Hello, and welcome to the Q3 2013 Harmonic earnings conference call. My name is Maisha, I will be your operator for today's call. (Operator Instructions) I will now turn the call over to Carolyn Aver, Chief Financial Officer. Carolyn, please go ahead.

Thank you. Hello, everybody. With me in our headquarters here in San Jose, California, is Patrick Harshman, our CEO. I'd like to point out that in addition to the audio portion of this call; we've also provided slides, which you can see by going to the Investor Relations page on harmonicinc.com and clicking on the third quarter earnings call button. Now, turning to Slide 2. Let me remind you that during this call we will provide projections and other forward-looking statements regarding future events for the future financial performance of the company. We must caution you that such statements are only current expectations, and that actual events or results may differ materially. We refer you to documents that Harmonic files with the SEC, including our most recent 10-Q report and the forward-looking statement section of today's earnings press release. These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections or 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 earnings press release, which we have posted on our website and filed with the SEC on our Form 8-K. We will also discuss historical, financial and other statistical information regarding our business and operations. Some of this information is included in the press release and the remainder of the information will be available in a recorded version of this call on our website. With that, let me turn the call to over to Patrick.

Well, thanks, Carolyn, and thank you everyone, for joining us. Turning now to our Slide 3. Today we reported our results for the third quarter of 2013, which reflect continued solid execution and important progress on our strategic agenda. Revenue was $122.9 million, up 2% year-over-year and 5% sequentially and our strongest revenue quarter since 2011, after excluding our HFC Access business, which we divested earlier this year. Business from our international customers contributed 56% or approximately $69 million, reflecting continued international market strengths and domestically some recovery in our cable business. Broadcast and media customers represented a record 41% of revenue this quarter, while cable customers represented 39% and satellite direct-to-home and telco customers contributed 20% of revenue. Our third quarter bookings of $115.9 million were up 4% year-over-year. Our book-to-bill for the quarter was slightly below 1. The third quarter has been and was again our seasonally lowest service renewal quarter, and we expect to see service bookings rebound in the fourth quarter. Nonetheless, year-to-date book-to-bill remains greater than 1 and our backlog and deferred revenues stands at a healthy $123.6 million. Gross margins for the quarter were 51%, in line with guidance. This reflects a mixture of continued higher margin new business and a particularly low-margin multi-million dollar long-term project that was recognized during the quarter. Non-GAAP earnings were $0.07 per share and cash from operations were $16.1 million, as we kept tight focus on both operating expense and cash management. Carolyn, will provide additional details on these results in just a few minutes. Turning now to our Slide 4, I'll provide a little bit more color on the quarter revenue. Driving our year-over-year and quarter-over-quarter revenue growth was our business with global broadcast and media customers, where we saw a record revenue of just over $50…

Thank you, Patrick. Let's move to Slide 10. As Patrick mentioned, we completed the sale of the Access HFC business on March 5. Accordingly, we have shown that business in discontinued operation section of our P&L for all the periods presented. Our net revenue for the third quarter was $122.9 million compared to a $117.1 million for the second quarter of 2013 and $120.4 million for the third quarter of 2012. Our bookings were $115.9 million, up 4% compared to the same quarter of last year and our year-to-date book-to-bill ratio was 1.03. I want to remind you that Q3 is our seasonally lowest SLA renewal quarter, which adversely affects our book-to-bill ratio this quarter. Backlog and deferred revenue was $123.6 million at the end of Q3 compared to $132.5 million at the end of Q2. Our non-GAAP gross margin was 50.8% this quarter, a decrease from 54.1% in the previous quarter, but an increase from 50.3% in the third quarter of 2012. The decrease in gross margin from the previous quarter is principally due to the large relatively low gross margin project that was recognized this quarter, as well as a product mix shift with an increased proportion of total revenue coming from edge, which was up $7.7 million from Q2. Non-GAAP operating expenses for this quarter were $53.7 million, down from $56.1 million in the second quarter of 2013 and up slightly from $52.9 million in the third quarter of 2012. Operating expenses returned to more normal level, as the new product introduction cost and legal expenses we experienced in Q2 were not incurred this quarter. Additionally, our focus on operational efficiency post our access divestiture has helped us reduce operating expenses. Our headcount was 1,063, slightly down from 1,078 at the end of the previous quarter and…

Thanks, Carolyn. So let me simply summarize by saying that during the third quarter, we delivered solid results and made important progress advancing our strategy to accelerate growth. I think it's clear that this progress reflects our focused execution as well as our customers' confidence in Harmonic and in our ability to continue to deliver industry-leading innovation and support in business partnership. As Carolyn just spoke to 2014, as I look ahead to it next year, I want to tell you that we will continue to execute on our growth strategy and we expect to expand our market share and global customer base, while also investing and innovating to capitalize on the coming waves of cable edge and video infrastructure technology transitions. We are consequently well-positioned and committed to drive top and bottomline growth next year and enhance value for our customers and for our shareholders. And with that, we'll open the call up to questions.

and:

(Operator Instructions) Our first question is Tim Quillin with Stephens.

Carolyn, in terms of the outlook for 2014, I just want to make sure I understand what you're saying. I think what I heard was that you expect to grow revenue, at least to some extent. You expect to improve gross margins and you expect to improve operating margins. And I guess if you can tell me if that's the correct takeaway. And then the follow-on, especially in terms of the operating expenses, do you see any opportunities to do more specific cuts or would you just expect to get leverage on the current base of operating expenses as you grow revenue?

So I'll start by saying, yes. I think you summarized my comments correctly. And I think as we go forward, look we're constantly trying to optimize the mix of spending, but I think for general modeling purposes, I think the level of spending in Q3 and the guidance of Q4 is likely to range that you should think about, and that the margins improvement will come from both gross margin improvement and leverage on the revenue for the OpEx staying in this range.

And then, I just had a couple of questions after spending a day at Cable-Tec or I would like to get your thoughts, I guess on a couple of things that I saw. I guess number one is that it seemed like there is about 100 vendors of multiscreen transcoding. I think some of them are realizing that it's not a standalone market and they are starting to come up market into your area. I don't know how successful they will be. But I would be interested to get your feedback on that. And then, the second thing is on CCAP. My read is that it's moving relatively quickly, and Time Warner made an announcement around CCAP, and I'm just wondering if you think that there is a disadvantage to Harmonic if cable providers move quickly in the sense that you provide kind of an evolutionary approach that might work best if you have a relatively slow CCAP rollout.

Sure. Tim, as you know I was down there in Atlanta as well. On the first question regarding multiscreen space, we'd absolutely agree it's very crowded. That's one of the reasons why I acknowledged just a couple of moments ago that it's somewhat confusing the follow-up. That being said, we're very pleased with this Frost & Sullivan work because it shows that in the transcoding piece for small screens, Harmonic has managed to be number one in this space. And of course, we're already well known as number one in the high-end of space, if you will. So as the market moves forward and as this high-end world increasingly merges with, for lack of a better term, the low world or small screen world that certainly plays to our strength. And on a different dimension, you are absolutely right, customers are more and more looking for end-to-end system solutions. Several of the deals that I highlighted just a moment ago, and that we won during the quarter involve not only our transcoding and our encoding, but our storage, our packaging, our origin server and in many cases our professional services. And the ability to put together that kind of bundle, particularly for overseas customers, who are kind of just saying, hey, come and help me get this done, help me stand up the service, it really plays to our advantages. And I think, it allows us to leverage our scale, our end-to-end technology and capability. So we like the way we're positioned competitively and we like the way the market is evolving. Regarding CCAP, it's in some ways perhaps, similarly a quickly moving and evolving space. From our perspective, frankly there isn't a 100% CCAP compatible product that's out there. I would agree with you that the market is moving quickly in terms of realizing that the cable plant is evolving towards an all-IP flexible infrastructure that will unify both video, as well as high speed data, we think we're as well positioned as anyone from a mid-to-long-term perspective to move into that market and to take share. We're not a participant in today's two-way CMTS market, and so from that perspective, it's all upside. There are certainly a lot of competitive announcements out there. From our perspective, these are really announcements about more or less today's CMTS technology. And we think that real CCAP, what it implies in terms of turning the whole plant into an all-IP infrastructure is really yet to come. And we think we're positioned to be there as quickly as anybody else.

Our next question is, James Kisner with Jefferies.

I guess the first question was just a clarification more than anything on else. On the NSG, you said you booked your first multimillion dollar order for the NSG next generation product. Did those hit in this quarter or are those in backlog?

The bookings were during the quarter, we didn't take revenue on those booking, James.

And is it all just VOD capacity or is there anything changing from an application standpoint that really drove that strong quarter-over-quarter cable edge results.

Our cable edge downstream business is historically a mix of different applications and that mix has evolved and changed overtime. It's not all VOD there is a fair amount of modular CMTS that continues to be a key component of that. And although, arguably a variant of VOD, we see increasing proliferation of catch-up TV or cloud DVR kind of functionality, different flavors or permutations of a on-demand video experience. So traditional VOD, these new kinds of services that I just spoke to, video services as well as modular CMTS are the prime components of the edge downstream business over the past quarter or two.

I'm not sure I got the answer to my question there. I guess I'm just wondering sequentially, big pop you didn't really see a big mix in chip and applications.

No, we didn't see any real mix change. This was just, the overall tide was raising and it wasn't specifically in any one of those application areas, it was overall, James.

So here's sort of a longer, I guess medium-term-ish kind of question around video processing. You've had a pretty impressive run here with over-the-top-end broadcasters with video processing, and even just backing out that it looks like you had a pretty strong services quarter with that group, if I am doing my math right, this last quarter, you had a reasonably good video processing quarter still with them. And I'm just wondering, do you have any sense of runway for that business? I mean could we continue to see strong video processing, broadcast and media, and other of that group or is this inherently a very lumpy business? I am just kind of wondering between now and HEVC, do you have enough revenues coming in from that group to kind of maintain the video processing levels where they are? I am just trying to figure out what happens between now and when HEVC kind of gets momentum more towards the end of next year?

There is two parts, two aspects, to the answer to that. First specifically, with broadcast and media we see a lot of runway. And frankly, the biggest reason for that is market share and market penetration. There are thousands of broadcast and media companies around the planet, and particularly outside of the U.S., many of their infrastructures are very immature. We estimate that HD broadcast and media facilities, for instance less than 50% outside of the U.S. have actually been even upgraded the HD. So combination of market share gains and the increasing and continuing evolution of the infrastructure of these players, it makes us feel continuing good about this space. And the market shares gains statement, it also holds true for the U.S. We highlighted Fox here. Fox is not a legacy account, so we called it out as a new customer, because it was a competitive win, an account that has historically been held by a key a competitor. So we see plenty of runway in broadcast and media for our video processing products. And we continue to be quite excited about that. Now, the second piece I'd like to highlight is that the runway between now and HEVC isn't only about that. I highlighted in my comments that, although perhaps not predicted, our R&D has been making some quite remarkable progress on MPEG-2 and MPEG-4 compression. And this work has really captured the imagination of a number of our large service provider customers. And consequently we're in a number of pretty interesting conversations about work to upgrade existing MPEG-2 and MPEG-4 infrastructure between now and HEVC. And of course that has a particular interest for our service providers, because they'd like to milk as much as they can the legacy installed set-top box infrastructure and as you know there is a lot of MPEG-4 and MPEG-2 boxes out there. So if we can come along and provide a significant bandwidth efficiency on those legacy services, it's quite compelling and quite interesting to our customers. So that's the second plank of why we see a good runway for our video processing business even before HEVC or Ultra-HD really hit full force.

So just a quick follow-up, Patrick. Just on that last point, are there any particular products that you would point to in your portfolio that are new for MPEG-2 and MPEG-4 either in the past or coming that's sort of are catalyzing that upgrade?

Its algorithmic work that in some cases will show up on legacy platforms in the form of a software or license upgrade sale and some of that may show up as new platforms. And as I mentioned earlier, although we're having detailed conversations with some of our largest customers, we've not publicly announced our productization plans of this new innovative work.

Our next question is Simon Leopold with Raymond James.

A couple of things I wanted to go into a little bit further. On the international business, in the prepared remarks you mentioned both Asia-Pacific and Europe or EMEA are showing improvement. Can you give us a little bit more color as to the dynamics there? In particular, one of the things I've been wondering is whether or not the acquisition of Kabel Deutschland by Vodafone has affected the environment by spurring other operators to think about investment. And what your sense is, of the dynamics of each of those markets, Asia-Pacific and EMEA?

They're both pretty broad region, Simon, as you know. There is a Western Europe dynamic I would say, which is that video service providers like Kabel Deutschland are doing quite well, but our Europe region, more formerly as Europe, Middle-East and Africa and it expands all the way to a pretty healthy African business. And good success in the emerging markets, part of that as well Russia, the Middle-East, Eastern Europe. So there we see, in the emerging markets -- let me back up. In the developed part, we see healthy competitive dynamics, very strong players. Look what's happening in the U.K. right now, SKY and Virgin and Liberty coming in et cetera. I mentioned British Telecom getting very aggressive with sport content, so we see a heavy level of competition in Western Europe and pretty good results continuing to come from the pay-TV operators. At the same time, in the emerging markets part of that Europe, Middle-East and Africa region, we see a lot of the trends we have talked about previously, which is new middle-class, new broadcast services, new media companies coming up. And that also characterizes a lot of what we see in the emerging markets, part of Asia as well. It's a little difficult to generalize what's happening in Asia. The dynamic in Southeast Asia is different than the dynamic in Japan, which is different still from the dynamic in Mainland China, but more broadly, the emerging dynamic, market dynamic of more middle class, more TV screens, a move towards digitized content, it's happening across all of these markets.

And then, I wanted to talk a little bit about your expectations for product mix, as well as the implications on gross margin for the December quarter. Typically, the edge products are weaker sequentially and the more software-oriented products are better sequentially, but I'm surprised in terms of the commentary on gross margin, and just want to make sure I am putting these things together. And I guess part of it is you did explain with the new product, there is some pressure on gross margin, but I'd be surprised that a few million dollars of chassis could take 100 to 200 basis points off the gross margin. So I feel like maybe there is more moving parts here than I'm appreciating.

The majority of it is that, and it depends on, which is why there is a range on how much NSG Pro we get orders for and we ship, so there is a range there. It does have not an insignificant impact. And again, it's really the first batch of unit, after that it drives back up to more typical edge margins for us, but these first units just come at a much lower margin because we're ramping up our cost optimization. Beyond that, there is no big mix shift going in there. We certainly don't have a lot of software baked in, an unusual amount of software baked in and that I would say an average mix quarter.

But how about the production and playout products? So it's typically, what we generally would think they'd be a little bit stronger in the fourth quarter. That seems like a reasonable assumption or not?

I don't think there is a seasonality to them in particular.

Our next question is Mark Sue with RBC Capital Markets.

Recognizing the razor and razor blade model, I'm just trying to get a sense of the density. It seems these products are initially going out very lightly configured. Does that say anything about the pace of the rollout by the cable operators? Maybe if you could get a sense of how that might ramp, that would be helpful?

It's a correct observation, Mark. These downstream products uniquely in the market -- actually the hardware, it's not just the chassis, the downstream hardware, it supports the full spectrum. And to the best of our knowledge, there isn't anything close like that. And while that's the ultimate vision of the operators, the amount of IP traffic is a far cry today of the full spectrum. So with this move we're actually putting out a substantially larger amount of capacity than its being used today. And so it cuts both ways. It's one of the reasons why we confidently state or sincerely state that we think that there is a real future proof aspect to this platform. The downside for us, if you will in the short-term is that we're putting out powerful hardware that can really be scaled to be the full enchilada or the whole spectrum, all-digital or all-IP. So we think it's the right strategic move and we think it's going to pay dividends down the road.

Just on that, is there any specific product enhancements that need to be still finished? I'm recognizing that downstream and the upstream component of that. When is that all complete for your customers?

The downstream is ready to go. That's what's been sold and deployed. We're still working on the upstream or two-way capability. I mentioned in my prepared remarks that we are already in one significant customers' lab doing testing. We have not given a firm date for the release of that. What I would say is, is we don't expect significant two-way revenue in 2014, but we expect to make a lot of progress deploying these platforms in a very dense, a very attractive way from a downstream perspective over the course of the year. And of course, those deployments take on real strategic importance for us. And it's 2015, when we expect the other two-way capability to really start to impact us positively, financially, in a significant way.

Our next question is Paul McWilliams with Next Inning Tech.

So in Q3, there was no material CCAP rev?

Correct.

And on the HEVC encoders, you expect that to kick in the second half of '14?

We haven't said it exactly. We expect there certainly to be demand. I think that we could see opportunities before that, Paul. But we're making good progress with the product. And we have several customers discussing that technology. Although, some of the more recent activity that we've been driving around MPEG-2 and MPEG-4 are stealing a little bit of the thunder there. But we're waiting to see how that shakes out. I do want to emphasize that it's really a demand issue. We've already started shipping the file-based HEVC product and that we're just now beginning to deliver the live-based or make available for delivery to live-based HEVC product. So the technology is there and we're waiting and looking for a ramp around that.

How come the pre-pay to your EMS provider?

Its part of a contract negotiation that allows us to get optimized pricing.

Good deal, when you have the cash, that's a good way to use it.

Absolutely. We get a better return on that than I get in the bank.

You mentioned in your presentation that the CCAP market at least according to Infonetics' around $2 billion. What is their value on your traditional edgeQAM market that you serve?

It's in the neighborhood, something less than $0.5 billion, maybe $400 million-ish.

That's what I had, but I wanted to get a correlating figure there. Now, Frost & Sullivan, when they came out on the transcoder piece today that I read, they estimated your share in 2012 at about 9% or about $12.5 million and project your share for this year at 10% or about $16 million. Do those dollar figures correlate well with what your expectations and your experience was last year?

Let me say it's the rough ballpark. For us certainly the market is more interesting than that. But it's also true that we sell much more than just a specific transcoders that were measured in that study. So I think it's probably the rough ballpark for that specific piece of the solution. I think it goes to the fact of how fragmented the space is. But for us the leadership there highlights that that's a good wedge or stake in the ground for the broader solutions that we're driving.

And I would think that you're positioning in the broader market is something you can leverage and continue to increase market share. One quick housekeeping question. For Q4 on other income and your fully diluted share count, could you give me estimates for those, Carolyn?

Other income, our target is always to be close to neutral on that. And a little bit depends on what happens with currencies. So I would shoot for neutral. And on the share count, roughly right around the 100 million.

And our next question is a follow-up from Tim Quillin with Stephens.

I'm wondering if you could quantify the impact on gross margins from the lower margin project that you discussed. And then, if you could just describe the nature of that project?

Sure. Patrick, do you want to take the nature and I'll take the margin.

Sure. It was a large international deal with a key international broadcast and media company. It was a competitive account, and we deemed it at the time strategically advantageous to move into that account. And it was business that was actually closed some time ago, several periods ago. That means it was booked, but it was a project and a project we finally just completed and recognized in this past quarter.

That's right. And without being specific, I'll say that it had up to a couple margin points impact.

And then kind of following-on with some questions about the cable edge business, but you did have a pretty big sequential decline in last year's fourth quarter. Given that you're shipping NSG Pro, would you expect a less significant decline or maybe even flat revenue in cable edge or what should we be thinking about there?

The overall driver is really the demand. And in this industry, our largest customers really march to their own drummer. And I don't think that there's a particularly seasonality from a year-over-year perspective. It really depends, Tim, on where they are in their own cycles. That being said, there has been some competitive shakeout that's happened in the market. And we think that our strategic and product position is with the Pro platform and several competitive platforms having been canceled or abandoned, we think we're stronger than we've ever been. So we expect somewhat more demand in the edge space. And we think competitively, we're somewhat stronger than we've been before. So we see good opportunity there.

Is there a shakeout in vendors, potential vendors for CCAP now? Is it down to four instead of five?

Well, I am not sure about everybody who is going after this space. I mean, clearly Motorola having become part of ARRIS, is out of the business and they were broadly considered the number three in the CMPS market. The CCAP space is in fact a new space and a different space, and different companies including the traditional CMTS guys and us are driving in it from different directions. So I want to emphasize that it's a new space. And in fact, there could be another companies going after it. We continue to like our positioning though, and I think our somewhat unique advantages of leveraging our QAM, our deployed cable background, as well as video expertise.

And just last question on production and playout, it looks like it's headed for the second year of revenue declines. And I'm wondering what that market looks like? Is it a declining market or when and why would you see a change to topline growth in that business?

Well, Tim, the first half of the year was actually up for us year-over-year. What we had was a particularly weak third quarter and we don't yet read that much into it. We see demand out there and certainly that business has been key to us in terms of opening the door to the video processing sales we've seen with broadcasters. It does seem a little bit that the broadcast and media agenda has shifted slightly to some other video projects that are video processing products serve. I talked quite a bit about the over-the-top initiatives and wins with those guys. We see decent opportunity going forward for the production and playout space. And I would suggest that as we do, not reading too much into a weaker Q3, which we think was a little bit more a happenstance around just lack of overall activity.

We have no further questions at this time. I would like to hand it back to Patrick Harshman for final remarks.

Well, I would like to thank everyone again for joining the call. And I want to let you know that we really appreciate your support. We're looking forward to continuing the focused execution we demonstrated in the third quarter and to further build shareholder value. And we look forward to speaking with everyone again soon. Thank you.

Thank you, ladies and gentlemen. This concludes the Q3 2013 Harmonic earnings conference call. Thank you all for participating. You may now disconnect.