Welcome to the Q2 2015 Harmonic Earnings Conference Call. My name is Eric and I'll your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Blair King, Director of Investor Relations. Blair, you may begin.

Thank you, Eric. Hello everybody and thank you for joining us today for Harmonic second quarter 2015 earnings conference call. My name is Blair King is and with me at our headquarters in San Jose, California are Patrick Harshman, our CEO; Carolyn Aver, our CFO; and Peter Alexander, our CMO. 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 second quarter 2015 preliminary results call button. Now turning to Slide 2, let me remind you that during this call, we will provide projections and other forward-looking statements regarding future events or the future financial performance of the company. We must caution you that such statements are current expectations and actual events or results may differ materially. We refer you to the documents that Harmonic files with the SEC, including our most recent 10-Q and 10-K report 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 we provide you on this call are determined on a non-GAAP basis. These items, together with corresponding GAAP numbers and a reconciliation to GAAP, are contained in today's press release, which we have posted on our website and filed with the SEC on Form 8-K. We will also discuss historical, financial and other statistical information regarding our business and operations. Some of this information is included in the press release, and the remainder of the information will be available on a recorded version of this call on our website. With that, I'll now turn over now to you our CEO, Patrick Harshman, Patrick?

Thanks Blair, and thanks everyone, for joining us today. Turning now to our slide three, today we reported our results for the second quarter of 2015, reflecting real progress in our strategic agenda, strong year-over-year earnings growth and gross margin expansion but also an unexpectedly challenging cable spending environment. Revenue in the quarter was $103 million, down 1% sequentially, but above the midpoint of our guidance range. Underneath this headline, it's very much a tail of two businesses. Positively our Video business grew 13% driven by an accelerated adoption of our VOS platform, but both service provider and media customers. On the other hand, our Cable Edge business was down 28%, following a record first quarter of revenue and bookings. Some decline was expected followed the first quarter, but other market factors accentuated the effect. Correspondingly bookings in the quarter were $99 million, slightly above our first quarter's result, but below what we expected, again a consequence of markedly slower cable spending. Aside of cable, we were pleased to see strong global bookings momentum in our video business across all other customer verticals, satellite, Telco, broadcast and media. And we're also pleased by the sustained strong gross margin of 53% in the quarter and down slightly from last quarter, but up a solid 3% from year ago, reflecting our product strategy, our powerful new intellectual property and improving competitive differentiation. Earnings were $0.05 a share, flat against last quarter's results, but more than double that of the year ago, reflecting both the improving operating leverage we're building in the business and the earnings growth we're targeting for 2015 and beyond. And finally here we generated a healthy $12 million in cash from operations during the quarter. With some that overview, let’s now turn to Slide 4 and take a closer…

Thank you, Patrick. Let’s move to Slide 9. As Patrick said, our net revenue for the second quarter was $103.1 million, above the midpoint of our guidance range and down approximately 1% from the first quarter's $104 million and 6% from $109.6 million a year ago. Our Video segment was up $8.9 million sequentially, while the persistent strength of the U.S. dollar continues to impact the purchasing power of our channel partners and end customers overseas, the improvement was led by a strong rebound from both our service provider and media customers and an acceleration of next generation products and architectures/ This was offset by a decrease in our Cable Edge segment of $9.8 million. As Patrick mentioned, the decline in our Cable Edge segment is principally related to slower capital spend during the quarter, some of which we expected, some of which we did not. Our bookings for the quarter were $99.3 million, up 2% sequentially and down 12% from the second quarter of 2014. On a year-over-year basis, the investment pause in our Cable Edge segment played a significant role. We're however encouraged by the sequential and year-over-year strength of our video bookings across all geographies. Our book-to-bill ratio was 0.96. Deferred revenue and backlog was $120.6 million at the end of the second quarter, down 1% sequentially and 9% year over year. This slight sequential decline is principally due to the timing of deferred revenue recognition. Gross margin was 53.2% in the quarter, above the high end of our guidance range, a decrease of 70 basis points from the previous quarter and an increase of 310 basis points from the second quarter of last year. The year-over-year improvement principally reflects a more favorable mix of our higher margin video products. Additionally we're benefitting from improved margin trends…

Okay, thanks, Carolyn. Let me summarize simply by saying that we're advancing our strategic agenda in both lines of business. In our video business, our second quarter results, particularly regarding the adoption of our newest products caused us to forecast sequential video growth for the balance of the year had a positive initial outlook for next year. In Cable Edge we're executing on our new DOCSIS product initiatives and near term market headwinds did not diminish our confidence in our ability to significantly penetrate the larger CCAP market opportunity. Nevertheless there is no question we're working within challenging operating environment, with persistent currency headwinds overseas and consolidation dynamics creating heightened levels of timing uncertainty, consequently impacting our outlook for the third quarter this year. That being said, we're encouraged by the strong year-over-year margin and earnings growth delivered in the first half of the year and we entered the second half fully committed to leveraging our opportunities to carry this momentum forward and to drive the earnings growth we're targeting for the full year. With that, we'll conclude our prepared remarks and open up for your questions.

Thank you. We'll now begin the question-and-answer session. [Operator instructions] And our first question comes from James Kisner from Jefferies. James, please go ahead.

Okay. Thank you very much. So just pressing on this cable weakness a little bit here, in the past you kind of assured some proportion of bookings that were on the NSG Pro I think last quarter they were greater than 50%. Is it still the case, just wondering if you're seeing any volume loss at all as your -- or business loss as folks transition Edge QAM legacy Edge QAMs to CCAP. Could there be any kind of weakness from that in addition to just the absorption, just any kind of perspective there would be helpful, thanks.

James, no real change in the mix of platforms. As you correctly point out, our Edge sales are split -- our downstream Edge QAMs are split between our newer NSG Pro platform and Legacy platforms and we saw sales of both platforms in the quarter and notably for us strategically, we continue to see an expanded footprint with the new NSG Pro platform. As we said the slowdown that we saw, we attribute to a combination of a little bit of digestion after what was a remarkably strong first quarter and in fact we had couple strong quarters leading up to that, but also a real pause and some changes as we saw some re-planning and evaluation going on around a couple of different M&A scenarios.

That helps. So from modeling perspective Q4 is I would say usually up. Any thoughts at all on that as you would be re-modeling this flat, might you see a little bit of a seasonal pick up in Q4 or just any advice at all on how we should think about Q4?

Look, we're positive on the video side of the business and as we said, we anticipate to a sequential growth through Q3 and Q4. The picture is admittedly and regrettably a little bit more murky on the Cable Edge side. We've regrettably, but I think understandably have take a conservative stance on the Cable Edge business in the third quarter. Visibility isn’t great on the fourth quarter. I would say I am cautiously optimistic that we will see a rebound above third quarter levels and as you say, historically Q4 is somewhat better and I see no reason why this shouldn’t be the case this year.

All right. Thanks very much for taking my questions. I appreciate.

Thank you.

And our next question comes from Tim Quillin from Stephens. Tim, please go ahead.

Hey good afternoon. Thank you for taking my questions. I was just noticing the phenomenon within your video business where the service revenue has grown meaningfully or faster than their product side and I notice that you give us an alternate presentation on net revenue and the vide business looks a little bit better when you combine the two. But what's going on there that would cause the service revenue to grow and a period of time where the product business is declining.

Tim, I think its a few things. One it's the continued build up of support revenue and we do a good job at renewing that and then you get incrementally more every new year with new sales. So as an install base grows, you would expect the SLA piece to continue to grow. Two, I think we've done a better job at monetizing our professional services. I think we've always done a good job of helping our customers on the service side, but really over the last year or two, we're beginning to -- we've been better at monetizing that as well. And then our video product sales are up right this quarter. So that's definitely a component of it.

Right, right. Fair and then on the VOS side and obviously on the number of bookings you're having some momentum, can you give us any sense of what the dollar amounts are, is it bigger than a red basket?

It is. I don't think we want to get into dollars, but it was certainly up significantly.

How about this, would you expect VOS sales or VOS related sales to be a meaningful component of video revenue in the back half of the year meaning would it be greater than 5%, greater than 10%?

Yes definite, video revenue definitely.

Video revenue, okay.

Yes definitely. I think we feel like even though the number of customers were the same, it took a big step forward and I think we feel like we're over the hump of the transition. So yes, it's meaningful.

And is there any sense of how the current quarter is shaping up in terms of the VOS pipeline or VOS demand? Numbers have gone so strongly the right way in terms of that bookings momentum. I am afraid to extrapolate any trends there but are you…

I don't think we would encourage you Tim to extrapolate 13% a quarter, but on the other hand we've made I think for us a uncharacteristically strong statement that we expect sequential growth in that video business in the third and then on to the fourth quarter. And that's based on -- and that's based on as your question suggested, very real pipeline data and very real market activity. There has been a little bit of a draught out there for a variety of reasons, some about technology transition, some about macroeconomic dynamics. But the net result is that there is in our view there is pent up demand and that's now starting to come true in request for quotations, designs, RFPs what have you. So the pipeline of opportunity that we see is healthier than it's been for some time, that's kind of independent of us and then coming back to us we think that we're at the right place at the right time with this VOS platform that is really powerful. And just to amplify Carolyn's statements, well we prefer not to give the exact percentage, it is -- it's already north of 10% and it's a real meaningful contributor and we expect it to become really more so over the coming periods.

That's great. And then just lastly was the Comcast a 10% customer and if so what percent of revenue did it represent? Thank you.

They were 11%.

Thank you.

Well, thank you.

And our next question comes from Greg Mesniaeff from Drexel Hamilton. Greg, please go ahead.

Yes, thank you. Just a quick question on the cable guidance and results that you gave, do you -- two questions really in the second quarter the weakness that you reported, is that in any way related to any market share dynamics or is that really -- that element is basically fixed and that is purely a macro set of events, that's part one?

We think it's the latter Greg and I'll just remind you, step back I don't know, 18 months ago or so, we saw a couple of really weak Edge QAM quarters and frankly we've received a lot of the same question. Hey, has the technology moved, has the market moved? Have you guys kind of lost it etcetera? And we said no. There is a certain amount of cyclicality here and we think that there is a self inflicted pause in the market as customers wait for our new NSG Pro platform to come out. We'll only hope to release that platform and as you know from our results, we had a really strong 2014 that worked its way all the way into a record Q1 of 2015. So we've seen kind of a pattern of consumption and absorption if you will before and we primarily attribute the second quarter to absorption, but secondarily as we said, we also anticipated frankly more activity and more work around coming out of some of the M&A activity taking place in the global cable environment and that didn't quite transpire the way we expected. We think those opportunities will come back to us in due course, but we think that that's M&A related slow down has kind of had an additional impact here, but we don't think we've lost any market share in the process nor do we think that our products or capabilities are any less relevant.

Okay. Got you. And then part two of my question is you eluded to perhaps a ramp in CCAP sometime in 2016, is that consistent with where you've been thinking all along or is that a push out due to the macro M&A issues that have been obviously playing out recently?

Greg, it's consistent with what we've been thinking and planning ever since at some point it became clear that 3.1 was the real entry point and as you know we've entered the market as we said we would with the distributed 3.0 solution. The fact is thought that as we've talked to most of our large customers, 3.0 is not the type of point frankly to introduce a new technology supplier. Our customers have been candid with us and we've been candid externally. Hence we're opt -- from a centralized perspective, we turned the ship and we're leaning in heavily to 3.1 and we think that there is a lot of desire and momentum pull for 3.1 from the customer base and we're committed to be right there as soon as it's possible to be delivered. So we think that that is only possible not only for us, but for others in the industry around the middle of next year and we expect to be there right with the other players as 3.1 becomes deployable reality.

Got you. That's helpful. Thank you.

All right. Well, thank you, Greg.

And our next question comes from Simon Leopold from Raymond James. Simon, please go ahead.

Great. Thank you for taking my questions. Handful of things I would like to run through, one is just to be able to think about the old segmentation, can you give us rough estimate of what video processing was within the video reporting segment?

Okay. As Carolyn has got something more specific to land, I would say not significantly different than historic proportion. I'll give you the color Simon that it was actually a somewhat stronger event historically normal quarter from a production and play-out perspective, but that's at the edges. In general, video processing as a portion of the whole is consistent with last several quarters average when we were breaking out that level of detail within video.

And if I could add to that, I would say even over the last few quarters, while we've had a dip in video, the production and play-out portion remained fairly steady. It was really video products that declined and it's really video…

Video encoding and transcoding.

Yes video and it's really those products that rebounded this quarter.

Video processing, yes and that's consistent with our dialogue around kind of a pause trying to figure out HEVC, trying to figure out Ultra HD and also trying to figure out virtualization and how to best really master the operationalization of that.

Okay. And within the commentary you offered, the Edge products which were down very sharply this quarter sequentially from a very, very strong March, the commentary and the guidance put together suggest that the September quarter could be down sequentially on the order of 20% or more given that you're expecting the video business to be up. I want to make sure I am getting that and I am trying to understand why it goes down further from the depressed level in June is what I am trying to get at.

The turndown that we saw didn't happen from the very beginning of the quarter. So I think we do acknowledge that there is possible further downside on the Cable Edge business in the quarter. It is not our -- the 20% I am trying to go through the math quickly in my head and I guess that seems more than what we would anticipate in a downside scenario. I guess put more differently, even in the worse case, I don't imagine down another 20% Simon. That being said, I do want to emphasize that on the video side, as I mentioned a moment ago, in the context of a different, someone else's question, while we do expect video to improve probably not another 13% and while it's encouraging to see the external factors -- demand factors having flipped, it's not naturally after the races, so with HEVC and Ultra HD and the like. We think that there is going to be a steady demand in same day ramp in demand on video side and therefore we expect the video to continuously increase, not at the same pace as we saw this past quarter.

Okay. And in this quarter you made some repurchases, just if you could update us on what the outstanding stock repurchase program is and how to think about the share count for September, basically where did you -- what was the share count as you exited June since what's reported is the average for the quarter?

Yes, exit was $88.5 million and I think you should -- we did taper the share repurchase into this year as we got close to $100 million in cash and all things equal we would think about repurchasing in the same levels over the last couple of quarters. So a continued repurchase. We still have -- I don't have the number right off the top of my head, but we have plenty of room left in our repurchase pool if you will and we expect to continue the repurchase that I would say kind of at current levels.

Okay. And then just one last one kind of a longer term trending question, you talked about some of the Ultra HD and 8K initiatives are really laying the groundwork, when would you expect that product cycle to be a meaningful contributor something that you would be able to call out as driving revenue. Is that something that's second half '16 or 2017, how should we think about the best guess of the timing of that product cycle driven by Ultra high def and 8K.

Simon, this is Peter. To be honest, the products are combined in a sense that it's all VOS based. Now when a significant portion of VOS sales could be attributed to Ultra High Def, depends on the rate of what that market accelerates. We're still very early in that market. So it's too early to tell, but we certainly see it continuing to develop. We have IBC coming up in September and I think we will get more indicators there as to how things are going, seems on a fairly regular basis, you're seeing news around Ultra HD, but it's fair to say that we wouldn't anticipate it being a large percentage of the total even next year or meaningful percentage in the next year.

And frankly that's why we also call out HEVC compression. Historically the two have been really linked together, but an interesting dynamic is that we now see a number of operators, cable, Telco as well as broadcast and media companies looking to use HEVC in the near term for traditional HD and even SD content as they look to drive better efficiencies in their mobile networks in their streaming infrastructure etcetera. So we do have a view -- we've had a couple of announced customers using HEVC technology for those services and so we do have a view now that HEVC will be more of a near term driver even before Ultra HD really kicks out.

Okay. Thank you.

Simon, we have $56 million left on our repurchase.

All right. Thank you.

All right. Well let us end the Q&A session there and let me simply conclude by thanking you again for joining us reiterating that we believe our technology vision, our strategy, our focus on execution and the opportunity in front of us is being both real and very compelling. We remain well positioned and firmly committed to delivering growth this year as well as well into the future. We really do appreciate your support and we look forward to keeping you updated on our progress. Thank you very much everyone.

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