Welcome to the preliminary earnings conference call. My name is Dakiba and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now turn the call over to Blair King. Blair King, you may begin.

Hello, everybody. With us in our headquarters today in San Jose are Patrick Harshman, our CEO; and Carolyn Aver, our CFO. I'd like to point out that in addition to the audio portion of this call, we have provided slides, which you will see by going to the Investor Relations page on harmonicinc.com and clicking on Quarter 2014 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 and 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 report. In 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. That these items, together with corresponding GAAP numbers and a reconciliation to GAAP, are considered in today's preliminary results 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 in the recorded version of this call on our website. And now with that, I'll turn the call over to you, Patrick.

Well, thanks, Blair, and thank you, everyone, for joining us today, particularly on short notice. Given the softer than expected preliminary second quarter results and outlook for the third quarter, we thought it important to share this information with you as soon as possible. At the same time, we also believe it was appropriate to take enough time to really understand and be able to share with you the dynamics impacting our business, and that's our goal here on this call. As we'll explain, we believe the softness impacting our video business is primarily a precursor to the market move to the new video technologies we've targeted for growth. That is to move to virtualized infrastructure, where our dear [ph] pipeline has grown much faster than expected. The adoption of the new HEVC compression standard and the upgrade of broadcast centers to support Ultra HD. A secondary source of challenge during the quarter was unforeseen weakness in the EMEA. And we'll discuss both of these dynamics in some detail. With that, though, let's first turn to Slide 3 and take a look at our preliminary results for the quarter, which really reflect the disappointing setback to our near-term financial growth agenda. Revenue is now expected within the range of $108 million to $110 million. And business in the Americas continues to outpace last year's results, and results at Asia Pacific are largely in line with expectations. EMEA fell short of expectations with several large projects deferred in the final weeks of the quarter. In terms of customer verticals, business from our service provider customers were solid, reflecting a very strong quarter in our Cable Edge business, while business from broadcasting media customers was softer than we anticipated. Our second quarter bookings were approximately $113.4 million, down about 10% year-over-year, while…

Thank you, Patrick. Let's move to Slide 7. Our preliminary results indicate revenue will be in the range of $108 million to $110 million, falling below our expectations for the quarter. As Patrick said, the weakness reflects the combination of overall softness in our video business, as customers evaluate our new VOS encoding platform across all regions and more specific softness in our EMEA business. The bright spot in the quarter was the continued strength in our Edge business delivering their best quarter. Our only 10%-plus customer for the second quarter of 2014 was Comcast. We anticipate our book-to-bill ratio in the quarter to be slightly above 1. Backlog and deferred revenue of approximately $132 million is expected to be up sequentially, and virtually flat year-over-year. The sequential improvement is principally due to an increase in SOA renewals in our support business. Our gross margin for the second quarter is expected to be within a range of 49% to 51%, also below expectations at the end of the quarter. The decrease in gross margin this quarter is largely due to a greater portion of our revenues coming from our edge product line in general, including an increase in the shipment of our NSG Pro products. This increase was primarily due to stronger-than-expected demand from our North America cable customers. As described in previous calls, our edge -- our Cable Edge products carry below corporate average gross margins and this is particularly true in the early innings of a product launch, where we typically improve margins as we ramp to scale. Notably, with early NSG Pro production costs largely absorbed in the quarter, the product gross margin did begin to improve as expected. However, when paired with softer-than-expected video product revenues, a quarter with relatively low software and firmware revenue, and…

Well, thanks, Carolyn. In summary, our preliminary second quarter results are not what we had anticipated, even just a few weeks ago in mid-June. Although we're disappointed with the outcome of the quarter, we're no less optimistic about what lies ahead. Harmonic is delivering industry-leading innovation at the right time, evidenced by active customer engagements and a growing pipeline of new technology opportunities. While the pace of our customers' transition to next-generation video processing technology has slowed our near-term financial growth agenda, we see ourselves exiting this lull as better positioned than we've ever been to deliver on our promised and targeted operating goals. Our strategy remains sound. Our fundamentals are positive. You'll see us continue an aggressive stock repurchase program and we built leverage into our business to drive strong earnings growth and committed to making all of this happen. And with that, we'll wrap up our prepared remarks here and open it up to questions.

[Operator Instructions] Our first question is going to come from Mark Sue of RBC Capital Markets.

This is Amit in behalf of Mark Sue. I think you mentioned the challenges in video delivery to persist in the near term, just wanted to check how long do you expect the planning stages to continue? And when do you expect the video delivery sort of solutions business demand and revenue sort of to return?

It's a transition process that play out differently for different customers. As I highlighted, we expect some of our most forward-looking customers -- they're quite far along and we expect to see our first sales and deployments in the current quarter, which is quite exciting. I would say the center of gravity, though, of the customers are probably still 3, 6, 9 months out. We see the U.S. operators, for example, being more further along than those overseas. So that's why we've given a softer guidance for the third quarter, but we're still not calling the fourth quarter. And it's certainly as an optimistic scenario that says that things really start to move. And we're doing everything we can from the execution perspective to be ready.

Okay. And just to confirm the challenges in EMEA related, limited only to delivery solutions or were they more broad based in both businesses?

No, that's broad and quite distinct from any particular technology. We did see a trend and particularly in some emerging markets of the EMEA that we had not anticipated of customers delaying deals. And to be clear, we feel very strong competitively. We feel that these deals are going to us, but for budget or other reasons, we see customers calling a delay. And that, as we said, has led to some caution, but that's really unrelated to any particular technology. Or put differently, we saw that across different -- a couple of different customer verticals and technology product areas.

Okay. So and just finally, could you provide some granular details on the Cable Edge, again, you mentioned in terms of maybe customers or regions and anywhere, just any granular details there, please?

Our Cable Edge product, as you know, going to just cable operators, and I'd say the U.S. is certainly leading the way. And that's where we see really a little bit of a renaissance of video-on-demand and we see strong over-the-top video trends putting a lot of pressure, creating a lot of opportunity for expanding bandwidth in the access network. That being said, we're making good progress with cable operators right around the globe. And we saw some very important new wins overseas as well during the quarter. So that business -- we like the momentum worldwide. The U.S. leads the way by virtue of having the largest and the greatest preponderance of cable operators, but it's a worldwide momentum that we're seeing there. And if I could go back to your first question, I also want to emphasize that while I -- on the virtualized video, well, I said that the U.S. operator scene is somewhat further along. The very strong pipeline that I mentioned is actually populated by customers from all regions. We see some of our key Tier 1 customers in Europe, Asia Pacific, as well as the Americas occupying prominent places on this bigger-than-expected pipeline for virtualized video solutions. So that's also a very much of a global phenomena.

And our next question is going to come from Simon Leopold of Raymond James.

This is Victor Chiu in for Simon Leopold. Gross margin, you guys came down a bit also. Is this a reflection of the slowing volume? Or is it driven more by the transition to virtualized solutions. Can you just give us more color around the gross margin?

Yes, it was not my intent to take gross margin guidance down from a long-term perspective. All along, we've said we targeted gross margin to be 53% for the year, with 53% in Q1. Obviously, down because the mix in Q2. Even with a more heavily edge-shifted mix in Q3, we're still projecting 52% to 53%. It is possible depending on the amount of rebound in video that we don't get all the way to 53% for the year. But there's nothing fundamental underlying a change in our outlook to gross margin by the individual businesses and expect that we'll continue to drive gross margin up. In this case, it's really a mix shift because of the heavy amount of edge as the percentage of revenue.

So the transition to virtualized products doesn't have any impact, I mean, it would [indiscernible]...

That's a positive impact. Yes, that's a positive impact.

Okay. Got it. Let me see, I guess, I'm not sure if I missed this earlier, but can you provide us, I guess, an updated view on your expectations or growth for the full year, if mid-single digit isn't in the books for you guys. Can you give us kind of an updated view of what we should we be expecting, I guess?

Well, I think that at this point, what we've done is we've given you a Q3 guide number and we've said we expect Q4 to be up sequentially. I think 2 weeks into the quarter and understanding the miss, it's too soon to give any more of a number for the year other than to say we've given you a Q3 guidance range. We expect Q4 to be up sequentially. Patrick talked about the reasons why we believe both businesses are intact from a growth perspective. But I don't think we're quite ready to talk about where the year will be exactly.

Okay. And just really quick, are you seeing any changes in the competitive landscape in the encoder business. Is that having any impact on the softness?

No significant changes. I think that this technology transition, if any does, it creates opportunities and dynamics but no real difference. I will remind you, going back to our discussion at the Analyst Day, that even in historically encoding base technology where most market research calls us out as a leader, our share is, in general, below 30%. So there are other competitors out there. We compete generally, favorably, that being said, there is a market share opportunity, and that's -- although we talked largely here about are technology trends. We're very focused on also strengthening our go-to-market execution in capturing more market share. And if you're 30% owner of a market, that means you don't participate or you don't win 2 out of every 3 deals that goes down. So there are a lot of competitors, there's a lot of opportunity there and we're very focused on. And frankly, with our new VOS platform, it's not just that it's virtualized, it's a highlighted fantastic new compression capability, et cetera. We've started winning shoot-outs with that platform. We believe that our competitive positioning is going to be further strengthened relative to our traditional as well as new competitors in the space.

There are no additional questions at this time. And I'd like to turn it back over to you, Patrick.

Well, thank you very much again, everyone, for joining us particularly here on short notice. I want to emphasize on one hand our disappointment with the results of the quarter and our strong conviction to do everything we can from an internal execution point of view to press the advantages we have and get back on the right track. That being said, the fundamentals of the business are very much in place. Our technology vision, our strategy and the opportunity in front of us is as real and in some ways more real than we've previously understood. So it's no way around it. We're going to see some turbulence over the next period or 2, as a lot of these transitions play out. We're determined to lead. We're determined to execute well and take advantage of these transitions. And on the other side, as often happens in this tech space, I think there's some very good possibilities. We'll see a more software-centric business. We see a more flexible business and we see a business that really goes to the heart of the areas where our customers want to invest. On one hand, the CCAP, next-generation infrastructure for Cable Edge and on the other hand, flexible, virtualized high definition, more compressed video services for all of our customers, broadcast, media, service provider. We're going to continue to do everything we can to take advantage of these opportunities to drive improved short-term as well as long-term performance. We appreciate your support. And we look forward to keeping you updated on our progress. Thank you very much.

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