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Harmonic, Inc. (NASDAQ:HLIT)

Q3 2010 Earnings Conference Call

October 28, 2010 5 PM ET

Executives

Carolyn Aver – CFO

Patrick Harshman – President and CEO

Analysts

Amir Rozwadowski – Barclays Capital

Chris - RBC Capital Markets

George Notter - Jefferies

Blair King - Avondale Partners

Victor Chiu - Morgan Keegan

Nicos Theodosopolis (ph)

Operator

Good afternoon. My name is Jeremy and I will be your conference operator today. At this time I would like to welcome everyone to the Harmonic third quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. (Operator Instructions) Thank you. Miss Carolyn Aver, you may begin your conference.

Carolyn Aver

That you Jeremy. Hello everyone, I’m Carolyn Aver, the CFO of Harmonics Thank you for joining us today. With me at 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 have also provided slides which you can see by going to harmonicinc.com and clicking on the third quarter earnings call in the events section of the front page.

Turning to slide two, let me remind you that during this call we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We must caution you that such statements are only predictions 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-K and 10-Q reports. 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 on this call we will provide you with financial metrics determined on a non-GAAP or pro forma basis. These items, together with the corresponding GAAP numbers, and 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 8K.

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 Harshman

Thank you very much Carolyn and thank you all for joining us today. Turning to slide three, let me begin by saying we’re extremely pleased with the way our business is performing. Our total revenue for the third quarter was $104.8 million, which includes $5.6 million of Omneon revenue. Omneon contributed just over two weeks to our operating results in the third period.

Excluding Omneon’s contribution, we had net revenue of $99.2 million, up 18 percent year over year. Non-GAAP earnings were $0.09 for the quarter, up from $0.05 a year ago, and Omneon’s contribution was EPS neutral.

Harmonic only bookings during the third quarter were $97.5 million, up 22 percent from a year ago, and Omneon standalone bookings were $32.2 million, up 16 percent from a year ago. So not only has Omneon’s business continued to perform very well, we’re making excellent progress on integrating the company, and our customers around the world continue to be very enthusiastic about the combination.

The key market dynamics underlying both Harmonic and Omneon results remain in force. We see increasing investment in high definition services worldwide, across all customer segments and Harmonic has never been better positioned to take advantage of this growing HD opportunity.

Additionally, while HD is the main locomotive driving business today, we continue to be encouraged by our success in expanding our customer base, particularly in international markets, and in establishing a leadership position in providing technology enabling new media services.

So let’s now move to slide four where we’ll take a closer look at how the market transition to HD continues to create a range of growth opportunities for Harmonic. In the U.S., we see our customers driving towards all HD for live and on-demand services. In international markets, new HD deployments are starting to accelerate in many geographies.

We also see growing worldwide interest in newer HD technologies including 1080P60, 3D, and even newer 4K encoding. We’re pleased to see this continuing HD wave driving our customers to invest in the preparation and delivery of HD services, including our new Omneon customers who are increasingly using our Spectrum and Media Grid solutions to optimize their HD production, play out and storage work flows.

We also recently announced that demand for HD encoding has resulted in over 10,000 of our Electra 8000 encoder channels being shipped, a really amazing result since the introduction of that product in the summer of 2009.

HD is also becoming the preferred format for video on demand services, driving demand for our very exciting Hecta QAM solution which began shipping during the quarter.

Delivering this increasing live and on-demand HD content is putting tremendous bandwidth pressure on access networks. In response to this bandwidth squeeze, our customers are also investing in a range of bandwidth technologies.

Across our customer base, we’re seeing a whole new encoder upgrade cycle where our latest generation HD and SD encoders are being purchased to replace existing encoders, opening up bandwidth for new HD content through improved compression of the existing channels.

We’re also seeing renewed cable industry focus on switch digital video roll outs, increasingly powered by our NSG Edge QAM’s. And on HD network segmentation resulting in strong interest in our new universal DWDM transmitters. All of these HD trends will continue for the foreseeable future and we believe create significant ongoing opportunities for Harmonic.

Okay, turning now to slide five, our expanding global customer base also continues to drive our growth. Particularly in emerging markets, we’re seeing subscription TV businesses growing strongly. Direct TV’s announcement last quarter that they added over 400,000 new subscribers in Latin America is just one example of the business expansion that is happening internationally.

In fact, we had our strongest international bookings quarter year to date, driven in large part by strong emerging market momentum, supported in part by the products and sales channels added to our Scopus acquisition.

Our growing success in Asia, Eastern Europe, the Middle East and Latin America is very exciting and evidenced by the wins we’ve recently announced in China, Kazakhstan, Korea, Russia and South Africa.

In the telecom market, we also had our strongest revenue quarter to date with continuing investment in IPTV, and new mobile video services happening in multiple geographies. In the U.S., we expect the recently announced acceptance of our products by the U.S. Rural Utility Service Agency to strengthen our ability to benefit from new spending by rural U.S. telecoms.

And finally, with the world’s leading media broadcast companies, we’ve vaulted into a leadership position through our combination with Omneon, and we see an overall strengthening of this market as advertising spending increases.

Turning to slide six, while HD is driving the biggest wave of customer spending with us today, we’re also making positive strategic progress in developing new media solutions and as business (inaudible) which we believe will impact our future growth.

We continue to win important key projects across our customer base and traditional service providers that enable the delivery of premium mild programming to new mobile devices and over the internet as part of converged multi-screen services.

During the third quarter we received our first major order from a cable customer who will provide IPT video services using the M-PEG 4 AVC standard. This work is the front edge of what will be over time, a significant opportunity as cable infrastructure evolves to support M-PEG 4 AVC video.

We also announced a ground breaking project with YES, a direct to home satellite operator in Israel to provide a converged video on demand solution by over the top internet delivery of HD content to their hybrid set top boxes.

And we also received, from a major service provider, our first order of over $2 million for an over the top live sport streaming service.

We also see good opportunities to assist broadcasters and media companies to develop their own new media delivery capabilities. During the third quarter, Omneon announced that it is working with the Metropol Television group in France to provide a next generation solution for content repurposing and play out to multiple delivery platforms, which include video on demand, IPTV and mobile video services.

We also continue to provide our Rossette video file transcoding solution for a growing number of new media delivery players. In short, we’re increasingly well positioned to capitalize on these new media trends, opening up attractive opportunities across customer segments and geographies.

Turning to slide seven, I’d like to provide a brief update on Omneon’s business, which operated on a stand along basis for most of the quarter. Similar to Harmonic’s core business, Omneon’s business system is performing very well.

Third quarter bookings were $32.2 million. Sales were $30.4 million and year to date sales were $90.8 million, up 30 percent and 17 percent respectively. It’s year to date gross margins have continued to be a strong 58 percent.

As with Harmonic, the key driver of Omneon’s business continues to be the market transition to high definition and international business expansion. Throughout the year, the Omneon business has also seen strong results as advertising spending has rebounded in the U.S. and elsewhere, and as its market share has continued to expand.

I want to highlight in particular, the great job Omneon is doing driving market adoption of its newest products and solutions, including our media grid solutions for video optimized storage and new media work flow applications, and our media application server for media management.

Turning to slide eight, I want to underscore that by combining Harmonic and Omneon, Harmonic is now uniquely positioned as the global leader in video infrastructure with market leading solutions spanning video content production to multi-screen delivery.

We believe the addition of Omneon will continue to expand our customer relationships with global media companies to create a powerful foundation for innovative convert solutions, and strengthen our revenue growth over the long term.

So turning to slide nine, let’s look at our progress towards integrating the businesses and realizing these benefits. In terms of sales synergies, we continue to see good opportunities to bring more Harmonic products to broadcasters and media companies and more Omneon products into service providers, and we now got our cross selling plans in place.

With respect to product synergies, we’re moving forward on developing joint solutions, enabling all of our customers to create, prepare and deliver the next generation of video centric media services, and the early response from a number of our customers to our ideas and expanded capabilities has been great.

We’re also making excellent progress on our organizational synergies with our combined leadership team in place, with all our Silicon Valley employees under one roof in our new San Jose corporate headquarters and with our major international offices soon to be consolidated.

Finally, the financial performance synergies are progressing on track. We continue to be confident Omneon will bolster our growth over the long term and strengthen our gross margins in the near term. Our supply chain integration is nearly complete, and we expect to achieve our target $8 to $10 million of annualized cost synergies by the second half of 2011.

And with that, let me now turn it back over to you Carolyn, to talk more about our third quarter results and our financial outlook.

Carolyn Aver

Thanks Patrick. Turning to slide 11, as Patrick highlighted, this was another strong quarter for Harmonic and Omneon as well. Keep in mind that our reported results for the third quarter of 2010 include a contribution from Omneon for approximately two weeks after the completion of the acquisition.

Most of my comments will be focused on full quarter results for both Harmonic and Omneon on a standalone basis and on a pro forma basis combined.

Driven by market demand for our products, we had a strong bookings quarter, which combined with our backlog entering the quarter, drove Harmonic’s standalone revenue growth up 18 percent from the third quarter 2009.

With respect to gross margin, we saw the expected impact of our new product introduction. Harmonic’s standalone non-GAAP gross margin was about 48 percent compared to 51 percent in the previous quarter and 4 percent in the same quarter of 2009. We do expect Harmonic’s gross margin to improve modestly in Q4. Note that even with just two weeks of Omneon’s contribution, our gross margin was boosted by 50 basis points.

Operating expenses for Harmonic on a standalone basis were $35.4 million, up eight percent from the same period last year and comparable to the prior quarter. Our standalone margin was 13 percent, the same as last quarter.

The year over year increase in revenue had a positive impact on our net income. Our reported non-GAAP net income per share for the third quarter was $0.09, up from $0.05 for the same period of 2009. Omneon’s contribution was EPS neutral. Note that our non-GAAP tax rate was 30% for the quarter.

Turning to slide 12, let’s look at our revenue and backlog in more detail. We reported total net revenue for the third quarter of 2010 of $104.8 million, which included $5.6 million in Omneon revenue and excluded $1.3 million of certain deferred revenue that would otherwise have been recognized by Omneon had the acquisition not occurred.

Excluding Omneon’s contribution, Harmonic’s standalone revenue was $99.2 million, up 18 percent from the third quarter of 2009. Our standalone revenue for the first nine months of 2010 was $279.5 million, up 20 percent from the same period of 2009.

Excluding Omneon, total bookings for Harmonic in the third quarter of 2010 were $97.5 million, up 22 percent from the third quarter of 2009. Including Omneon, we had bookings of about $130 million for the quarter and our combined backlog at the end of the quarter was $125.5 million.

On slide 13, let’s first discuss our revenue mix on a Harmonic standalone basis and according to our pre-acquisition categories. You can see our domestic customers represented 52 percent of total revenue for the third quarter. We continue to have strong results worldwide, including the emerging markets in Asia, the Middle East, Eastern Europe and Latin America.

Our largest customer was again Comcast, representing 25 percent of revenue in the third quarter including the Omneon revenue contribution. Cable customers accounted for 63 percent of Harmonic revenue in the third quarter. Satellite customers 14 percent and Telco broadcast and other was 23 percent.

By product category, video processing sales were particularly strong, representing 51 percent of our revenues for the third quarter, engine access represented 35 percent and services and support 14 percent. It is significant that much of our strong demand from our cable customers involve the large portion of video processing shipments.

If Omneon’s revenue had been included for the entire third quarter of 2010, you can see from slide 14 that our pro forma revenue basis is significantly less concentrated on any particular geography market or product category.

Our pro forma international sales would have been 52 percent of our net revenue. Pro forma sales to cable customers would have accounted for 49 percent, satellite and Telco, 22 percent, broadcast media and other, 29 percent. Note that we have now separated broadcast media and other out as a category. With the combination of Omneon, we want to highlight our continued results in this important category.

In addition, we have combined satellite and Telco segments as non-cable service providers.

By product category, combined video processing sales would have been 39 percent of net revenue, engine access 27 percent, service and support 14, and a new category production and play out, 20 percent. Note that production and play out is primarily composed of the Omneon product sales.

Going forward, we expect to disclose our revenue mix according to the segmentation on the slide. In addition, we have provided for you all four quarters of 2009 and the first three quarters of this year in this format for Harmonic, Omneon and on a combined basis that’s both attached to the press release and at the end of this deck.

As you can see on slide 15, we continue to maintain a strong balance sheet. At the end of the third quarter, we had cash, cash equivalents and short term investments of $110 million compared to $277.9 million at the end of Q2.

During the quarter, we used approximately $155 million of cash to acquire Omneon as the cash portion and $7.4 million for costs associated with our new building. Additionally, we used approximately $4 million for operations, which was principally working capital.

Our inventory was $57.2 million, up from $42.8 million at the end of the second quarter. This inventory increase mainly reflects the inclusion of approximately $11 million of Omneon inventory as well as an increase in inventory for our new product introduction. Excluding Omneon, our inventory turns were $4.5 million, about the same as the previous quarter.

Our receivables balance increased to $92.4 million, reflecting the addition of approximately $15 million of Omneon receivables, Our DSO’s were 64 days on a combined basis, down from 68 days for the previous period.

Finally, our capital spending was $8.3 million in the third quarter which includes approximately $7.4 million for additional leasehold improvements and equipment for new headquarters facility. We expect CapEx to be in the $2 to $3 million range for the fourth quarter.

Turning to the outlook on slide 16, we are moving into the fourth quarter of 2010 with a strong backlog position and the Omneon integration well underway. Taking into account our backlog and business momentum, as well as the full contribution of Omneon’s results for the entire fourth quarter, we expect net revenue for the fourth quarter of 2010 to be in a range of $127 to $132 million.

This excludes $2 to $3 million of certain deferred revenue that would otherwise have been recognized had the acquisition not occurred.

For the full year of 2010, we expect revenue to be in the range of $412 to $117 million again, excluding the deferred revenue that would otherwise have been recognized. Our pro forma revenue, which would show a full year of Omneon’s contribution and would ignore deferred revenue adjustments, is expected to be in the range of $499 to $504 million.

Non-GAAP gross margins for the fourth quarter of 2010 are anticipated to be in the range of 50 to 52 percent. This reflects a modest improvement in Harmonic’s gross margin as well as the benefit of Omneon’s higher gross margin for the full quarter.

Our target for non-GAAP operating expenses for the fourth quarter is $51 to $52 million. Our head count was 1,129 at the end of the third quarter, up from 848 employees at the end of the previous quarter, reflecting the addition of Omneon.

We are evaluating the impact of incorporation Omneon’s operations into our tax structure. At this time we expect the effective tax rate in the fourth quarter to be between 30 and 32 percent.

As we look out into 2011, on slide 17, we see a number of encouraging signs. Our combined business has excellent momentum. With the addition of Omneon and extending our addressable market, we currently are targeting a 12 percent plus revenue growth rate for the year.

We also expect strong combined operating performance. Omneon has higher gross margins than Harmonic, so the combination should have a positive impact on our gross margin. Keep in mind that we expect the impact of seasonality and higher operating costs in the first quarter.

While we begin to realize cost synergies immediately, we will realize the full benefit of those in the second half of 2011. We anticipate the combined non-GAAP operating margins for the year to be in the 15 percent range, lower in Q1 and improving during the year.

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

Patrick Harshman

Thank you Carolyn. In summary, we believe the progress we’ve reported to you today offers clear indication that our strategic direction that is focusing on the technology and services that enable HD and other next generation premium video services, while also addressing an every broadening base of customers, is paying dividends.

We continue to see great opportunities for Harmonic and believe the combination with Omneon has further solidified our position as the leading provider of mission critical video infrastructure to leading service providers and media companies around the world.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Amir Rozwadowski.

Amir Rozwadowski – Barclays Capital

Good afternoon Patrick and Carolyn.

Patrick Harshman

Good afternoon.

Carolyn Aver

Hi.

Amir Rozwadowski – Barclays Capital

Just wanted to touch base on the strength in the cable division. You had mentioned the, on your prepared remarks that you’re seeing a lot of demand for your encoder products within the cable division. I was wondering if you could give us a little bit more color in terms of what’s driving that and how sustainable do you think that is and sort of going forward.

Patrick Harshman

Yeah, we do see demand from cable right across our product categories Amir. It’s encoding. It’s other kinds of video processing solutions as well as our engine access solutions. Within the video processing product area, it’s principally encoding and principally HD.

Cable operators around the globe have been adding more and more HD channels and those are all getting encoded, and we’ve I think won a fairly significant percentage of the business that’s been awarded out there.

But additionally, there’s other kinds of interesting applications that happen in the cable universe, moving digital content around. Back bone networks for example, there was a nice press release issued by the Comcast media center last quarter talking about our involvement with their large digital video backbone project.

And so we find ourselves engaged I think in a broadening array of video processing applications with cable operator’s right across the globe.

Amir Rozwadowski – Barclays Capital

That’s helpful. And then looking to 2011, you know you’re sort of providing a framework for us to how to think about growth in terms of the 12 percent range. What level of comfortability do you have with that sales outlook? You know we’ve seen in previous years that things can, operators can be fickle in terms of their spending from any given quarter depending on the economic environment, and I just wanted to get your sense as to how solid do you think that sort of growth outlook from where you stand?

Patrick Harshman

Look, it’s our best estimate sitting where we are today and knowing what we know. I mean I think you’re absolutely right. The last couple of years have told us is that we live in an unpredictable world, and I think nothing there has changed.

You know that being said Amir; we look at a lot of the fundamentals. We look at our growing base of customers around the world, in the U.S. in particular, but elsewhere. We look at the competitive dynamics that are happening out there.

We look at the strategic imperative I think behind rolling out some of these services to stay competitive, and we feel relatively comfortable and relatively confident that we can deliver that kind of growth.

Amir Rozwadowski – Barclays Capital

And what type of variables would we consider Patrick to drive growth above those levels?

Patrick Harshman

I think looking at the CapEx plans of our largest customers is going to be important as we roll into 2011, and we’ve kind of made an assumption that it’s kind of status quo in terms of overall capital spending. So I think that will be important to watch.

And then over time, I think it’s going to be important to see how we do with Omneon. We’re quite optimistic that we will in time realize substantial cross selling benefits, and I don’t want to say we’ve been conservative, but we certainly haven’t been aggressive in terms of inserting those kind of revenue synergies into the forecast we’re providing you today.

Amir Rozwadowski – Barclays Capital

All right. Thank you very much for the incremental color.

Patrick Harshman

All right. Thanks.

Operator

Your next question comes from Mark Sue.

Chris - RBC Capital Markets

Hi, this is Chris for Mark Sue. How should we think about guidance by customer segment, cable Telco, satellite going forward?

Carolyn Aver

You know, we haven’t given guidance by those segments historically. I have provided you with the last seven quarters of all those segments now both for Harmonic standalone and for Omneon and together, so you’ll have some basis from which to you know, do your work.

We think international continues to be important. We think there’s definitely growth around the world and that applies in some ways to different segments. We certainly think Omneon’s growth opportunity is interesting, but specifically we don’t give a lot of color on guidance on the segments.

Chris - RBC Capital Markets

And just to follow up on the cross selling comment from earlier, are we starting to see cross selling already or is it still separate?

Patrick Harshman

Well we’re seeing good opportunities. I mean it’s important to remember that the companies have been combined for just something on the order of five or six weeks, so we’re very much still in the getting ramped up mode and talking to customers jointly. But we continue to be quite optimistic by the feedback we’re getting from the marketplace.

Chris - RBC Capital Markets

OK. And this is the last question. If operating margins for next year will be in the 15 percent range, and they’re improving throughout the year, where do you think they’ll be when you exit the year?

Carolyn Aver

Well you know, again we need a little more time for more color, but you know I think they could be a couple points down early in the year and a couple points higher at the end of the year. That tends to be somewhat seasonal as at the end of the year, again, this payroll tax thing becomes an issue and people hit their maxes, and so those numbers go down. There’s a lot more vacation in Q4.

So you know, I think you can offer 15 percent. It can be a little lower at the beginning and a little higher at the end. I wouldn’t necessarily imply from that thought that the following year starts at 17 percent. I think it comes back down again in Q1 for those same dynamics to some extent.

So there’s two components. One, we’re ramping there because of synergies and two, a year in general has some seasonality to its expenses.

Chris - RBC Capital Markets

Thank you.

Patrick Harshman

OK. Thank you.

Operator

Your next question comes from the line of George Notter (ph).

George Notter - Jefferies

Can you hear me?

Patrick Harshman

Yes we can.

George Notter - Jefferies

All right. Great. Thanks. I was just going back to the set of expectations you guys are putting out there for next year and you know in the 12 percent revenue growth, I was trying to get a better sense for what the assumptions are in terms of pricing erosion. You know certainly they can be different across different areas of the business, but I’d love to get some sense of what you guys are thinking about in terms of price erosion on the encoder side. You know, edgeQAM, are you assuming price erosion on the Omneon side of the business. Certainly it ties into your discussion of a competitive environment, but what are your thoughts there?

Patrick Harshman

Well, our thoughts, we’ve always lived in a competitive environment where prices go down and functionality goes up frankly, George, and certainly price declines around products is just a fact of life and the way we’ve always thought about and planned our business.

So I guess the core assumption is that there is no dramatic change one way or the other. That is, prices don’t deteriorate more quickly next year than they have kind of year over year in the past. On the other hand, we don’t assume a more benign environment in terms of competition, innovation and corresponding price reduction.

So certainly price reduction is a key part of our thinking, a key part of our business modeling and our initial thoughts that we’ve put out there in terms of our, the way we see growth playing out certainly takes into account all of those market dynamics.

George Notter - Jefferies

OK. And then I guess separately I wanted to ask about the guidance, just kind of parsing our your views of the heritage Harmonic business versus the heritage Omneon business. If memory serves, you know you guys were talking about a $120 to $125 million revenue number for Omneon for 2010 and kind of you know bumping that up. I think we were thinking like 18 percent growth rates for Omneon. If I kind of go through the math it looks like you’re looking at the Harmonics business on the heritage side being pretty flatting year on year and then most of the growth, I guess 12 percent for the combined entity coming on the Omneon side. Am I thinking about the correctly or what’s your thought?

Patrick Harshman

No, we definitely see what you call the heritage Harmonic business growing, and I think growing well. Certainly less than 10 percent, 12 percent, but we’ve kind of always said we thought that the core Harmonic business grows double digits, so that’s a component of it.

We continue to see a year over year, as we think about ‘11, we see the Omneon piece growing faster than that, and the number that we see is a blend of the two.

George Notter - Jefferies

Fair enough. Thanks very much.

Patrick Harshman

All right. Thank you George.

Operator

Your next question comes from the line of Blair King.

Blair King - Avondale Partners

Great. Thanks for taking the questions. I wanted to just kind of go back to a previous question on seasonality for 2011. We’ve historically, at least I have modeled 50 percent minus a couple percentage points for the first half and 50 percent plus a couple percentage points for the second half. I guess around the seasonality Harmonic’s historically exhibited, is that still the right way to think about 2011 or is there a different way to think of it with the Omneon acquisition?

Carolyn Aver

You know, we’re a little bit specifically not trying to give 2011 specific guidance and not by quarter. I realize you’re building your model, but we’re not feeling like that we’re newly with Omneon, sort of prepared to get to that level.

Having said that, you know I think we’ve given enough information that would say yup, that’s probably what Omneon’s business will look like and you can probably go back and look at Harmonic’s business. And I’m not sure that we know anything today that would say seasonality would be dramatically different next year than it’s been on the average of the last several years, sort of taking out you know, a little bit of the bad market time in ‘08 and ‘09.

Blair King - Avondale Partners

That’s fair. Thanks a lot. And then last question. Patrick perhaps for you, you had mentioned cross selling in your prepared remarks and there was a question earlier about it as well from one of the other analysts. But when you kind of correlate back into your customer base, have you seen any enthusiasm from any particular segment more so than the others? Have the content creator guys been more enthusiastic of cross selling opportunities, the integration of the products more so than the content distributors or has it been widespread for you in terms of customer reception on both ends?

Patrick Harshman

I think the most enthusiasm actually has come out of the gate from customers who although in different proportions, are already customers of both businesses. You know, Harmonic does some small amount of business today with broadcasters and media companies, Omneon much more, and maybe a little bit reverse situation with satellite direct to home operators.

So in both cases, we’ve got customers who are kind of purchasing the technology and very often installing or integrating this technologies in adjacent ways as part of a greater whole. So both sets of those customers are the ones that responded most positively, kind of the light goes on both in terms of the technology integrated solution ability, and our ability to innovate quickly on top of that.

Blair King - Avondale Partners

And also, just from the point of view of having a healthier, stronger customer – I’m sorry – supplier in the combined Harmonic/Omneon who can really support them as they navigate their way through a challenging and competitive market.

You know, that’s not to say it stops there, but specific answer to your question, we’ve seen a lot of very favorable feedback from existing common customers.

Blair King - Avondale Partners

OK. Last question and I’ll turn it over. Carolyn, on the bookings have you seen any geographic region more – have the bookings been weighted in any way in any various region or has it been, is that too broad?

Carolyn Aver

You know I think that you know, quarter by quarter they move around a bit. You know Q3 did – Q2 you know in the bookings we saw cable was big and we tried to indicate that going into Q3 and as you can see by our cable numbers and our Comcast number, clearly that was the case.

I think this quarter, and Patrick’s comment you know, he mentioned international was strong in the quarter and so you should expect to see that play through in our revenue next quarter.

Blair King - Avondale Partners

Ok. Great. Thank you very much.

Patrick Harshman

All right. Thanks Blair.

Operator

Next question comes from the line of Simon Leopold.

Victor Chiu - Morgan Keegan

Hi, this is Victor in for Simon. I know you mentioned in the past before that your business doesn’t necessarily track directly with cable CapEx spending, but you’ve also seen some pretty consistent declines in video subscribers (inaudible) cable provider over the last quarter. So if we look at that as a structural shift, to what extent do you think that would impact your business in the long term?

Patrick Harshman

Well look, we like to see our customers be as successful as possible you know, but the reality is, is that it’s a very competitive environment out there right now and we saw AT&T and Verizon pick up some subscribers and we saw cable lose some subscribers. And what we think that means is for all players, is that it comes back to innovative, compelling consumer products.

You know if you look at Comcast investor presentation yesterday, they really focused on new innovative services and products they were rolling out. They also highlighted some areas of targeted investment that we thing really all feed directly into where Harmonic’s core competency and capabilities lie.

So we think a competitive environment out there and you now, a tussle for subscriber’s wallets is frankly a positive thing for us.

Victor Chiu - Morgan Keegan

You mentioned some strength in SDV exposure, is that correct?

Patrick Harshman

Yes.

Victor Chiu - Morgan Keegan

I wanted to see if you could give us a little more color on that because there was another cable provider that reported results lately that didn’t have as great an outlook in that particular spot.

Patrick Harshman

What we’ve seen is, we have seen as more HD has gotten rolled out, I mean it just simply consumes bandwidth and SDV I think is one of many tools that cable operators have available to them to conserve bandwidth and make room for more HD content.

And as this congestion has risen we’ve definitely seen a number of our customers look to the switch video. Harmonic provides really a market leading Edge QAM for a variety of applications including switch digital video, and certainly we’ve seen some good success there and that was an important contributor to our results this past quarter.

Victor Chiu - Morgan Keegan

I guess just lastly, could you give us a little more color around the progress on the international front, which countries you think you’re seeing the most opportunity from?

Patrick Harshman

Well you know, it’s really broad based. In developed markets you know, one of the things going back three months ago, there was a lot of concern about Europe associated with sovereign data etc. We’re pleased to say that Europe seems back and quite healthy to us, but we also really are excited about the progress we’re seeing in emerging markets, Eastern Europe, Russia, India, China, etc.

And there we’ve seen quite a lot of activity, and we’ve been very pleased with the results that we’ve seen out of there as of late and we’re actually increasingly pleased by some of the results that are really coming out of our Scopus acquisition of last year, both products that address those emerging markets as well as a stronger direct sales and channel sales presence that that acquisition afforded us, so we’re pretty bullish about international broadening.

Victor Chiu - Morgan Keegan

Great. I’ll jump back in the queue. Thanks a lot.

Patrick Harshman

All right. Thank you.

Operator

The next question comes from Nicos Theodosopolis (ph)

Nicos Theodosopolis

A couple of quick questions. You might have mentioned this in the past, but perhaps you can refresh my memory. On Omneon, what, can you talk about the customer concentration of that business you know for this whole quarter? What would it have been? You know, what percentage of revenues, let’s say the top ten customers are? Can you talk a little bit about that?

Patrick Harshman

You know historically and in the past quarter, Omneon does not have any 10 percent customers. I think historically in any given period, it’s actually relatively rare that they even have a five percent customer, and so relative to the historic Harmonic standalone business, Omneon has a much broader customer base and much less concentration.

Nicos Theodosopolis

OK. So if we look at your top customers this quarter and if Omneon had been a full quarter, I mean the percentage of those represented would clearly go down a lot.

Patrick Harshman

Yes, that’s right.

Nicos Theodosopolis

OK. And then second question was, I don’t know if you gave this or not. I might have missed it. What would have been the gross margin for Omneon this quarter is they had reported a full quarter?

Carolyn Aver

58 percent.

Nicos Theodosopolis

58 percent. OK. Thank you.

Patrick Harshman

Thanks Nicos.

Operator

We have another question from George Notter.

George Notter - Jefferies

Thanks. The 15 percent gross margin guidance, I assume that excludes stock compensation expense. How much stock compensation expense would you expect for the combined company next year?

Carolyn Aver

Yes, it does. I don’t have a full year estimate based on the granting that we would expect to do over the course of the year. For Q4, we expect it to be roughly $5 million.

George Notter - Jefferies

OK, for the combined entity. OK. Is that then a good run rate to kind of base line off of for the full year next year or would there be a new tranche of stock coming in for the Omneon employees?

Carolyn Aver

You know there will be some granting that occurs in Q4 and Q1 which would lie on top of that.

George Notter - Jefferies

OK. Any order of magnitude? I guess I’m just trying to ball park what that might look like.

Carolyn Aver

Yeah, I’m sorry. I don’t have that at this point. I don’t think, that’s particularly sensitive. I’ll get that number. We can talk about it. At least I’ll get an estimate.

George Notter - Jefferies

Great. Thank you very much.

Patrick Harshman

OK. Thanks. Thanks very much George, and I think we’ll wrap it up there. Before we sign off let me just reiterate again how excited we are about our business. The opportunities that we see out on the marketplace, the way we think we’re positioned in the marketplace and the way we think that the combination now with Harmonic really opens up in a way that’s brand new and exciting for us, tremendous new geographic as well as customer opportunities.

We’re very focused on delivering the Q4 that we’ve laid out for you and we’re running very hard to take advantage of all the opportunities we see in front of us in 2011, and we look forward to talking with you next time. Thanks very much.

Carolyn Aver

Thanks. Goodbye.

Operator

That does conclude today’s teleconference. You may now disconnect.

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