approximately 3.7 million. Our non-GAAP operating loss for Q1 2016 was 8.4 million compared to a profit of 1 million in Q4 2015 and profit of 6.1 in Q1 2015 for Harmonic on a standalone basis.

For the most part, our Q1 2016 operating loss level as compared to our plan and financial guidance is related to revenue, $4 million tied to $5 million revenue deferral for Harmonic and 2.2 million tied to TVN’s low revenue level for March.

Our non-GAAP EPS loss for Q1 2016 was a $0.11 versus a $0.01 profit in Q4 2015 and $0.05 profit in Q1 2015 for Harmonic on a standalone basis.

Again the difference in both cases is mostly the result of the revenue situation just highlighted and somewhat due to the lower level of shares of common stock outstanding at the end of Q1 2016 as compared to Q4 2015 and Q1 2015.

We had 77 million weighted average shares of common stock outstanding as of the end of Q1 2016 versus 85.6 million as of the end of Q4 2015 and 90.1 million as of the end of Q1 2015.

Now turning to our balance sheet, we ended Q1 2016 with 76.2 million in cash compared to 152.8 million as of the end of Q4 2015 and 101.9 million as of the end of Q1 2015. During the quarter, we incurred approximately $80 million of cash outflow related to TVN.

Our days sales outstanding at the end of Q1 2016 were 105 days versus 73 days at the end of Q4 2015 and 67 days at the end of Q1 2015 for Harmonic on a standalone basis. The increase in DSO is due to a higher content of international sales including TVN and building service revenue for Q2 2016 on April 1st, the last day Q1 2016.

We typically build service revenue for the quarter on the first day of the new calendar quarter. We anticipate that we will improve DSO throughout 2016. Our days inventory on hand were 94 at the end of Q1 2016 compared to 91 at the end of Q4 2015 and 59 at the end of Q1 2015. We anticipate that we will improve day’s inventory on hand throughout 2016.

At the end of Q1 2016, we had a $180 million of backlog in differed revenue compared to a 120.1 million as of the end of Q4 2015 and 122.2 million as of the end of Q1 2015. Staffing at the end of Q1 2016 was 1,418 compared to 989 at the end of Q4 2015 and 1,008 at the end of Q1 2015.

We added approximately 430 people as a result of the TVN acquisition. Now, I’ll discuss our finance guidance. For Q2 2016, the following are our financial goals. Revenue 103 million to 108 million, we estimate by the end of Q2 2016, we will have approximately $4 million of differed revenue that has been recognized on a ratable basis.

Gross margin 50% go 51%. During Q2 2016, projected differed software revenue Cable-Edge revenue with a low content of license revenue and then a full quarter of TVN revenue will put pressure on our gross margin as a percent of revenue. Operating expenses 55 million to 56 million. Operating loss 1 million to 3 million.

EPS loss %$0.02 to $0.05 based on approximately 78 million serves of the common stock. For the full year of 2016, we continue to anticipate that we will achieve the 2016 financial goals that we discussed during our Q4 2015 earnings conference call in February 2016 which are as follows. Revenue 400 million to 415 million.

Gross margin approximately 55% include the recording of high gross margin catch up software revenue that we plan to record in Q4 2016 as previously discussed. Operating expenses 208 million to 212 million. Operating profit 14 million to 16 million. EPS $0.09 to $0.12 per share of common stock outstanding.

Cash at year end 2016 $50 million to $60 million. Just before turning the call back over to Patrick, I’d like to give you a quick update on our targeted synergy savings on a global basis. We’ve remained committed to the following, $20 million of annual synergy savings.

$5 million of synergy savings recorded in the back half of 2016 which is the equivalent of $10 million on an annual run rate basis. Exiting 2016 with the actions fully implemented to achieve the aforementioned $20 million of synergy savings in 2017 based on our Q4 2016 annualized run rate.

As we progress throughout 2016, we will provide a more detailed progress report. And finally, we continue to anticipate that restructuring charges related to obtaining our synergies goal will be $20 million which we expect to incur in 2016. I will now turn the call back over to Patrick..

Okay, thanks, Hal. Turning now to our Slide 11, I’ll conclude by summarizing our strategic and execution priorities for the year. We have a video business; it is the market share leader in video encoding and related systems for the world’s leading Pay-TV and media companies.

We’re focused on increasing the value of this business by leading industry transformation to software based video infrastructure and the next generation of high quality over the top services.

For acquisition, Thomson video networks, our objective is to accelerate this technology strategy, expanding our global footprint and driving greater profitability this year. And the stronger customer demand and competitive wins we saw in the first quarter tell is the wrong track.

For the same, we are also investing in a Cable-Edge business that has poised for significant growth with a release of our innovative CableOS platform. While most of 2016 will be spend bringing this new CableOS product to market.

Positive customer response and pending cable architecture shift cause us to be confident in the growth outlook for this part of the business.

And finally, I want to confirm that our entire organization is focused on the execution of the strategic initiatives driving competitive wins that will translate into top line growth and margin expansion and delivering on approximately $20 million of annualized global cost synergies to the Harmonic and Thomson combination, position in the company in exit 2016 with double digit operating margin and a compelling future.

With we’d now like to open up the call to your questions..

Thank you. [Operator Instructions] And we have a question from George Notter from Jefferies. Please go ahead..

Hi, guys, thanks very much. I just - I got a few question here. I guess I am wondering if you can kind of get through some of the business process improvements that you are referencing that sales up revenue recognition, I guess I am just trying to understand what was really going on there.

I assume you’re trying to change the way you write contracts with customers in order to make software recognition a little bit easier, but I want to understand that? And I got a follow-up..

Yeah, George, this is Hal. First of all I just like to point out that this is fairly - there is a lot of moving parts to the source, not an easy topic to understand. So I think it’s really two pieces.

The first is because of the consolidation on a global basis, the position required for master service agreements, purchase orders and other things that enable you to recognize revenue have to be very exact, they have to be the same for affiliates, legal structure and so forth.

We have a pretty good beat so to speak on those and we think we’ll have those well in hand. And that was a primary issue related to the $5 million revenue deferral that we discussed. And again that was a very high gross margin, roughly $4 million of gross margins. Again we’ll have those we believe taking care by the end of this current quarter.

The software piece is a little bit tougher because you really have to be able to establish their fair market value on service to enable you to recognize the software piece that goes along with that booking upon shipment. And we believe that we understand the problem.

There is a fix that we are working on so to speak, a fix in terms of chancing our processes and so forth. We are in the implementation mode for those right now. It takes a couple of quarters of a track record to demonstrate that you really do have an accounting term called VSOE which is Vendor Specific Objective Evidence.

And we think we’ll have that in place by the end of Q3. Now the good thing about this is any software that you’re recognizing on a ratable basis because you did not have the necessary evidence, you can effect to catch up as soon as you establish the right process.

So we think as we exit Q3, we’ll be in a position where any differed software revenue that we had for the full year, we can recognize all of that revenue that hasn’t already been recognized on a ratable basis which will be the majority of it in Q4. So that’s what we’re actually targeting to do right now.

Sorry for kind of long one to answer, but it’s a bit of a detail topic..

And our next question is from Greg Mesniaeff from Drexel Hamilton. Please go ahead..

Yes, thank you.

On that subject of the grown complexity of row in your recognition, how much of that is attributable to TVN and how much of it would have been the case as you’d done the acquisition?.

You know I think the majority of by far is just the transition to our software business model. Essentially I would characterize almost none it is associated with the TVN.

We have some - we do some things we had tighten up there but again by far the majority of this is related to software, that’s why out of the $5 million in revenue that we talked about earlier, we can recognize a large part of that, that was related to the business process cleanup.

And then software pieces, I indicated in my script, we think at the end of Q2, we have roughly about $4 million of software setting in our backlog that we started to recognize on a ratable basis. We’ll be able to catch up in Q4. And we probably have another $3 million or $4 million in Q3.

So we’re going to have fairly significant catch up in Q4 of software revenue that’s very high margin. But again the issue is really software, it’s nothing else Greg..

Okay, got you. And on the subject of the DSOs you know spiking this last quarter.

Is that again due to the acquisition or is that a combination of other factors, can you give us some color there?.

Yeah, now the biggest - single significant factor was we build all of our service revenue that was due on Q2 on April 1st which is typically - we always bill in the first day for the year the current quarter that we’re in, that added about 15 days of DSO to our overall DSO.

So if we would have ended on the calendar quarter like lot of companies do, our DSO would have been below 90 days. And we believe that we can get that DSO below 80 days over the next two or three quarter as we improve our collection processes and so forth.

TVN added a few more days to our DSO because the majority of their business is international as opposed to kind of a 50/50 split for us. So it did add some additional days but again the biggest factor was the billing of the service revenue on the first day of the new quarter..

And our next question is from Tim Savageaux from Northland Capital. Please go ahead..

Hi, good afternoon. Couple of questions here. I wanted if you could first sort of address the sources of booking strength in the quarter.

I think you sort of mentioned it, sound like it was pretty broad based, but you could provide any more color on either product or geography with maybe a particular focus on cable TV, seeing the Time Warner showing up here I guess for the first time in a while and how important that segment was to your booking strength?.

The strength was in fact broad based. We saw it really across geographies. From a customer point of view as I mentioned it was service providers, cable operators, but also satellite direct-to-home and telco operators who probably the single biggest engine of that and around video technology and associated service and support agreements.

And yeah, we’re pleased to see in particular resurgence of activity with large cable operators. We had a reasonable first quarter and as we look ahead for the balance of the year, we see a pretty good pipeline of service provider projects.

And after they have been acquired for the better part of 18 months, it’s - I think it’s overdue and we think we are well positioned as many of these large service providers get back to improving and upgrading their networks..

When your reference being quite for 18 months, you are talking about the service providers in general or the cable guys in particular?.

Service providers in general, I think the service provider spending has been somewhat lackluster through most of 2015. We saw some improvement in the fourth quarter and we see that momentum rolling into the first half of this year..

And our next question is from Simon Leopold from Raymond James. Please go ahead..

Hi, guys, this is Victor Chiu for Simon Leopold. I just wanted to ask you about the 5 million of revenue that split out into 2Q. If that was just a timing issue and it just you know was just pushed out, I guess I would have expect to be the low end of your range to be a little bit higher.

So maybe can you kind of speak to what, you are baking into the low end I guess on your revenue range and what’s the risks might be there for the low end to come in?.

Yeah, I think you know first of all Victor, it was clearly just a timing issue, it was contractual customer commitments. And for the most part I was just making sure that we had the alignment that we needed between all the documents that I just mentioned our master service agreements, purchase orders and so forth.

That’s going to come in for the most part in Q2. That will be part of our revenue. So you know if you look at our guidance, certainly our internal plan is to get to the high end of the guidance you know roughly the 108 that we talked about.

And you know before that we were pretty much target where these three consensus was around a 104 million and we think we’re going to pick up 4 million of the 5 million which got us to 108 million. We pick that up then we’re right back on plan from a revenue standpoint through the first half of the year.

And then as we were talking earlier on from our gross margin standpoint because of the software revenue recognition was it’s going to take us into the second half of the year to get caught backup from a gross standpoint. And our FX is right on target from an overall standpoint for the year.

So we believe that we’re on track to achieve our overall annual financial guidance that we gave back in February as well as just reconfirming now. So it’s timing difference for the most part..

Okay that’s helpful.

Okay, and I guess you know just given the incremental moving pieces I guess, what gives you confidence that you’ll be able to hit those targets, you know I guess what let you to maintain those targets instead of kind of adjusting the range?.

I think there is really three things that are going on right now. Number on the $5 million which is an important part because of the margin level, that’s contractual commitments that we have in place.

As Patrick mentioned earlier, the transition to our VOS product offering is well underway and you know we think by the end of Q2, we’ll have about $4 million of revenue and fundamentally profit sitting in our backlog. And then our video revenue in the first half of the year is going to be light because of the software issues that we talked about.

It’s going to be made up Cable-Edge revenue which will have lower gross margin because it doesn’t have all the licensing associated with that. I think we’ll pick up in the back half of the year. And then the third element is TVN where we had light revenue in March, because we basically we cut them early. And we think that will pick up.

They are pretty much right on track with where we thought they were going to be for the year to enable us to get the $60 million of revenue that we gave as guidance. And from a gross margin standpoint, you know particularly in the back half of the year we’re on track with our synergy.

So we think we’re pretty good from an overall revenue and gross margin standpoint. And as I indicated earlier, OpEx was right in line where we need to be there. So I think those three of four factors gives us a confidence level that we are hit the overall guidance for 2016..

Great, thank you..

Just one last point, on our synergies, I just want to point out again that our synergies of $20 million on are on a global basis, it’s not simple just focused on TVN or France. We’ve actually - we believe we made fairly good progress. The integration process is well underway.

So fundamentally Harmonic is operating as an integrated entity with TVN today. For example, we’re going to discontinue some of our products. They are going to discontinue some of their products. We are going to have a combined product offering. So we went a long way now to really operating as an integrated organization.

And that was a big part of the reason for doing the acquisition you know the payoff that we expect to get..

Our next question is from Jeff Bernstein from Cowen Prime Advisors. Please go head..

Hi guys. Couple of different questions. First of all, just backlog is improving; you are switching to software from hardware, so there is sort of headwinds on the revenue side just from that switch.

Can you talk about kind of channel capacity growth as a metric or any other way we can sort of thing about the actual growth in demand versus the pure revenue..

Yeah, let me start and then Patrick may want to make some comments on the channel side of it. You know again we’re encouraged to be worth of $180 million backlog. For example I can look out into Q2, Q3 and Q4 and I know how much revenue we’re going to get out of the backlog to help us in each of those quarters.

And you know we understand the split between the product and the service piece of it. And the margin that we need for improvement as I highlighted earlier on, half of it you know as we complete Q2 if we hit the guidance that we talked about was we think we will.

We have more than half of what we have to catch up in effect from a gross margin standpoint staring in the backlog. So having that backlog, it gives us a lot more confidence. In terms of channel structure and stuff like that, Patrick, I’ll pass it over to you..

Okay. Well Jeff you see a couple of different of things going on in particular on the - I think your question was related to the video side of the business..

Correct..

You know historically we see a cycles of replacement and upgrade with new compression technology.

And as I alluded to earlier, we feel as that we’ve been kind of a couple of years overdue on that and we are starting to see a new way of that investment by service providers around the globe really taking advantage of quantum leaps in compression efficiency.

And on top of that we see new channel adds particularly around you know over the top like of services complementing with say the traditional Pay-TV platform. And third, although it’s definitely come in waves as well, there is a lot of the developing world that is pretty still mature from a digital video perspective.

And Latin America is a particularly region in the world where we did see - we have seen quite strong demand over the past six months, some parts of Latin America and more than others. But that creates a third driver in terms of demand behind for the digital video products..

That’s great. And then in terms of the as a service products that you guys are introducing, I mean I think they are embedded in the stock is some fear about you are making this transition and I know for a live video, may not be moving quite as quickly as is for some other parts of video.

But can you just talk about what’s going on there, sort of who your partners, who are your competitors in that particular part of that market and the outlook?.

Well I do my best to be concise. The truth is there is an element of it which is a little bit wide west. In one way we think about is we just think we do a high quality video compression better than anyone else in the planet.

And if you were a service provider who is comfortable in the past buying an appliance for that great, but there is an emerging, you know there is lot of emerging companies that just went business that way. Their whole platform is in the cloud. And a big part of what we’re trying to do is address that part of the market.

And as many of those companies they got started, they may not have had a need for really pristine kind of video or they may not have cared too much about bandwidth consumption.

But as those over the top services now as their business models call on them to hit the big screen TV in a living room as they start to think about exponentially growth bandwidth cost, CDN cost and store cost associated with startup - excuse me - start over capacity.

The whole notion of good looking video with a minimum number of bits starts to become relevant for these over the top guys. So our first target with our SaaS offering is more about expanding the addressable market. And going after a part of that market, we have not been able to address historically with our client sales.

Now it’s true that even within our existing customer base, there is a certain part of what they are looking to do popup channel special events, the Olympics, concerts whatever that are also well suited toward a cloud kind of offering. So - but we also fundamentally look at that is marking expansion as well.

In overtime, I think it’s possible that this kind of business model quick proves out to more broadly applicable. But I’d say for the foreseeable future, we see this is really an expansion of the addressable market not a replacement..

And then the UHD and I guess high dynamic range should be drivers in the encoding business, are those actually happening yet or is that something that’s still out in front of you?.

You know it’s happening but in a modest kind of way and then to be candidly we feel a little bit like the Boy Who Cried Wolf and some and we disappointed with the lack of real volume behind the older age day. But the market just hasn’t happened.

Now we are just about every major service provider on the planet, there is one, two to five sometimes ten channels on ongoing, so there is a certain amount of revenue opportunity that’s there, but it’s not at this point anything like the transformation or opportunity we saw when HD came in. That’s still may come.

I mean as you alluded to high dynamic range is something else that people are starting to really dabble with. And in fact perhaps is more likely to be a broadly applicable technology because it’s not only important for ultra high definition but in fact for high definition and even standard definition.

So there is a lot of media companies and service providers who really experimenting now with high dynamic range. And we’re optimistic about this being layered and I think this is a feature or a license that comes on to a lot of existing technology again as opposed to a wholesale upgrade.

But you layered on to your question, let’s say gradually growing ultra HD opportunity, you layer on a high dynamic range opportunity. We are doing a quite a bit of dabbling with virtual reality. I think the new technologies are shortly in area where we’ve established a leadership position. We’re not quite ready to call any other curve in demand..

Gotcha. And then just a couple of quick ones for Hal, just on the cash flow from operations front, at the end of year, I guess we’re probably going to do a little better on cash flow with some of the license revenue coming through.

But can you just talk about cash flow from operations and what you think the CapEx will be for the year?.

Yes, I think in general, our stated goal was to have $50 million to $60 million of cash at the end of every quarter. This past quarter we were above that. Our cash this quarter I think we used more than we thought we’re going from AR standpoint. We think we can catch that back up.

And pushing as hard as we can stay above our guidance range of 50 to 60 and I think we can do that. I think overall our CapEx for the full year is going to be in the $20 million range. Historically we spent $3 million to $4 million a quarter. We had a little bit more for TVN, so we’re not going to be dramatic different.

So that $20 million to $25 million of CapEx I think is probably a pretty good number. But cash is a primary focus and we want to make sure we have a significant butter there relative to the $50 million to $60 million and we are on track to do that..

Great, thanks very much..

Thank you..

Our next question is from Matthew Galinko from Sidoti. Please go ahead..

Hi, guys thank you for taking my question. Hal you alluded to TVN is one of the factors maybe inhibiting gross margin and I know in the past you know you may be talked about potentially bring that more in line with the rest of the business.

So just curious how that process is going for you?.

Yeah I think you have to take the first quarter and kind of set it aside as an abbreviation because we basically have few weeks in March and you know that was 42%, so there was lot of overhead issues, unabsorbed overhead and so forth. We think in Q2, we’ll start getting closer to the low end of our 46% to 47% guidance.

And then in particular which always the case when we get into the back half of the year, we think we’re going to be able to start pushing towards the higher end of the 47 to 50. And it’s primarily going to be related to our cost of revenue improvements and other manufacturing activities.

So there is supply chain synergies, volume synergies and so forth. So a lot of that will come in the back half of the year. So I think we’re pretty well on track with our overall gain plan..

Great and then we’ve had looks like the conclusion of a couple M&A processes among American cable operators fairly recently, so I am just curious if you can go into how that’s factors into valuations and decision making on CCAP?.

Let me say in general we are pleased to see some of those processes coming to an end. Certainly we saw delays associated with M&A across not only cable but satellite and telco if you include your upend and the U.S.

So in general, we are optimistic that well we don’t think M&A is done, we are optimistic that we’re going to thing return to normal with some of our largest customers. And we think that will indeed create opportunities for both the video part of the business and of course with our new CableOS care platform.

And in particular I would just say that we are close to our largest cable customers with what we are doing in the CCAP area. We are getting a lot of good constructive feedback. We are doing a lot of very good work in lab. And we feel very well positioned.

And like I won’t be more specific about different cable companies names but it’s clear that high speed data and in fact new architectures including the distributed one that I mentioned earlier are going to play a permanent role for leading cable operators in the U.S. and overseas.

And we are working hard to make sure that we’re right in the middle of that..

Great, thank you..

Thank you..

And our next question is from George Notter from Jefferies. Please go ahead..

Hi, guys, thanks for the follow-up.

I guess I just wanted to ask about if we’re going to booking strength, you said that you build for service on I guess April 1st, I would assume that that impact really went into the backlog, is that correct? And assume there is no rev rack associated with those billings?.

That’s right. I mean typically when you look at the differed revenue, it’s contractual and that’s becomes differed revenue when we actually invoice the customer. So there is no rev rack on that..

Got it and then so the strength in backlog by the services billings.

I guess I am just trying to understand sort of what’s really change in terms of the demand and or is this more related to this quarter you know kind of stilling exercise?.

No, I think if you go back in our script, there are really three key factors on the increase in the backlog, there was $27 million from the bookings that we had over and above the revenue that we recognize. We had $21 million from TVN and then we have $12 million differed revenue.

So I would say that the backlog increase that we had was really a healthy backlog increase not associated with one particular aspect..

Okay, thanks..

Alright, thank you..

And we have a question from Tim Savageaux from Northland Capital. Please go ahead..

Hi. I guess I had a kind of related question there and there we can take another crack at that to what - it sounds like the services bookings would have contributed to that 27 million.

But either way I guess you mentioned, you hadn’t seen bookings sort of as strong since 2014 overall in the quarter, it sounds like we can at least talk you an organic backlog of 160 million and maybe if we could for some overage and service billings a bit less than that. It looks like you haven’t seen anything like that in more than a few years.

So I wanted to get sort of maybe put the background strength or at least the organic backlog strength in kind of the same context you did as the booking strength and are we really looking at some sort of historic strength here or maybe a combination of a few onetime items maybe helping us get there?.

You know I think - I don’t know, Patrick you may want to try. The biggest factor was the $27 million of - around $110 million of bookings that we had versus the $83 million of revenue, so added strength to our backlog. And that has the same balance between product and service that we’ve hand.

The other big piece has a same category in terms of the breakout was the $29 million that we added from TVN. And we did have a good service bookings quarter in Q1 that added some additional differed revenue. So again I would say it’s very balanced between product and service.

And in particular the product piece of is strong because of the makeup of that backlog and the $5 million we talked about previously high margin. There is some differed revenue in there over and above the $5 million that we talked about that’s being recognized on a ratable basis. So I think in general it’s a pretty healthy backlog in it.

I don’t remember in past quarters going away back but this is well above any backlog that we’ve ever had in the past. I think even if you take the TVNP side of it. So it’s a very healthy indicator for us going forward.

Patrick, I don’t know if you want to add anything else on that or?.

No. Yeah I think that’s right. I mean frankly is just the - it’s the other side of the coin of the strong bookings in this case. I think the good news well we would have like to see more of a waterfall in the revenue.

And the fact is these bookings are heavily video oriented of which services associated in meaning there is high value there and that’s really in line with the strategy we are driving. So from our perspective if we look at the health of the business I think demand out there in the market is the number one indicator.

And demand are you succeeding competitively. And we’re encouraged by the demand that we saw and we are encouraged by our competitive pasture in the first quarter. All of that translated into strong bookings.

As we’ve discussed that is much of that cascaded in the revenue during the quarter, but that’s okay from the perspective of the year, it’s right there for us to be recognized in the coming periods and we are excited about the fundamental strength that dove that success in the first quarter and also the fourth quarter we had - where we also had a positive book-to-bill ratio..

I think the other points I made in my prepared remarks is our backlog is represented by contractual customer commitments with specified delivery dates for the part that we pulled out in the books drive on effecting the first year as well as feature functions and so forth. So it’s high quality backlog.

I mean we do a lot of scrubbing on that to make sure that it has all the right characteristics..

And maybe one other thing Tim, I don’t want to overstate it but it is worth while noting that in the let’s call the organic Harmonic backlog. There is CCAP component now which historically didn’t exit either. And of course that won’t be recognized until we deliver that product later in the year.

But I want I guess acknowledge and I think it’s goodness again there that it’s - while it’s predominately drive by strengthen in video services and video software product. We’re also seeing some CCAP element of that. So it’s all aligned with the strategy we are pushing..

So just to support Patrick’s statements, but I’d also add that the CCAP piece represents single digit percentage of the overall backlog. So we are very happy it’s not dominating our backlog at this point or anything else to prevent us from getting revenue.

We hope it gets to the point we are dominates as we head into the back half of the year, but we are not quite yet..

If I could possibly follow-up on the world’s longest bookings and backlog question, before I was trying to get underneath to where was operating the kill switch there.

Would you care to make any commentary on whether you’ve seen that kind of booking strength maintain into the current quarter to date?.

You know again I’ll start it and I’ll pass it to Patrick. We don’t really give guidance on bookings and so forth but I can tell you that based on the profile that we are looking at right now, it’s not dramatically different than what we’ve experienced over the last few quarters. I don’t know if you want to add anything..

No, I think it’s well said..

Thank you so much..

It’s a good followed book so far..

Okay..

Okay, well thank you very much Tim and everyone else who joined us on the call. We are excited by the progress that we’ve made. We are very focused on delivering against we’ve outlined and reiterated to here again today. Our full year plan is continues to be well insight and continues to be the operational and execution focus of the team.

We look forward to reporting to you on our progress again soon. Thank you everyone..

Thank you..