Hello and welcome to the Fourth Quarter and Full Year 2014 Harmonic Earnings Conference Call. My name is Erik. I'll be your operator for today's call. [Operator Instructions] . Please note this conference is being recorded. I'll now turn the call over to Blair King. Mr. King, you may begin.

Thank you, Erik. Hello, everybody. With me in our headquarters in San Jose, California, is Patrick Harshman, our CEO; Carolyn Aver, our CFO; 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 which you can see by going to the Investor Relations page, harmonicinc.com, and clicking on the Fourth Quarter and Full Year 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 or the future financial performance of the company. We must caution you that such statements are only current expectations and actual events or results may differ materially. We refer you to documents that Harmonic files with the SEC, including our most recent 10-Q and 10-K 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. 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. The remainder of the information will be available in the recorded version of this call on our website. With that, let me turn it over to you, Patrick.

Thanks, Blair, and thanks, everyone, for joining us today. Turning now to our Slide 3. We reported our results for the fourth quarter of 2014. Results reflect good progress on our strategic and financial agenda, but also continuation of the market turbulence we've discussed on recent calls. Revenue in the quarter was $108 million, essentially flat from the third quarter. Video business improved modestly, up about $5 million sequentially. While as expected, our cable business declined approximately $6 million, following 3 very strong quarters, while services revenue grew approximately $1 million from the third quarter. Business from our broadcast & media customers represented 32% of revenue, while service providers accounted for 68% of revenue, underpinned by a rebound in service provider demand for video products. From a regional perspective, the Americas drove our business in the quarter, contributing 56% of revenue, while EMEA and the Asia Pacific region accounted for 25% and 19% respectively. The financial highlight of the quarter were strong bookings of $121 million, up an encouraging 24% sequentially and 7% year-on-year. Driven again by the Americas but also by a modest rebound in the EMEA. Correspondingly, we had a solid book-to-bill ratio of 1.1. We exit the quarter with materially increased product and services backlog. Gross margin in the quarter was 54.1%, reflecting both our product strategy and our continuing strong competitive position in the market. Earnings were $0.06 a share. And cash from operations was approximately $20 million. So let's turn to Slide 4 for a broader view of 2014. Looking back on the year, 2014 was characterized by both significant accomplishments and disappointments, and our revenue of $434 million, 6% below last year's revenue is certainly a disappointment for us. That being said, the performance of our Cable Edge business was a highlight, with revenue…

Thank you, Patrick. Let's move to Slide 10. Our net revenue for the fourth quarter was $107.9 million, above the high end of our guidance range. Net revenue was down from $120.2 million for the fourth quarter of 2013 and roughly flat with $108.1 million for the third quarter this year. Our video business revenue was up $5.3 million sequentially led by improved demand for our video processing product. This was offset by an expected decrease in our Cable Edge business of roughly $6 million as cable operators digested previously purchased network capacity. Services were up modestly to $24.1 million. Our bookings for the fourth quarter were $121.1 million, up 7% from a year ago, and up 24% sequentially. As Patrick mentioned, this represents a solid bounce back from the low Q3 bookings. Our book-to-bill ratio was 1.1:1 for the fourth quarter, and 1.06:1 for the full year. Backlog and deferred revenue was $128.7 million at the end of the fourth quarter, up 10% sequentially, and up 13% on a year-over-year basis. We're building good momentum as we enter the new year. Gross margin was 54.1% in the quarter, also above the high end of our guidance, and an increase of 50 basis points from the third quarter of this year, down just slightly from 54.3% in the fourth quarter of last year. The sequential increase in gross margin is principally due to a greater portion of our revenues coming from our video products business. Notably, for the full year, gross margin was 52.8%, up 20 basis points from 2013, despite a strong mix shift towards our lower margin Cable Edge products during the year. This improvement principally reflects our continued strategic focus on innovative products and solutions to deliver differentiated value to our customers and the significant operational efficiencies…

Thanks, Carolyn. In summary, 2014 was a year of both significant progress on transformation initiatives and significant marketplace challenges. In our video business, we delivered a powerful message to the market with the release of our VOS platform envision, with video compression technology advances. We finished the year with a string of high-profile strategic wins. So, the market will pause in anticipation of 4K Ultra HD, and to evaluate a transition to virtualized video processing, we pressed forward investing and developing powerful new intellectual property, products, customer relationships and strategic partnerships. Similarly, in our Cable Edge business, we drove the continued deployment of our NSG Pro platform. We accelerated the release of and received orders for our first DOCSIS CMTS, our NSG Exo distributed CCAP product, and we refocused our midterm CCAP strategy on an even bigger opportunity associated with DOCSIS 3.1. Nonetheless, 2014 was also characterized by challenging market conditions in several international geographies, and we see some of these challenges spilling into 2015. While we can't control the macroeconomic environment around this, we can drive focused innovations, productive customer engagements and optimize cost structure. That's exactly what we've done and will continue to do. We're carrying more backlog in 2015 than we did a year ago and internally, we're laser focused on driving significant earnings growth, cash generation in 2015 and beyond. So with that, let me say thank you for your continued interest and support. And let's open the call for questions.

[Operator Instructions] James Kisner is online with a question.

This is actually [indiscernible] for James Kisner. And we had a question about Title II legislation, and whether you see it affecting your customer spending in any way, if there's actually the discussion of that, and if it's actually enabled, how it may affect customer spending? How do you see that?

Well, I don't think we've got a unique view, here. I think we and most of the industry share the perspective that the Title II is the wrong way to go, and that it has the potential to negatively impact investment in the industry. That being said, we think there's a lot of consensus around that and we're optimistic that we won't see that come to fruition. We are waiting along with the rest of the industry to see how this progresses.

Okay. And regarding the pause -- the technology transition pause you were talking about the Ultra HD in 4K. So do you have any visibility into it how long it may go on? And do we see it improving in 2015, or customers accelerating their spending?

Certainly, around 4K Ultra HD. We are encouraged and see positive signs. And I think that the CES show was a great example or a great indication of building momentum in the industry. And so as I said, a couple of moments ago, we see an increasing rate of trials and tests and some early smaller scale deployments in the first half of the year. And although our guidance that Carolyn talked about doesn't contemplate yet a rapid ramp. We see an after ramp in the back half of the year as a significant upside. And we'll just have to be watching it closely over the next several months to see how it plays out. Peter, do you want to add anything?

Sure. this is Peter Alexander. So the other thing we started to see is pay-TV operators and broadcasters actually start to outline when they will begin persistent services, some as early as the second half of this year, many going into next year. So that's a more concrete sign that we'll see that transition starting to happen a little later this year.

Next question comes from Tim Quillin [ph].

I just want to dig in a little bit about the pickup in demand that you saw from service providers on the video side. Is that catch-up from relatively slow spend early in the year? Are you seeing encoding upgrades that might look like preparation for 4K? Or what exactly are the products that those service providers are buying and why?

Thanks for the question, Tim. There may be a little bit of catch-up in there and we did see some projects delayed out of the second and third quarter. But we also saw a growing trend towards just operators availing themselves of latest compression efficiencies. Even before our Ultra HD 4K, even pushing the envelope on really significantly enhanced compression in both MPEG-2 and ABC MPEG-4. And I guess, to your point, in preparation for pulling out more bandwidth for Ultra HD as well as just making more bandwidth for additional content, we saw both of those as being drivers of the investments and service providers in the fourth quarter.

Good. And then in terms of the Cable Edge business, you mentioned that you thought there'd be a greater mix of Cable Edge in the first quarter. What's the anticipated seasonality when you think about mid- to high-single digit growth there on the Cable Edge. You had maybe some pretty strong revenue in the front half of 2014, does the growth look a little bit more back-end weighted, at least year-over-year, this year?

You know, Tim, although it was a down -- slightly decreased revenue quarter, it was actually a pretty good order quarter for the Cable Edge. And that tells us that we'll have at least a reasonable beginning into the year in the Cable Edge space. And that being said, we're excited about the new Exo product and the 2-way CMTS win that I described there and that something that we expect to pick up steam over the course of the year. So I think about and I think you think about 2 kind of overlay dynamics. One, there is a certain cyclicality to the investment in the traditional downstream qualm. You see pretty good demand trends carrying forward. But that's overlaid with what we hope will be growing NSG Exo, CMTS revenue over the course of the year.

Okay. And then just one last question, I'll step back into the queue. But you mentioned development and putting some development into getting ready for DOCSIS 3.1, which hopefully will be late 2015, maybe 2016 is more realistic, but what's left to do right now in terms of preparation for you all?

Well, our big thrust up until now has been around DOCSIS 3.0, and that's the basis of the product that we announced that we received our first orders for in the first quarter. Not overly dramatic, 3.1 involves new silicon, and it's a fairly substantial, incremental, undeveloped program. So for that reason, we expect -- we don't expect much 3.1 revenue in the year. We think it's going to be mostly a development year and a customer evaluation, and trial and approval on the 3.1 side. And then from a revenue perspective, it's going to be 3.0 story in 2015.

And the next question comes from Brian Coyne.

I've got a couple for you there, Patrick and Peter, and then a follow up for Carolyn. First, I'm wondering if you guys could talk a little bit about the loss wins, especially in North America that you mentioned. I know it's hard to compare apples-to-apples, but I wonder if you would speak a little bit to perhaps order size and margins for these deals versus what you would might traditionally expect to sell on sort of a hardware, software solutions basis. And then second question along those lines, a little bit more on the Cable Edge side, I'm wondering if you can speak to your success and the traction on NSG Pro and Exo for DOCSIS applications. And sort of if you see it, your orders and the progress that you're making there really is reflecting sort of upgrade of existing footprints or do you feel like you're gaining share against other sort of an incumbents, perhaps more from the traditional CMTS side?

So Brian, this is Peter. Let me start with the question on VOS as opposed to VOS, and the nature of the deals we're seeing so far. So in many respects, the VOS wins so far have been very much like historical business in that the customers initially for adoption of wanted us to package the servers and do all the work in integrating them into the -- integrating VOS into the servers so that they end up in more like and that's transaction with us and they don't necessarily have to take on some of the skills around managing the servers to begin with. So very much the nature of the deals and the margins associated with them are quite similar to what we've seen historically. We don't believe that will be sustained over time. But that does actually help us drive adoption for those that aren't necessarily immediately wanting to go to a data center architecture.

That's great. And then progress on NSG for DOCSIS?

Yes, so Brian, the NSG Pro, the success to date that I mentioned and orders received over $45 million, that is all around downstream QAM applications, roughly evenly divided between traditional cable VOD and modular CMTS applications. And in both cases, we see good demand trends. If you've seen the new user interfaces, cable is finally joining or catching up with some of the Internet competitors. And I think it's clearly driving, it's more than I think. We're seeing good data. It's driving higher take rates of VOD. So we see just more traffic, more transaction that's driving more need for more downstream QAM bandwidth. And then analogous thing is happening on the high-speed data side, again, with over-the-top video really being the driver of more access bandwidth there. As I highlighted in my comments, one of the exciting things that happened over the quarter is, for the first time, we've seen not just in the lab, but actually in deployment. We're now seeing -- we've got a couple of customers who are using common NSG Pro platform to channel both modular CMTS traffic and traditional MPEG video. And this really is the convergence envisioned by the CCAP spec. So my perspective, we continue to take very significant steps forward. We're getting a broad footprint of the NSG Pro platform. And now, we have it being used in a downstream converged capacity. We demonstrated the cable show late last year working 2-way functionality in DOCSIS 3.0. I've articulated here our real focus on getting to 3.1. And we really think 3.1 is going to be the point of entry and the larger opportunity to convert this large, slightly populated base of NSG Pro platforms to 2-way DOCSIS 3.1 engines. In parallel with all of that, we've entered the distributed CCAP space and there, as I mentioned, we're very excited to have taken our first orders. And with the NSG Exo starting to get in the field, not only do we see an opportunity for incremental edge revenue, but we're really going to start turning our strides, our credibility, our experience deploying real DOCSIS systems. And so we're going to go in starting with our customers not only with fantastic technology and a fantastic roadmap, but with a services organization, a testing environment that has really been proved out in the context of deployed DOCSIS services. So certainly, in this case, Rome isn't -- hasn't painted and it will not be built in a day, but I hope you see that we're making steady, significant steps in terms of really being incredible player in this business and really poised for significant growth.

That's very helpful. Is there a significant ASP or margin differential between the Pro and the Exo?

No, not really.

Fully and fully deployed, I guess, formats?

It's still early days for the Exo. But no, our view right now is not materially.

Got it. And then just very quickly, for Carolyn, I know you've mentioned, you've a little bit more than $68 million still available under purchase authorization. With the share sort of 7-ish or something like that, relative to your average price over the last 37-and-change million shares being close to 620, does that change -- sort of your view on how aggressive you might want to be with the repurchase or how do you think about that?

Sure. I certainly don't think, it will be as aggressive as we've been in some of the prior quarters where we repurchased several million shares in a quarter, given up to some extent the stock price and our cash balances at this point. I think our goal is certainly to continue to repurchase. I think you could expect, we will probably do more of that at lower prices and somewhat less at higher prices, but with a goal that kind of averages out over the year. So we'll be active but certainly, I think, for the year at a lower rate than we were last year, and with some price sensitivity rolled into that.

And our next question comes from Simon Leopold.

This is Victor Chiu in for Simon. You highlighted the transition to software-based encoding solution for few quarters now. I think most of us agree that that's a necessary strategy to position yourself to capitalize on this trend. What are some of the impediments that are preventing this from happening more quickly, I guess. Basically, I'm asking kind of what are -- what is making carriers more resistant to the transition, and what is preventing them from transitioning more quickly than you'd like?

I wouldn't say, Victor,that it's resistant as much as it's just new. And so we've seen as we said elongated decision making cycles. Particularly, for live video, that it carries -- think about the Super Bowl coming up this weekend, that's carrying billions of dollars, and people want to make sure that the infrastructure they put in place is rock solid. And as you and I both know, sometimes from a personal computer experience, there's a concern about Intel or Windows, what we're doing is absolutely not Windows. But you can kind of understand, as people come to this technology afresh, they want to really understand it and make sure that it's up to the reliability standards of the industry. I want to show you that we're absolutely certain and in fact, the Tier 1 wins that we talked about in the fourth quarter is really a testament to the fact that leading operators are really coming around. So I would say, reliability and robustness relative to historic live television or broadcast industry technology is one question that's being addressed. Second was mentioned a moment ago by Peter, is really the whole question of the best way to deploy it. You buy that from us bundled on a server as an appliance or, in fact, you go even further and to -- to take it to more of a data center model, which can actually yield even greater operational efficiencies. But requires our customers to bring to forth a different set of skills, around virtualization, really IT skills, which historically, for many of our customers have not really been merged with the traditional television video management. So it's a new environment and it's just taking, I think, a little bit of time for everyone to understand it, figure it out, decide how to go forward. So there's comfort going forward. That being said, it's going well. I think everybody gets it intellectually. Most of our customers are reaping these benefits on the IT side of the house already. And as I mentioned, for us, it's not just a story of kind of same old, same old except from the software. Whereas part of this delivering dramatically improved video compression efficiencies, and some real dramatic innovations in terms of kind of horizontal functions collapse. They'll open up new avenues to service creation agility, et cetera. And that's, I think, also unlocking or stimulating a lot of creative thinking on the part of our customers. So from my perspective, it is a little slower but it's all good. And we see the wheels starting to turn a little bit faster here as we head into the beginning of 2015.

So I guess -- to what degree can we think about the growth, I guess, as replacement versus incremental opportunity for customers to see, opening the market to a new set of customers and having this as incremental growth I guess, rather than just kind of a replacement, I guess?

I would say existing media and broadcast and service provider customers -- I think, it's more than replacement. But I guess, at a high level it is replacement. And by bringing better technology to the market, we expect to gain better share. We don't think this technology in itself is going to drive our large customers to have more content to more channels but it is going to allow them to be more agile more quickly, hopefully more innovative and drive better business returns. That being said, there isn't a newer class of over-the-top streaming customers that we highlighted 1 important deal or 4K is streaming over-the-top, not a long-standing customer of ours. I would say these newer players are more inherently biased towards a data center kind of operational model, so this technology certainly positions us quite strongly with the -- I'd say the orientation of the mindset of new media players. And certainly new media players do represent an expansion of the market opportunity for us.

Just really quickly, I just wanted to get a little more color on your long-term outlook, you are forecasting single-digit growth roughly 2015, can you just maybe help us understand a little bit of the moving parts that contribute to the growth? I guess, which segments are you most optimistic about for 2015, which areas do you think could be a little more challenging?

Sure. We expect certainly te Cable Edge side of the business to continue to grow. And I think I said in my comments, mid to high-single digits. And then we expect right now the video business to grow low-single digits. I think the reality is, for both of those businesses, we have a view that they will grow faster than that, but we have overlaid over that the sort of macroeconomic conditions that we're seeing right now in Europe but with currency around the world. So we think the possibility for higher growth rates in both of those businesses are there. And for different reasons, we'll accelerate as we get through '15 and into '16 but we have a somewhat subdued view right now, given everything we're seeing from a macroeconomic perspective.

Does the cable operator consolidation have any impact on results? Is that something that might cause a pause for you guys perhaps in the near-term or is that not as relevant as your particular piece of the budget?

We've not seen any impact to date and -- including in Q4. Our current guidance does not contemplate any significant impact. It's certainly possible, though. Right now, we're not expecting that. I mean, the things we do by and large are responding to pressing needs of our cable customers. And so we -- at this point, we're not expecting any substantial or significant disruption.

We have no further questions. I'd like to turn it over to Patrick for closing remarks.

Okay, well, thank you, everybody, again, for joining us. I'd certainly like to close by again highlighting the positive momentum that we've established heading into this year. In fact, the key customers are telling me they want to do business with our company. We're strategically aligned with our customers, competitively advantaged with innovative new technologies, committed to driving strong earnings growth throughout the year. So thanks again everyone for being with us on the call, and we look forward to keeping you updated on our continuing progress. Good day.

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