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

Thank you, Adrianne. Hello, everyone and thank you for joining us today for Harmonic’s third quarter 2015 earnings conference call. My name is Blair King. With me at our headquarters in San Jose, California are Patrick Harshman, our CEO; Hal Covert, our CFO; and Carolyn Aver. 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 third quarter 2015 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 the 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 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 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. With that, I'd like to now turn the call over to our CEO Patrick Harshman. Patrick?

Thanks Blair and thank everyone for joining us today. Before we get started with the third quarter results, I want to first update you on some changes to our executive management team. First, after five years with Harmonic and an impactful 25 year career in high-tech, Carolyn Aver has decided to step down and turn her focus to her family wine business. Carolyn, you’ve been a strong executive and business partner and you'll certainly be missed. Stepping onto the team is our new CFO is Hal Covert. Hal is a real pro with a passion for driving results and Hal, I'm really excited to have you join the management team and hit the ground running bringing to bear your knowledge of the company and you deep management experience, particularly in tech business transformations and software business growth. With this change, Hal is stepping off of our Board of Directors and Nikos Theodosopoulos will be taking the reigns as our new Audit Committee Chairman. Finally, today George Stromeyer, our Worldwide Head of Sales has also tendered his resignation. George has been with us for about two and half years and has made important contributions as we've navigated through internal change and a challenging external market. That said, we are fortunate to have a talented next level team of regional sales leaders. And we've recently made several personnel and alignment changes within our sales organization that better position us to be success in the current environment. I'm confident our sales organization is focused, energized by our competitive position and we’re planning to support and determined to drive our business now and in the future. So with that let’s now turn to slide 4 for a summary of our results for the third quarter of 2015. The revenue in the quarter was $83…

[Technical Difficulty] down 23% from the $108.1 million a year ago. The decline in both our video and cable edge segments reflect a combination of project deferral as our customers transition to the next generation of video and data products and architectures as well as an increased level of impact due to customer consolidations and project deferrals. The persistent strength of the US dollar also continues to negatively impact the purchasing power of our channel partners and end customers overseas. As Patrick highlighted earlier, this was primarily within pockets of Asia, Europe, Latin America and the Middle East. There were no 10% customers in the third quarter of 2015. Our bookings for the quarter were $74.6 million, down 25% sequentially and 24% from the third quarter of 2014. On a sequential basis, the same factors I noted a moment ago that negatively impacted our revenue also affected our bookings in the quarter. And while the decline in bookings was both in our video and cable edge segments, it was most pronounced in the video segment, reflecting project deferrals from several service providers in North America and EMEA regions. To a lesser extent, this was also the case in our cable edge segment. Our book to bill ratio was 0.9, deferred revenue and backlog was $110.8 million at the end of the quarter, down 8% sequentially and on 5% year-over-year. The sequential decline is principally due to lower bookings in the third quarter. Our gross margin was 56.3% in the quarter, a sequential increase of 310 basis points from the previous quarter and an increase of 270 basis points from the third quarter of last year. Approximately two-thirds of the improvement is due to operational efficiencies and product mix shifts in our product portfolio. The remaining one-third improvement is due to…

Thank you Carolyn and Patrick for your kind words. I'm excited about joining the Harmonic management team. I believe that we will have a rewarding future as we continue to evolve our video segment with more of a software orientation and as we prepare to penetrate a much larger addressable market with our upcoming new CCAP architecture. It is increasingly clear to me that Harmonic’s core value proposition, market leadership, and strategic direction are in sync with the technology and marketplace transitions that are underway. After eight years of serving on the Harmonic Board and Audit Committee, and working closely with Carolyn and her team, I'm looking forward to leveraging my experience and knowledge about the company to enhance growth and shareholder value. Blair, I'll now turn the call back over to you.

Thanks Hal, Adrian if you could please open the call up for questions and be happy facilitate any answers.

Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] And we have James Kisner from Jefferies online with the question. Please go ahead.

Hi guys, thanks for taking my questions. So one thing I want to just clarify a little this year was the currency driven delays. I guess I was going to talk about that a little bit more, I'm just thinking that if your purchasing power reduce to get the currency headwinds that would necessarily be a delay unless currency bounce back -- bounces back, I mean is there just -- are they having liquidity issue and I should understand that indeed that's a temporary thing and a push out these currency headwinds, and they’re just sort of like disappearing of orders, can you just explain that a little bit better? Thanks.

Well thanks for the question James. Listen indeed, we don't have a crystal ball on exactly how this will work out but I mean, let me give you more specific example. We saw several projects in Latin America, projects that we think are strategically important to our customers put off. Now indeed maybe the currency situation that won't improve but maybe it will, and maybe it's part of a re-planning process for them to re-prioritize things out of which a broader portfolio of projects may be evaluated. So it’s true that in that case, we don't have a crystal ball and we can't say definitively how things will work out in the future. I would simply say that we’re doing business with major players on an international scale, players that I believe intent to be competitive, intend to investigate in their networks going forward. And the wrestling right now with the business plan that didn't contemplate the currency imbalances that exist today. And let me emphasize, these are markets were we sell in US dollars. So our products and services as well as others look proportionately more expensive. And we think that our customers are simply grappling with how to best manage their way through that and that process is leading to some delays.

Okay, that's helpful. Can you talk about Cable Edge for a minute, I guess to understand, it sounds like if I'm interpreting right, you had just had some customers that have just stopped buying edge QAMs and moved to CCAP and that's causing a temporary depression in that business. I really want to make sure they understand that correctly and I guess sort of separately, how should we think about the trajectory and I know Q4 you're saying is going to be up a little bit but should we just assume this remains pretty close to this level say through the first half of next year until your CCAP stuff ramps post Q1 trials or if there is any kind of color you can give there on the longer term trajectory the edge QAM or Cable Edge business. Thanks.

I will start with the last question first and while we're certainly not here giving detailed guidance for 2016, specifically in the Cable Edge area I would say roughly the ZIP Code of business for the next couple of quarters is a good, if not conservative assumption. Stepping back from that to go to your question about dynamics, I mean, let me be clear there is multiple dynamics playing out here as with our video business. The impact of customer consolidation and delayed projects is certainly real, quite independent of any technology transition. As you know, both in this country and overseas, a number of leading cable operators are involved one way or another and focused on M&A activity. Second, the currency issue is non-zero even in the edge space, although the edge – cable edge space tends to be tilted a little bit more towards the US, we also do cable edge business in other parts of the globe. So that was the second factor also impacting the cable edge business. And third, indeed, there is some amount of traffic that is migrating from the traditional VOD platforms to DOCSIS platforms. There is -- no customers are going 100% wholesale, but we do see a migration of some traffic, which is also, I’d say, dampening demand for incremental edge QAM capacity in the short-term and in the near term. So all three of those together conspire to make a particularly weak quarter. We expect the consolidation issue in particular to resolve over the next couple of periods, but the real uptick in this business -- the meaningful uptick where we think real value is going to get created is really all tied up in our big push into CCAP, which as we’ve said a couple of times, is targeted to really commence in earnest from a revenue perspective the second half of next year.

Okay. Last housekeeping, I mean is it fair to say Q1 seasonality might be a little muted, I mean it’s usually kind of a big down quarter for you, but it’s always like that that soon ends and you have a lot of visibility, tough question, but any thoughts on perhaps video in particular, what you're thinking about seasonality in Q1?

Yeah. I regret to say, it is a little bit too early. We certainly don't have -- it’s fairly a guess or a feeling James and we don't really have good feedback or good visibility to our customers’ plans for the first quarter. I mean I would say that seasonality historically has been most pronounced with the cable part of our customer base to the extent our video business is a little less cable centric, from that point of view, yes, less impactful. And of course, I also -- as I highlighted, in particular in the video business, we've got a strong pipeline of projects, there is a backup here. I think that there is a reasonable chance that we may see that break loose early next year, if not at the back end of this quarter and I think that that would be a positive driver of business in the first quarter that might offset typical seasonality. But we will have to wait and see and we’ll update you when we get better.

Okay, thanks very much. That's very helpful. I’ll pass it.

And your next question comes from Greg Mesniaeff from Drexel Hamilton. Please go ahead.

Yes, thank you. I was wondering Patrick if you can give us more color on the recent shift towards a higher software content for your products. What product areas are you seeing that in and what -- going forward, what impact do you see that having on the pricing of your products, the price competitiveness of your products, if you can just kind of give us some color there? Thanks.

Yeah, so good question. Core to our VOS initiative, which started initially with our video processing products, encoding, transcoding, et cetera is a push towards the core of the intellectual property being captured in software. We can deliver that as an appliance or indeed as pure virtualized software to be run on a customer’s datacenter or off-the-shelf server. So, it’s encoding and transcoding where that is the sharp end of the stick for us, so the rest of everything we do in our video business is following and indeed, in those cases where customers are not buying the off-the-shelf server from us, just a virtualized software, we’re seeing a lower top line price, but our strategy is to drive obviously equal or greater gross margin dollars out of those transactions. It’s on an all-in basis it’s a modest impact today, but the proportionate of sales that are pure software continues to expand and I think you will continue to see continue to expand over the next year. So indeed it may be a headwind for the top line, but the strategy here is not primarily about the top line, it's about driving growth of gross margin dollars and then of course ultimately [Technical Difficulty] and from that perspective the demand trends and the competitive position this new VOS platform has put us in is looking increasingly possible.

So in other words, in addition to where you said about the impact on the top line and margins, is it fair to say that going forward your products with a higher software content will be more price-competitive and less pricey “vis-a-vis the competition?” Does that -- and make therefore more attractive as an alternative for your customers?

Let me give you a qualified yes. I don’t want to suggest that we think that we have not been price competitive up until now, but indeed going forward some of our competitors are engaged in software, others aren’t. And with the market by and large particularly the tier 1 customers pushing hard towards data center where they’ve got a real volume purchasing power over off-the-shelf server technology et cetera, there is a compelling – there is an even more compelling commercial offering that we can put in front of them. And of course our story and our value proposition isn’t just about the price or the value of the software itself, but it’s the broader total cost of ownership here. And that is where particularly the tier 1s are out in front and really realizing the significant operating efficiency advantages of moving to a data center kind of infrastructure and approach.

Got it. Okay. Just one quick follow-up. We’ve also seen your revenue segment from service and support creeping up throughout the year as a percentage of total sales. Do you see that as being very much linked with higher software sales as a percentage as well, the two kind of going together?

Short answer is yes, Greg.

Got it. Okay, great. Thank you.

All right, thanks very much.

And the next question comes from Simon Leopold from Raymond James. Please go ahead.

Thank you. Appreciate you taking the question. Quick housekeeping one first is, if we could get maybe a little bit of color of how the former production and playout business is doing. Sort of my interpretation is, it sounds like you expect a good fourth quarter given that the margin commentary, but just wondering where we are in the baseline revenue within the video products.

It’s doing actually relatively well. As you know, we don't break out explicitly, but I will tell you, actually our broadcast and media customers are not involved in much M&A right now and so we haven't had that headwind for our production and playout products. And within our video revenue actually the production and playout and more generally the business that we are doing with the content, the media players is the relatively the healthiest and the strongest. It's the products that we sell to the large service providers that have been most impacted by slowdowns associated with M&A and that's I think make sense.

Okay. And then this is kind of a bit of a difficult question to answer I imagine, but back in 2013 you exited the transmission business, you sold that business that you had been in and just wondering what your appetite might be to reenter that particular part of the market from hopefully obvious reasons, but given that you know the customer base, you know the products just want to get your perspective. Thank you.

Yeah, well, a tricky question, Simon. Look, we will land on the next generation of cable infrastructure. Our view now and our view actually in 2013 is that future is really all about DOCSIS and frankly it's no longer analog, it's all about IT. So it’s a risk of getting too much into detail, we're very interested in the future of the cable network vis-à-vis delivering IP packets to people’s homes and indeed deep into the network. We are less interested in what I would call legacy analog transmission. That’s our strategic orientation, it’s why we did, what we did about divesting one business and really doubling down in terms of investing in this new CCAP platform that we are working with. And of course, as I am sure, you know, being kind of an expert in this area, Simon, the cable operators were increasingly looking at DOCSIS, not only centralized, but new distributed architectures. And here indeed, I think that this company has unique know-how expertise, customer relationships et cetera to be successful above and beyond technology. We are certainly going to press all of those advantages and I think increasingly is part of or winning formula. Might we down the road look for opportunities to further strengthen our hand, and indeed, maybe. That being said, we think we have put ourselves in a pretty good position as it is to take advantage of where the cable operators are going with their next generation IP networks.

Great, appreciate that. And maybe an equally difficult question to answer. I know, there are not a lot of really pure comparables to your business, but there are other companies that sell to similar customers, they aren’t at least seemingly to experience the same kind of slowdown, at least not to the same degree. So while you have peers selling to the operators as you are, they don’t seem to be suffering as much due to the operator consolidation. Could you help us understand what makes you different?

I don’t know that we are different from any one particular competitor, Simon. In terms of the slowdown, I think it’s worth pointing out that we are not in CPE. As you know, one of our large customers announced today and the biggest step up in spending was around CPE equipment. Well, we have reasonable scale, the truth is we participated in a couple of relatively narrow-specific areas, and those are the areas where we think we continue to lead, but there are also areas where for one reason or another, we think we have seen spending slowdown. I would hasten to add that in our case, we are driving across our portfolio, a couple of very transformational product transitions. In video, we are moving to a virtualized infrastructure and around Cable Edge, we are pushing on something that is – has really captured the imagination of a number of our large customers. There is no doubt that that’s also part of the thought process and the calculus of how our customers are thinking about spend and those categories in general and about doing business with us. I mean, a great example is, what we are doing in DOCSIS focusing just on 3.1 instead of 3.0 and we announced a year ago our decision informed by our customers and putting feedback to drive straight for 3.1 and so that’s another example beyond CPE where we see customers continuing – cable customers continuing to invest in 3.0 platforms, so no doubt about it. We have made the bet for better or worse to be fast as possible to market with two-way 3.1. And as I said earlier, we will be demonstrating that in customer and industry labs this quarter and rolling that out to the field early next year, and we think that’s on pace with, if not ahead of the rest of the market. So our strategic decisions as well and cadence of product releases, I would also suggest you consider.

Great. Thank you for taking my questions.

You’re welcome. Thank you.

The next question comes from Jeff Bernstein from Cowen. Please go ahead.

Thanks for taking my question. So understandably, the headwinds that are out there are being experienced by anybody selling globally and you have particular technology transitions going on. I guess, seeing a significant change in a couple of senior management positions makes you kind of step back along with the magnitude of decline that we’ve seen here. So why should we not be worried or what is it that is causing the transition in people that you felt like needed to take place at this point in time?

Well, I want to be clear. I mean, Carolyn here, you can complement it, Carolyn’s departure is a loss for the company that’s for sure, and this is not a change that the company precipitated. That being said, we’re thrilled to have Hal here able to step right in and he served on our Board and knows the company well. And, while Carolyn your departure will be a loss, I think we’ll largely be able to proceed without really missing a beat. And frankly we’ll benefit from the additional new fresh perspective of Hal. So in the context of a business with a lot of opportunities but also admittedly headwinds and some challenges, I think fresh set of eyes, a fresh approach is a positive thing and one that I hope is in total welcomed by our stakeholders.

And in terms of the sales readership, I mean, where you guys surprised and unhappy about how your forecasting has been, I think you said with a lot of conviction that you have not lost any share to any competitors. Just could you make us understand a little bit more what is going through your mind about what has happened to your after, a quarter -- the prior quarter where you looked like you were sort of muscling through these transitions?

Yeah, we did feel as though we were muscling through. And candidly, while I think we’ve executed fairly well in terms the way we have gone to market. In everything we can do there is room for improvement. And candidly there is certainly room for improvement in our forecast. That being said, particularly when you're talking about M&A in a lot of moving parts with the customers, even they themselves don't have great crystal balls in terms of what's coming next. So we’re not so focused beating ourselves up but we're focused on continually asking ourselves how we can do better and that’s what we’re trying to do across the board in sales, in engineering and in every function. And you can continue to expect us to constantly look for ways to improve the way we’re running and driving the business.

So Jeff, just let me add a couple of points, so this is Hal. Number one, as indicated I was on the Board for eight years and I worked closely with Carolyn and her team as Chairman of the Audit Committee. So I can tell you there is no issues from accounting our financial standpoint that shareholders should be worried about. The second thing is that, if you look at my experience and background, I’ve been around the valley for a number of years now, I was CFO of a number of public companies and on the Board of a number of public companies. And I wouldn't take the risk of damaging my reputation or my position if I didn't believe in the company's strategic direction and operating plan and I did not believe in the management team here. So I think the company has a good path forward recognizing that we have a bumpy transition that Patrick just highlighted. I think we have a strong management team and I believe with my background and experience that I'm going to be able to help Patrick and the team so that Patrick can spent as much or more time with customer facing activities and making sure that the transition continues so that we can hit the inflection point hopefully next year with an upward trend.

Great, I really appreciate the frank answers guys, we think you guys have a lot of opportunities in front of you, so good luck.

Well, thank you very much Jeff and we appreciate the candid questions.

We have no further questions. I'll now turn the call over for final remarks.

Okay. Well thanks very much. Listen, I think we just hit on really the key points. From our perspective as a combined management team of the company we're driving clear technology leadership in a challenging spending environment. So we’re confident about our mid-to-long term strategic direction. In our video business, our compression and delivery technologies are clearly being valued and priced by a growing number of service providers and media companies and we see the technologies gaining traction and strategic importance in the market at large. In the Cable Edge segment, we are executing and we're increasingly well-positioned to meaningfully penetrate this much larger CCAP market opportunity that’s in front of us. Our entire global staff is focused, we’re excited about what we're doing, we've got strategic relationships that are growing with industry-leading service provider and media customers. And the gross margin profile of our business is also steadily improving. And finally, as we've just discussed we've got a leadership team that’s truly committed to driving our next phase of growth, profitability and shareholder value creation. So, I want to thank everybody for joining us today and let you know that we very much appreciate your support and we look forward to keeping you updated on our progress. Good day.

Thank you. Ladies and gentlemen, this concludes today's conference.