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Harmonic Inc. (NASDAQ:HLIT)

Q4 2012 Earnings Call

January 29, 2013 5:00 pm ET

Executives

Patrick J. Harshman – President and Chief Executive Officer

Carolyn V. Aver – Chief Financial Officer, Secretary and Investor Relations

Analysts

Mark Sue – RBC Capital Markets

James M. Kisner – Jefferies & Co.

Simon Leopold – Raymond James

Greg Mesniaeff – Maxim Group

Chelsea Shi – UBS Investment Bank

Operator

Hello and welcome to the Q4 2012 Harmonic Earnings Conference Call. My name is Mysha, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note this conference is being recorded.

I will now turn the call over to Carolyn Aver, Chief Financial Officer.

Carolyn V. Aver

Thank you. Hello, everybody. With me in our headquarters 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 by clicking on the fourth 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 or the future financial performance of the company. We must caution you that such statements are only current expectation 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 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 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 over to Patrick.

Patrick J. Harshman

Well, thanks, Carolyn, and thank you everyone for joining us today. Turning now to our slide 3, today, we reported our results for the fourth quarter of 2012, which reflects solid strategic progress in several areas, but also continuing marketplace challenges.

Revenue was a $133.4 million. Business from our international customers contributed 62%, or approximately $82.7 million, our strongest ever international quarter. This international result was powered largely by new business and market share gains in Asia, Latin America, and other emerging markets, although, we also saw a stabilization of our European business.

This combined international strength offset a slowdown in domestic business during the quarter, particularly in edge and access demand from our domestic cable customers. As a result, cable customers represented 45% of revenue this quarter, the smallest cable contribution year-to-date.

Our broadcast and media customers represented 35% of revenue, the largest broadcast and media contribution year-to-date, and satellite direct-to-home and Telco customers contributed 20% of revenue. Our bookings results of $127.5 million largely reflected the same revenue pattern, sequentially stronger international demand offsetting weaker U.S. demand.

In particular, as anticipated, we saw no material budget flush which sometimes occurs during the fourth quarter. Despite the slowdown in fourth quarter demand, our total bookings for the year were up modestly versus 2011. We finished the year with a book-to-bill ratio of 1:1, with a backlog of $7 million larger than we entered the year with.

Turning to operating performance, the clear highlight of the quarter was our gross margin, which came in at 53% also a record high. Operating expenses were again carefully managed and non-GAAP earnings were $0.09 per share.

We also again had good cash performance increasing our cash balance by approximately $9.2 million after using a little over $8 million to buyback approximately 1.86 million shares. Carolyn will provide additional details on these operating results and our repurchase program in just a few minutes.

So let’s turn now to slide 4, where I’ll provide a little bit more color on the quarter, beginning with our software products and licenses, which underpinned our strong gross margin results.

In the Video Processing product category, we realized strong sales of software licenses that expand the functionality and capacity of previously sold and deployed multi-screen encoders and we also had strong sales of transcoding and workflow software for one particularly large Internet video service provider.

Similarly, in the edgeQAM area, also demand for new hardware was cyclically down. We had strong demand for licenses that unlock [cloud] capacity on already deployed hardware. But we do not expect to see the same software versus hardware mix of stand over the next couple of quarters. It’s very good to see the market responding positively to our growing software and capacity license capabilities, a positive indicator of our ability to drive longer-term margin expansion.

Another highlight of the quarter was continuing multi-screen and over-the-top momentum. Our new ProMedia Xpress transcoding appliance is being very well received. We have our first Tier 1 customer wins with this product.

This product is uniquely positioned in the market, because it provides both industry-leading speed and amazing video quality. We’re generally leveraging our full multi-screen solution portfolio with one important new projects in the broadcast and media market, the cable market, and the Telco market, expanding both developed and emerging markets.

I’m turning now to emerging markets more generally. We’re also very encouraged by the demand trends in our growing competitive and go-to-market strength in places like China, India, Latin America, and Southeast Asia.

Results from these markets were prime reason for the strength of our overall international business in the fourth quarter. We’re well positioned for the future in these markets, but we’re seeing good results in emerging markets across product lines. The tremendous growth of new and locally customized content in these markets, particularly strong demand for a Production and Playout products. In fact, due to the strong emerging market demand, the fourth quarter was the strongest of the year for our Production and Playout product category.

And finally, regarding the fourth quarter, I’m pleased to report that cable customer response to our new CCAP platform, an underlying innovative technology has been extremely positive.

Our development team continues to make great progress. Our first generation product is now being tested in the labs of five Tier 1 customers with very positive feedback so far. And consequently, we are increasingly confident in our ability to be a leading player in this exciting and large growth market.

So let’s now turn to slide 5, and take a step back and look at the whole of 2012. From a geographic perspective, we saw strong growth in Asia-Pacific, and the Caribbean and Latin America. We have good growth with U.S. broadcast and media customers.

And despite a slow fourth quarter, we had solid growth year with our U.S. cable customers. In each of these areas, we’ve benefited from new investment initiatives, as well as competitive market share gains. However, this growth was offset by markets where our revenue declined, specifically both our overall business in Europe and our U.S. Satellite and Telco business declined relative to 2011.

In neither theater do we believe we lost market share. Rather we believe we gained market share in what were very challenging market conditions where customer spending slowed considerably in response to both macroeconomic uncertainty, which was the dominant dynamic in Europe and business cycles with the early adopter satellite market in particular now looking ahead to the next major investment cycle.

When we compete with many good companies across all of these markets, we believe our unique strategic focus, innovation engine, and scale and video infrastructure provide us with a competitive edge that we’ve been successfully employing when up against both large Big Iron and small Hot Box competitors.

Evidence of our growing competitive strength and market share gains during the year is documented by Multimedia Research Group’s recently published IPTV Market Report. This is a well respected annual report that found Harmonic has now become the global market share leader in video headends for IPTV, and the only company in the report to move up in the rankings.

And I’d also like to highlight the Harmonic’s strong cash generation during the year. We generated approximately $71 million of cash from operations, despite the challenging market environment, with this cash and our confidence and our ability to continue to win in the marketplace and to continue to generate more cash. We announced mid-year an initial $25 million stock buyback program. We are now expanding by an additional $75 million.

Okay, turning now to slide 6, behind these 2012 headlines that I’ve just reviewed is what I believed to be very significance of a perhaps quite strategic progress that has fundamentally repositioned the company’s future growth.

First, over the past 12 months Harmonic has substantially strengthened and broadened its product opportunity and leadership. Emerging from a muddled competitive playing field, we believe we become the market leader in video infrastructure technology, from multi-screen and over-the-top applications.

We’ve also entered the new CCAP space, which will enable us to access an incremental $2 billion annual market, it is vitally important to our cable customers. And we’ve grown our service and support capabilities into both the key competitive differentiator and a key driver of revenue.

Second, over the past 12 months, we significantly expanded our global customer base and go-to-market capabilities. Our expanded on the ground presence, expertise and know-how in both developed and emerging markets has been and will increasingly be a key to enabling us to access new video infrastructure opportunities wherever they emerge. And third, changed and bolstered our management team and Board of Directors.

We’ve added experienced and accomplished new marketing and product management leadership to the executive management team and two new industry leaders with deep and relevant business experience in media, software and telecommunications have joined our Board of Directors.

So how do we leverage this stronger market and product position, management team and Board? We’re turning now to slide 7. We see significant technology change in growing customer investment in front of us. In particular, we see four major industry trends will begin to gain momentum in 2013, and that will lead to significant way of this new investment in video infrastructure.

There is no news in the statement that video will be delivered over IP, so what is news? An opportunity rich, the fact that IP based video services are going to move into the realm of premium video quality and user experience. Anyone who has spent time with the Apple 11 display or seen the latest OLED TV noted Netflix talking about getting into UltraHD understands the future of IP video as about super high quality video. This is what Harmonic’s reputation for superior video quality will be our greatest differentiation.

This is going to be an area of industry investment where Harmonic is uniquely focused and determine to drive growth across the full range of our production, playout and video processing product areas. In the cable environment, all of those high quality IP video will be delivered over new generation of IP delivery infrastructure, based on new CCAP Technology.

Converting this more efficient all IP delivery model would be a major initiative for global cable operators and market analysts tell us that this will grow into a $2 billion a year market. Harmonic is making major investments in building a leading technology position from which to attack this opportunity.

Turning back to the video itself, just yesterday, it was announced that the ITU has approved the next generation Video Codec to both high-definition and Ultra high-definition video. This new Codec technology called HEVC offers the potential to have the bandwidth requirement for encoded video stream, making it mission-critical technology for high-quality video delivered over bandwidth-constrained satellite, mobile, DSL and Internet networks.

Consequently, over the next several years, we’ll see the world adopting this new technology as a replacement to currently deployed MPEG-2 and MPEG-4 AVC compression, driving a large scale in coding and video processing technology refresh cycle across our entire customer base.

We believe this broad upgrade cycle begin to plan beginning in the second half of 2013 and we’ll continue to invest and being prepared to capitalize on this really tremendous opportunity. And lastly here, the recent CES show on Las Vegas made clear that a whole new level of consumer experience is coming in the form of UltraHD or 4K video.

Like anyone who saw the video displays in the Samsung booth for example, were just blown away by this new display technology. Result of the CES event is an – the industry question I believe has changed from if UltraHD technology is real to when it will be deployed in volume.

Now the technology trends I am highlighting here, volume deployment of UltraHD is probably the furthest out. But we already see signs of arrays to deliver first services growing in our global focus on the 2014 world cup for example. Anyone who has followed Harmonic’s business knows that the move from standard definition to high definition technology drove and continues to drive internationally, a huge cycle of global business growth. In UltraHD, we see analogous opportunity beginning to play out, which is really exciting.

And turning now to slide 8, with these major technology trends in front of us, what are our objectives in 2013. First, we intend to continue to gain strategic market share across the markets we serve. Second, we intend to increase the value of the premium leverage that we gain from our global brand, which is strengthening with our increased executive focus on marketing, and our growing global reputation for innovation, and market leadership.

Third, we’re positioning the company for strong 2014 growth, taking full advantage of the expected surge in industry investments and the technology transitions I just reviewed that is to move to high-quality IP delivered video, video infrastructure replacement and expansion cycles based on the new HEVC and UltraHD technologies. The cable industry has moved to new CCAP infrastructure.

And finally, delivering shareholder value is central to our mission as we pursue these growth opportunities, while continuously improving our operational execution, and cash generation. And given our strong cash position, our confidence in the growth opportunities in front of us and in our ability to execute on these opportunities, we’re pleased to be in a position to substantially expand our share repurchase program.

And with that Carolyn, I will turn the call back over to you for your remarks on the fourth quarter, the first quarter and the additional information on the buyback program.

Carolyn V. Aver

Thank you, Patrick. With that we’ll move to slide 9. Our net revenue for the fourth quarter was $133.4 million, 2% below last quarter and 7% below last year’s fourth quarter. Our bookings were $127.6 million slightly lower than the third quarter. However, we still had a book-to-bill ratio that was greater than one for the year.

Our non-GAAP gross margin improved to 53% this quarter from 48% in the previous quarter. This brought our gross margin for the full year to 49%. There are number of factors that impacted our gross margin this quarter. First, we had several million dollars of software revenue. This ranged from a multi-million dollar follow-on order for a software-only transcoding customer to additional software licenses for the large edgeQAM order we had in Q1 to additional software licenses for a large multi-screen implementation we did back in 2011.

The second factor impacting higher gross margin is product mix, with a higher percentage of our revenue coming from video processing and production and playout products this quarter. Roughly, we are seeing the results of the initiatives we implemented earlier this year, which include improved margins in our service business, and cost efficiencies in our operations.

Non-GAAP operating expenses for the fourth quarter of 2012 were $56.5 million, up 3% from the third quarter of 2012, and up 5% from the fourth quarter of 2011. Our head count was 1,148 slightly down from the 1,155 at the end of the previous quarter. The non-GAAP tax rate was 25%. As a reminder, the fourth quarter tax rate does not reflect the renewal of the R&D tax credit, which came into effect in early 2013. Non-GAAP net income for the fourth quarter of 2012 was $10.8 million or $0.09 per diluted share, compared with $8.1 million or $0.07 per diluted share for the third quarter of 2012.

Turning to slide 10 and looking at our quarterly revenue and backlog more closely, we see net revenue for the fourth quarter has slightly decreased from the third quarter of 2012 to $133.4 million. Backlog and deferred also dropped slightly to $132 this quarter, from the third quarter but increased 6% from the $125 million in the fourth quarter of 2011.

The increase in backlog and deferred revenue from the prior year is principally a result of our growing professional services business. As we begin to deliver solutions rather than products, our revenue recognition spreads out over the delivery period. We ended the year with a few large multi quarter projects that are currently underway. The revenue for these projects will be recognized later in 2013.

Moving to slide 11, our international revenue represented 62% of total revenue in the fourth quarter, compared to 58% in the third quarter and 57% in the same period of 2011. We continue to see the growth in Asia, the Caribbean and Latin America and in other emerging markets.

For the fourth quarter, video processing represented 43% of revenue, an increase from last quarter by $7.7 million. Production and playout also increased from last quarter and represented 19% of our revenue this quarter. Overall production and playout had a much stronger second half and we are encouraged by the market reaction to our newest product, the new Spectrum ChannelPort.

As we indicated in our guidance last quarter, the edge and access business decreased from the third quarter of 2012 and from the fourth quarter of 2011, when it represented 22% of revenue to 21% of revenue this quarter. This decrease was a result of the completion of a couple of large projects, which began earlier in the year.

Services and support stayed flat from last quarter, but was up 7% from Q4 of 2011 and represented 17% of revenue. While I expected services would actually decrease slightly in Q4, we completed more projects than we had anticipated. We expect service revenue to grow again in 2013, but we do expect that service revenue will be seasonally down in Q1. The broadcast and media market has recovered nicely, and it represented 35% of our revenue, up from 30% in the third quarter of 2012.

Satellite and Telco has remained flat from last quarter and still represents 20% of our revenue. Our cable customers represented 45% of our revenue, a drop from last quarter, revealing the reduction in edge and access as we completed those large projects. No customer represented 10% of our revenue this quarter.

Now turning to slide 12, you can see we continue to maintain the strong balance sheet. We ended the quarter with a cash balance of $201.2 million, up from a $192 million in the third quarter of 2012. Our receivable balance was $85.9 million and our DSOs were 61 days, down from last quarter’s 63 days, as we continue to execute on our receivables objective. Inventory was $64.3 million, down slightly from the prior quarter. As a result, our inventory turns were 3.9 times. Capital expenditures for the fourth quarter were $2.7 million and for the full year were $12.6 million.

Now moving to slide 13, over the last three quarters, we purchased 5.1 million shares at an average price of $4.43 per share for a total of $22.6 million. We also generated an additional $39.3 million of cash in 2012. Therefore today, we’ve announced an expanded share repurchase program of $75 million for a total of $100 million with the intent to return some of our cash to the shareholders. We expect to make open market purchases over the next 18 months. These expected repurchases will be funded from available working capital and are expected to reduce our number of shares outstanding.

Turning to slide 14, as we look at the first quarter, we continue to experience a macroeconomic overhang in Europe, while emerging markets continue to grow. We also expect the customer investment cycle around edge and access to continue to be soft in the first part of the year.

And as I mentioned earlier, while our backlog and deferred revenue were up year-over-year, we have a few large projects that won’t be recognized until the latter half of the year. Therefore, we expect our net revenue to be in a range of $115 million to $125 million in the first quarter of 2013.

While we continue to maintain our policy of providing guidance for only the next quarter, we do want to highlight that there are several factors impacting Q1, which we don’t consider to be indicative of the full year. While we don’t expect the same level of software sales in Q1, we do expect some of the margin improvements to continue. Therefore, non-GAAP gross margin in the first quarter are expected to be in the range of 49% to 50%, and we have targeted our non-GAAP operating expenses for the first quarter to be $56 million to $57 million.

Finally, we anticipate our non-GAAP tax rate for 2013 to be in the range of 21% to 22%, subject to our domestic versus international income split. These rates do reflect the benefit of the R&D tax credit in 2013, but exclude the expected one-time benefit for the 2012 R&D tax credit, which will be recorded in Q1 and is expected to be between $2 million and $3 million.

With that, I’ll turn the call back over to Patrick for his closing comments.

Patrick J. Harshman

Well, thanks Carolyn. In summary, during the fourth quarter, we delivered our highest ever revenue from international markets and our highest ever gross margins against the backdrop of slower customer spending worldwide. These results reflect Harmonic’s increasingly strong competitive position and expanding market share.

Looking ahead, as Carolyn just explained, our first quarter outlook indicates we do not expect an immediate reversal of fourth quarter macroeconomic and customer investment trends. And we do expect 2013 to remain a mixed environment with more upside opportunity in the back half of the year.

However, as the recent CES event may clear, new waves of investments in video infrastructure truly coming, whether these ignite in the back half of 2013 or in 2014, Harmonic is in a strong position to take advantage of these transformational technology trends as they unfold. We’ll press our competitive advantage and continue to invest in new growth initiatives, including emerging market expansion, our new CCAP platform, new HEVC technology, and new UltraHD technology.

And finally here as we close out 2012, I want to thank all of our customers for their support during the year, and I also want to thank our fantastic employees all over the globe for their energy, their tireless efforts, and their many innovations.

And with that, we’ll end the formal portion of the call and Carolyn and I would be pleased to answer any questions that you might have.

Question-and-Answer Session

Operator

Thank you. We would now begin the question-and-answer session. (Operator Instructions) Our first question is from Mark Sue with RBC Capital Markets. Please go head with your question.

Mark Sue – RBC Capital Markets

Okay, thank you. It gets to your gross marginal improvements, would there be some lingering impact of the gross margin that understanding a lot of that was software mixed near-term. There is a March quarter margin guidance marked sort of the new bottom for gross margin, and then we improved on from there, it seems like you’re making a big focus to improve margins, so I’d just trying to see underneath the mix of what might be since April?

Carolyn V. Aver

Yeah, good question, Mark. So we certainly, as you point out of how to focus on gross margin and Q1 guidance does indicate, if you just look at 2012 for the full year, we are at $0.49. We’re guiding sort of up from there or flat to up from there. And we do think over time the margins are going to continue to go up. We are going to do more software sales.

We do think the mix shift that P&P can have over time will improve. On the other hand, we’re also predicting lower edge and access sales in Q1, which help margins in that case. So, I don’t want to say it’s a bottom, because in anyone particular quarter, we could have a mix issue or an opportunity where we sell a lot of equipment without a lot of license and then two or three quarters later those licenses are going to come again. So I don’t want to predict in the quarter at the bottom, but we began to think about it on a trailing four quarter basis and we definitely think on sort of an average fourth quarter basis, you should see it go up into the right.

Mark Sue – RBC Capital Markets

Got it, that’s helpful. And maybe a question for you Patrick, if I’m looking it from a high level and what’s happened in the industry your primary competitor as more than doubled the size with both acquisition recognizing past deal such as Scopus and Omneon and also the product improvements you’ve made this year so far. Are there bolder strategic possibilities that you may consider in 2013 as you try to reaccelerate top line growth in addition to the margin improvement that you have made, perhaps any of the big picture thoughts in how you might approach the business generally this year?

Patrick J. Harshman

Certainly, there is always opportunities and we’ve got our eye open on what’s happening out there in the market. But as I explained, the opportunities that we see most clearly that are quite significant around new video technologies and CCAP itself, that’s all the areas where we feel that we have not only good technology, but the industry’s best technology in house.

So our prime focus right now is executing on the opportunities we see in front of us and with the innovation engine that we have in house. Certainly that doesn’t preclude us doing anything, but in this industry being fast is often more important than being big and having great technology usually trumps everything else. And so our goal is to move fast, develop the industry’s leading technology to go after CCAP, go after HEVC, go after IP video, go after UltraHD. And that’s what we plan on doing, Mark.

Mark Sue – RBC Capital Markets

Got it, that’s helpful. Thank you and good luck.

Patrick J. Harshman

Thank you.

Operator

Next question is from James Kisner with Jefferies. Please go ahead with your question.

James M. Kisner – Jefferies & Co.

Great, thank you for taking my questions soon. Just first question is just sort of on Europe. Can you talk about what your expectations are from them, it sounds like it’s sort of been stable for a while, I get the impression it’s been stabilized recently perhaps this quarter was flattish sequentially. Are you expecting kind of another like down in Q1 or what’s your kind of thought on Europe going forward?

Patrick J. Harshman

We don’t have the crystal ball out, I guess. So from the short-term we expect no material change up or down from the past two quarters. You’re right. The situation was declining or deteriorating rapidly to the first half of the year and it seem to stabilize in the fourth quarter.

And we’re cautiously optimistic that will continue to stabilize and we’re hopeful that we’ll see a rebound. I mean it’s important also to remember that in Europe as in the U.S. first quarter is usually characterized by seasonality and so it’s reason additionally difficult to read the TVs in terms of if and how the market maybe recovering this time.

James M. Kisner – Jefferies & Co.

Okay, fair enough. I guess also just wanted to dig a little bit on this edgeQAM dynamics. So I mean even just looking into last two quarters adding them together, I need a strong Q3 and I know you said there are projects finished, but it was a pretty weak second half for edgeQAM, I guess in aggregate of $68 million.

I’m just wondering and it sounds like getting into first half it’s going to be kind of weak for edgeQAMs as well, I’m just wondering is this partially a way for effect for CCAP or is there also potentially some cannibalization of IP-based Video-on-Demand or perhaps Netflix, perhaps it cannibalizing that revenue somewhat. Could you just talk a little bit about what you kind of think is happening with the edgeQAM business in more detail?

Patrick J. Harshman

So we had a very strong first three quarters I think. The business tailed off towards the end of the third quarter and as we, I think predicted on the call a quarter ago was soft in the fourth quarter. This is a historic cycle, particularly around infrastructure in cable, you kind of build a lot of infrastructure and then you kind of use it and digest it so to speak, and then you get back to building it again. So our short-term outlook in the first quarter is that we don’t expect to see a tremendous more spending in edgeQAM immediately, but that’s certainly not a prognosis for the basis of the year.

And maybe to the second part of your question, we think that QAM technology would continue to be widely important to cable for the foreseeable future. I mean, as a reminder when we sell QAMs, we’re selling them now in for VOD applications, but very often from modular CMTS applications. So you’ve highlighted Netflix, I mean Netflix traffic, it is something that drives some capacity, it challenges in the cable network and drives the need for more modular CMTS QAM. So that’s very positive.

James M. Kisner – Jefferies & Co.

Okay. And prospect…

Patrick J. Harshman

Just one another thing if I could, you also mentioned kind of CCAP in there, I mean certainly we see a product transition down the road, but I do want to mention that over the past year, I think we’ve navigated very well on our transition from our previous generation edgeQAM to the HectoQAM technology. So we have to be careful with product transitions, but it’s something I think we really want to screw on and did fairly well on. So I think we feel well positioned to navigate that transition.

James M. Kisner – Jefferies & Co.

Great, and thank you for that, it’s very helpful. And just one final, just sneaking here on, just a year in general and I know you’re not going to want to give guidance for the year. But I think you kind of alluded to the Q1 as unusual factors. I mean here we’ve got five sequential quarters including this quarter you’re guiding to year-over-year declines, I mean could you, what do you think about the possibility is that CCAP ramps at some point in this year that you initially grow revenues in 2013. I mean you commented about 2014 being the year, your positioning for growth, is it just – is this another kind of year of muddling through an investment? Is it possible you could grow this year? And that’s it and I’ll pass it.

Patrick J. Harshman

It’s definitely possible that we can grow this year. I mean I’d go further to say, I’ll tell you honestly I’ll be disappointed if we don’t grow. I’m confident see here we’re saying I do not believe that’s going to be another down year. How much growth is opportunity is out there? I think remains to be same. It’s more clear of based on the technology trends that out there that 2014 will be a strong growth year. To the extent, some of these things catch early and the market starts to move quicker. We can see – we can definitely see a further upside in the back half of the current year.

James Kisner – Jefferies & Co

Great, thanks very much guys.

Patrick J. Harshman

Thank you.

Operator

Next question is from Simon Leopold with Raymond James. Please go ahead with your question.

Simon Leopold – Raymond James

Great, thank you. A couple of things and maybe let’s start off following up on the discussions about 2013 growth prospects. It does sound as if with the slow start in Q1 that it’s a back-end loaded year. Do you have the ability to give us some idea of what kind of split you’re expecting between the first half and the second half?

Patrick J. Harshman

We don’t have guidance or a forecast for the second half of the year. And so we – I don’t have a – we don’t have a quantitative way of talking about.

Simon Leopold – Raymond James

Okay. And then maybe looking at this at different way, if product mix you made a number of comments regarding the potential for mix shift sounding, I think pretty positive on video processing, certainly more constructive on playout and maybe I would say cautious on edge and access. That‘s I think what I heard and then you explicitly said you expected service revenue to grow in 2013. So if you could maybe talk about what you expect in your mix in March and how you expect the mix to look for the full year? At least kind of relative commentary of what grows the most versus what might grow the least?

Patrick J. Harshman

Sure, I’ll take a crack at that and can Carolyn you can help me as appropriate. The comments on mix were really oriented towards the first quarter side. And I think that the headline might be something like a continuation of what we saw in the fourth quarter. We saw slower edge and access spending. We definitely don’t think that persist throughout 2013. So I mean, I think that’s a key point. I wouldn’t over interpret anything to it.

A year ago, first quarter was a big edge and access investment cycle, second quarter is a big edge and access investment cycle. It’s not in the first quarter, so therefore we think that that will be lighter from a mix perspective. And yes, we’re encouraged by the strengths that we see in video processing and in production and playout as we mentioned I think a couple of times, we had a strong quarter in production and playout in the fourth quarter. So the initial view on the first quarter is that it looks somewhat similar to the fourth quarter.

Simon Leopold – Raymond James

And when you think about the full year, what do you see as the most promising segment?

Patrick J. Harshman

It really depends on to what extent a couple of these things take off in the back half of the year, and I don’t going to be evasive, but it’s true. We are very excited about CCAP as I think you know, we’re not really sure how quickly that will take off and how quickly that will ramp in the back half of the year. If that ramps, I think it will be a very strong year for Edge.

On the other hand, we’ve already got good momentum in video processing and coding both traditional as well as in media as we’ve discussed. Later this HEVC starts – but that starts to ramp kind of quickly in the back-end of the year that can actually look quite positive and depending on you know that ramps more or less than CCAP, I mean, I can see a couple of different mix in areas.

So we’re kind of thinking about it and I regret the ambiguity, but for us it’s a little bit of a portfolio picture. We see a number of opportunities out there, we’ve got I think more than just irons in the fire. We’ve got real growth plans behind each of those and we’re really waiting to see how they are going to accelerate.

Simon Leopold – Raymond James

Are there any metrics you can share on the CCAP progress number of trials or something along those lines to help us frame that prospects?

Patrick J. Harshman

The primary metric today is in fact that we’re in five separate Tier 1 customer laps and we think that that’s quite encouraging, the longest of those we’ve been in one form or another since back in the fall. We’re pleased to seeing the number of customers expanding and we think that that number will continue to grow. And we will continue to let you know any further information about first deployments.

Simon Leopold – Raymond James

And just one last one, you had a press release beginning of the year concerning a shift in sales leadership and you are – yourself are I think managing sales in the interim, any update you can provide on prospects for a new hire?

Patrick J. Harshman

Well, I received your resume, Simon and it looks pretty good.

Simon Leopold – Raymond James

Fine.

Patrick J. Harshman

Fine, okay. We’ve hired a – we’ve got a top tier search retain search ongoing with real leader in the markets. And it’s always difficult to forecast those things. The good news for us is that we have very strong regional leaders of each of our theaters running our North American cable and Telco business et cetera or Asia-Pacific business et cetera, so rest assured that the business is in safe hands, the same people who have delivered these market share gains that we’ve been talking about over the past year.

On top of that though, we have a retained search ongoing, we’re seeing actually quite good resumes, and I’m very confident that we will bring on a world class leader, who will help the company take yet another step forward strategic.

Simon Leopold – Raymond James

Okay, thank you.

Patrick J. Harshman

Thank you, Simon.

Operator

Next question is from Greg Mesniaeff with Maxim Group. Please go ahead with your question.

Greg Mesniaeff – Maxim Group

Yes, thank you. In the discussion earlier about the edge and access business in the fourth quarter, it appears that at least based on what you’ve said, a lot of activity kind of wound down in the fourth quarter that was ongoing earlier in the year and that now you – the focus has shifted more to an upgrade for software and various upgrade activity to the installed base, is that right?

Patrick J. Harshman

Yeah, let me just rephrase it slightly, Greg…

Greg Mesniaeff – Maxim Group

So my question is how – how does that affect your visibility in 2013 on that business, has it has changed?

Patrick J. Harshman

So I need a backup as I don’t mean to suggest a permanent change in the business, we had a big cycle in the first half of last year, putting new hardware, new infrastructure out there into the market, and we saw a slowdown on kind of new hardware, new iron into the market, what we did see is, a number of customers coming back and buying additional capacity licenses on top of that existing hardware.

Yeah, I mean, this is a cycle we’ve been talking about with our – particularly with our very dense QAM technology. We expected that cycle will continue. As we have quite a bit of latent or unlicensed capacity out there in the market and it’s part of the beauty of the footprint that we’ve established today, this is a strategy that we began with the HectoQAM technology and we’re certainly continue with our CCAP, NSG Pro product. But at the same time, I want to be clear that, I don’t think that the industry has done by any means putting new hardware out there.

I think, we’re actually just in a couple quarters cycle, where it’s a little bit more digesting that new hardware infrastructure, utilizing that capacity, perhaps expanding it that somewhat is needed with the software licenses. I very much think that we’re going to be back to during 2013, further expanding the infrastructure more hardware buys, a little bit to Carolyn’s comment with kind of the vagaries of margin behind that, as well as on an ongoing basis licensing the capacity on that hardware, previously deployed as well as newly deployed hardware with these licenses.

So our visibility I would say overall has not changed dramatically, Greg. We have a pretty good idea from our cable customers of what they’re going to do, sometimes exactly when, it’s a little bit tricky to gauge. And hence, that’s a little bit of the uncertainty about exact timing, about kind of the next big push in terms edge and access spend. We’re confident that we’re going to spend. We’re going to confident again to spend more in 2013. And I would say not big difference in visibility between the traditional hardware sales and license sales layer on top of the hardware.

Greg Mesniaeff – Maxim Group

Gotcha. And just as a quick follow-up to that, a lot of the discussion on the edge and access business centered around the edgeQAM product line. Can you give us any color or granularity on some of the other products within edge and access and how they trended in the quarter versus earlier in the year?

Patrick J. Harshman

The edgeQAM is kind of the Edge or the edge and access, the other part of the business is our HFC optical cable access business. And that business continues to take along quite nicely. I think we’re probably guilty of not talking about this as much, it doesn’t have the same kind of upside potential with edgeQAM because of the – there’s no analogous CCAP opportunity that is out there.

We have announced a couple of existing new products in that area including a double-density WDM transmitter, which I believe is the hottest product in the industry in that category. But that part of the business Greg continues it’s just kind of take along pretty steadily.

Greg Mesniaeff – Maxim Group

Good. I’m glad to hear that, because, you’re not mentioning it – made me think that perhaps something was, you know, wasn’t going right there, but thanks for that update.

Patrick J. Harshman

You’re welcome. Thanks for asking.

Greg Mesniaeff – Maxim Group

Thanks.

Patrick J. Harshman

All right. Bye-bye.

Operator

(Operator Instructions) Our next question is from Amitabh Passi with UBS. Please go ahead with your question or comment.

Chelsea Shi — UBS Investment Bank

Hey, thank you. This is actually Chelsea Shi on behalf of Amitabh. So, it’s encouraging to see that international revenue get to a records level. I just curious, could you give us some more colors on what kind of customer, especially new customer you gain internationally is that mostly Tier 1 customer, or it’s kind of broad based, and also like what segment you’ve seen most of the growth internationally. And probably like what type of margin profiles, especially aggregate margin profile comparing to the revenue from U.S., just typically we have a good race through for the U.S. revenues, but for international just I appreciate any colors from you. Thanks.

Patrick J. Harshman

Well sure. Well, I think very good question. You know the rest well pressure in the U.S. it’s the rest of the world, so the rest of the world there is a big place. And so, it’s always difficult I think to generalize. And the truth is we do business across a huge range of geographies and customers, everything from large operators in Western Europe were very much like a large service providers here, large telecoms or direct-to-home satellite operators, or the very large cable operators, all the way to you know smaller providers in – I was just actually in Southeast Asia last week where were doing some very interesting business.

For those local countries, we do business with the Tier 1s, but you know Tier 1 there is often very much smaller or in a much more nascent stage growth part of their business.

Chelsea Shi — UBS Investment Bank

Thank you.

Patrick J. Harshman

So, in general we’re doing business with Tier 1 or Tier 2 across the geographies we addressed. And it is really right across the customers we addressed. Media and broadcast cable, satellite and telco IP TV, I would say relative to the U.S. business, our international business is less cable centric.

Cable outside of a couple of markets like Japan and the U.K. is actually not as strong as it is here in the U.S. So the satellite, telecom and broadcast and media component over international business is much stronger proportionally of our international business than it is here domestically.

Chelsea Shi — UBS Investment Bank

Interesting, so it sounds like the margin is more or like say either comparable or maybe over time it could be even higher than in U.S.? And then…

Patrick J. Harshman

You’ve got two different dynamics which pulling off as a direction. So right now, we see a pretty broad basket honestly. Some of our highest margin business is indeed in international markets where we’re delivering very high value products, solutions and technology, and our customers well appreciate that. And as you point out, on a proportionate basis, our video processing, our production and playout business is actually proportionately stronger overseas than it is in the U.S. And those were highest margin products.

On the other hand, particularly in some emerging markets, you often see quite intense price competition, even if that price competition is among so-called Western competitors. And so, I also will acknowledge that some times we see some of our lower margin deals overseas. We see a very, very acute competitive dynamics playing out over what, you know, for a lot of a better term is beachfront property and kind of a really fast growing or emerging market.

Places like India comes to mind, which has a booming media sector, and has a big change that’s happening in the regulatory environment, encouraging the growth of pay-TV, a pretty fast approaching, transition to digital television, a lot of dynamics. So, which make an extremely attractive market and hence it’s a very competitive market.

And in that market just as an example we’re dealing with Tier 1 broadcasters, media companies, satellite companies, Telcos as well as a couple of other cable operators. I would say the business is dominated by our broadcast, media and satellite business there. And we see a range of gross margin profiles.

Chelsea Shi — UBS Investment Bank

Gotcha. Yeah, yeah I really appreciate the color. Just have a quick follow-up on the Ultra High Definition, I think as there is a lot of excitement during CES but – so if you’re trying to get your opinion, how real do you think the opportunity is especially for 2013? Or is more like a 2014 opportunities?

Patrick J. Harshman

I think the volume opportunity, I mean, it’s a good question, I think the volume opportunity around UltraHD is more of a 2014 opportunity. All of the major technology trends that we talked about CCAP, HEVC encoding moved to higher quality IP video. I think that UltraHD is probably the farthest out, but I don’t want to say it’s too far out.

There is a lot of interesting excitement even outside of the U.S. about for instance about document technology for the World Cup in 2014. So I think that including my own, I think that what happened if CES changed a lot of minds about the value, I think a lot people went in, thinking well this is another 3D kind of a maybe a flash in the pan, a very – a narrow niche. And really when you saw this displays and realize you kind of have this immersive experience without any kind of glasses or headache or anything of that stuff.

Chelsea Shi — UBS Investment Bank

Right, right definitely.

Patrick J. Harshman

I think people really understood this is powerful, this is what’s going to come next and it’s really starting to move. So, our view right now is that it’s more of a 2014 kind of ramp. I think you could see some early stuff in the back end of this year that really we’re thinking about there is 2014 and 2015 significant growth driver.

Chelsea Shi — UBS Investment Bank

Yeah, got you. Yeah, cool, thank you.

Patrick J. Harshman

All right, thank you.

Operator

That’s all the time we have today. I will turn the call to Mr. Harshman for closing comments.

Patrick J. Harshman

Okay, well thank you very much again everyone for participating in our call today. We believe we’ve made significant strategic as well as operational progress. We are facing a mixed customer spending in macroeconomic environment.

We’re very focused on strengthening our position in the market and taking advantage of these truly exciting opportunities which we believe are in front of us. Although while being mindful of improving our operational execution in the near-term.

With that, I would like to say we look forward to speaking with you all again on next quarter’s call. Thank you again.

Operator

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

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