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Executives

Carolyn Aver – Chief Financial Officer

Patrick Harshman – Chief Executive Officer

Analysts

Mark Sue – RBC Capital Markets

Mark Mckechnie – ThinkEquity

Blair King – Avondale Partners

Larry Harris – CL King & Associates

Simon Leopold – Morgan Keegan

William Stein – Credit Suisse

James Kissner – Jefferies & Company

Harmonic Inc. (HLIT) Q4 2011 Earnings Conference Call January 31, 2011 5:00 PM ET

Operator

Good afternoon. My name is (Jarrett) and I will be your conference operator today. At this time, I would like to welcome everyone to the Harmonic Fourth Quarter and Fiscal Year End 2011 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I will now turn the call over to Ms. Carolyn Aver, Chief Financial Officer. Ms. Aver, you may begin your conference.

Carolyn Aver – Chief Financial Officer

Thank you, operator and good afternoon everyone. I am Carolyn Aver, the CFO at Harmonic. With me at our headquarters in San Jose 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 the harmonicinc.com and clicking on the fourth quarter earnings call button in the Events section of the homepage.

Turning to slide two, 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 that actual events or results may differ materially. We refer you to documents that Harmonic files with the SEC including our most recent 10-Q report and the forward-looking statements 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 and pro forma basis. Revenues described as pro forma include Omneon as if they had been part of our results for the period stated. 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 Harshman – Chief Executive Officer

Thank you, Carolyn, and thank you everyone for joining us today. Turning now to our slide three, today, we reported record fourth quarter revenue of approximately $144 million, up 4% from the same period last year and up 3% sequentially from the prior quarter.

In the fourth quarter, we saw continued strong international growth and continued broadening of our customer base. Our international revenue represented 57% of our total sales. Notably, no single customer was 10% of our total sales and our top 10 customers represented only 34% of total revenue. Fourth quarter bookings were approximately $142 million as we continue to see strong competitive momentum across the growing base of global customers, media applications, and markets. At the same time, the lack of budget flush we saw in the final period of the year seems to indicate some continued customer caution with respect to the global economic environment.

Our operating performance has continued to improve. We’ve realized gross margins of 51% and delivered an operating margin of 13% and our non-GAAP earnings were $0.12 per share and we generated approximately $20 million of cash during the period.

So, let’s now turn to slide four to take a look at our full year results. We had record revenue of approximately $549 million, up 8% from 2010 on a pro forma basis. Our international revenue represented 55% of our total sales and our top 10 customers represented only 35% of total revenue. We’ve realized annual gross margins of 51% and delivered an annual operating margin of 12%.

Our non-GAAP earnings were $0.41 per share and we generated approximately $41 million of cash during the year. It’s important to consider these results in the context of the year when growth in the U.S. market and cable market in particular was challenging industry wide. In this environment, we attributed our ability to grow to our strategic focus on leveraging our video strengths across an increasingly broad base of global customers.

More specifically and turning now to slide five, throughout the year we’ve highlighted three areas of strategic focus, instrumental to our evolution to new kind of video company. First, we have anticipated an expanding international market opportunity. And consequently, we have been very focused on strengthening our sales and marketing position overseas. Second, in the internet era, we see broadcast and media companies as well positioned for significant growth. And we have been working hard to strengthen our customer relationships and product offerings for this market. And third, particularly in developed markets, we see a new wave of video applications and services for both traditional video networks and over-the-top delivery creating tremendous opportunities for innovative new products and solutions.

So, let’s take a look at how Harmonic performed in 2011 and has positioned to perform going forward in each of these areas. Turning to slide six, international expansion has continued to be a key strategic priority for us. In our international business delivered strong results in 2011. Our international revenue for the year was up 14% on a pro forma basis and international bookings remains strong to the fourth quarter. Our international revenue represented well over half of our total business encompassing a wide range of video applications from traditional standard-definition TV production and origination in fasting growing emerging markets to cutting-edge mobile video wins with a stronger and now fully integrated direct sales presence in more international locations than ever before complemented by a strong network to local resellers.

Our international business outlook remains healthy across geographies, market verticals, and product categories. Specifically, we foresee continued expansion of high-definition content production and service delivery across all geographies. Demand for new more personalized and mobile video services and particularly in developed markets and tremendous Pay-TV subscriber growth in emerging markets such as Brazil, China, and India.

Turning to slide seven, another area of strategic focus is our expanding business with global media and broadcast companies. For 2011, media and broadcast sales generated 32% of our total revenue and grew 17% over 2010 on a pro forma basis. This success spans traditional video production and delivery as well as new media applications. It was driven by powerful new solutions built from a combination of historic Harmonic, Scopus, and Omneon Technologies. The success also leverages our historically strong Omneon customer relationships.

Based on our market activity in 2011, it’s clear that our growing relationships with the world’s leading media companies represented significant strategic opportunity and advantage for Harmonic. Going forward, we see more opportunities in the broadcast and media area. These opportunities are driven by global proliferation of new media outlets and content being developed from multiple new platforms together with the growing adoption of higher performance products and solutions that spanned compelling new high-definition formats to more efficient internet protocol networking technologies.

Turning now to slide eight, we have also established Harmonic as a technology and market leader for a range of new applications and services within the context of traditional video delivery networks as evidenced in part by the strong demand for our growing range of versatile video processing products, where we saw revenue up 17% for 2011. Within the context of traditional managed service video networks, high-definition continued to be a key driver of new investment and Harmonic’s leadership position delivering the highest quality HD, while requiring less network bandwidth than competitive solutions continue to provide us critical competitive advantage across both geographies as well as customer types.

Our video processing growth was also bolstered by new IPTV projects, one with telcos around the world with our newest video stream processing products providing a compelling competitive advantage for IPTV applications. And beyond services targeted just for television sets, we also saw a trend with multi-screen applications delivered over managed networks for in-home consumption on devices like PCs, iPads and iPhones. And we are pleased to win several such projects, including the largest in-home multi-screen service we are aware of, a 500-channel simulcast deployment.

We also continue to extend our leadership in edgeQAMs to our introduction of next generation dense QAM technology with applications spanning video-on-demand, network PVR, and modular CMTS. In a study published in December, Infonetics reports that Harmonic maintains a commanding market share leadership position with approximately 40% of the edgeQAM market.

Beyond our outstanding technology, Harmonic is also increasingly considered by our customers to be a trusted partner, because we possess the expertise and practical experience to deploy and support even the most complex and demanding new video services. As a result, our service and support revenue grew 11% in 2011 and represented 13% of our total revenue.

Turning now to slide nine, 2011 was also the year we established Harmonic as a leading technology and solutions provider for the growing number of over-the-top video delivery players as we won strategic projects with a number of leading media and service provider companies. Among these wins, we are transcoding projects for leading domestic and international internet movie and TV serial on-demand streaming services, Cloud-based transcoding solution for major Hollywood studio and very high-quality live sports streaming services.

Looking ahead, the recent CES event in Las Vegas emphatically made the point that over-the-top services are increasingly evolving towards high-definition video, consumed on wide-screen connected TVs, and increasingly high resolution tablet devices.

Ensuring delivery of high-quality, high-definition video over bandwidth constrained networks is where Harmonic originally made its name. And we believe we are extremely well-positioned to lead as the over-the-top market moves more and more towards high-definition formats. Our new Electra 9000 and ProMedia products are uniquely capable of enabling super-efficient HD for over-the-top applications comprising what we think is a leading HD solution for both connected TV and mobile web services.

And leveraging not just our Electra and ProMedia video processing products, but also our advanced MediaGrid storage solutions and professional services, we see tremendous opportunities to capture more over-the-top business and differentiate ourselves as this market grows.

So, summarizing our thoughts on the over-the-top market, we believe the proliferation of video content and media outlets combined with increasing demand for higher video quality in every format including HD for wide-screen connected TVs, and further combined with the Internet and mobile networks that are increasingly bandwidth constrained. A real sweet spot of opportunity for Harmonic’s proven capabilities is really provided in emerging.

So, looking ahead to 2012 and turning now to slide 10, we continue to execute our key strategic imperatives as we move into this year. First, we are leveraging our increased scale, solution breadth, and competitive strength to capture greater share in international markets. We’re also continuing to work aggressively to expand our business with leading media companies and of course remain very focused on expanding our relationships with leading cable, satellite, and telco service providers worldwide.

Second, we are successfully extending our leadership position in new applications and high-performance technologies namely with video production, post production, and content management, internet delivery, a very high-quality video, and new integrated products with broader functionality that enable fundamental efficiency improvements for our customers. Our objective is to continue to lead the market and helping our customers deliver value creating services. And I remain confident that our pipeline of new products and solutions will further differentiate Harmonic in the marketplace.

And finally, leveraging the value we are creating in the global market. We intend to improve our operational execution and business model, the target R&D investments in highest growth areas of our business, and continue to carefully manage our operating expenses with the focus on profitable growth.

And on that note, Carolyn, I’ll turn the call back over to you to talk more about what happened during the quarter and the year as well as our financial outlook.

Carolyn Aver – Chief Financial Officer

Great, thank you, Patrick. Turning to slide 12, as Patrick has said, our record fourth quarter net revenue was $143.6 million, up 4% from the same period in 2010 driven by strong growth across international regions and particularly in the broadcast and media market. You will recall that the floods in Thailand affected our global supply chain that ultimately had only about a $0.5 million of adverse impact on our revenue in the fourth quarter.

Total bookings in the fourth quarter were approximately $142 million, up 5% from the same period in 2010. As we move into 2012, we are pleased to see that our bookings included improving market demand for production and play-out products. Non-GAAP gross margins remained at 51%, up just slightly from the previous quarter and last year. The floods in Thailand also had an impact on the cost of disk drives, which adversely impacted our gross margins in the fourth quarter by 20 basis points. We expect this impact to increase to 50 basis points and continue for another quarter or two. We expect product cost improvements as well as product mix to modestly improve gross margins as we moved through the year.

Operating expenses for Q4 of 2011 were $53.9 million comparable to the previous quarter. While we did see the expected benefit of higher vacation time and no big tradeshows, this benefit was offset in part by higher year-end sales cost. Non-GAAP operating margin was 13% for the fourth quarter of 2011, up from 12% in the previous quarter and comparable to the fourth quarter of 2010. Our non-GAAP net income per share for the fourth quarter was $0.12 per diluted share, up from $0.11 in the previous quarter and the fourth quarter of 2010.

Turning to slide 13, let’s look at our quarterly revenue and backlog in more detail. As noted, net revenue for the fourth quarter of 2011 was $143.6 million, up 4% from Q4 of 2010. Our backlog and deferred revenue at the end of Q4, 2011 was $125 million comparable to the previous quarter and up 3% from the same period of last year. As Patrick mentioned, we had little or no benefit from year end budget spending this year compared to a relatively robust benefit in 2010.

Moving to slide 14, we are very pleased to have continued to significantly diversify our revenue mix across different geographies, product categories, and markets. Our international revenue represented 55% of total revenue in 2011, up from 53% in 2010. With the exception of Q3 of 2011, a period when our domestic revenue was quite strong, our international revenue was grown steadily in recent quarters and we continue to show strength worldwide in both traditional and emerging markets.

During the fourth quarter, our international business was up 17% from the previous quarter. On an annual basis, international sales grew 14% in 2011. You can also see that our video processing revenues have rebounded strongly since the market’s domestic spending pause in the second quarter of 2011 driven by interest in the wide range of applications and increased market demand worldwide. For the year, video processing revenues grew 17% and represented 43% of our total net revenues. Edge and access revenue also remained strong representing 26% of the total.

Our production and play-out revenue represented 18% of total revenue and service and support was 13%. While our largest customer for the year was again Comcast, none of our customers were over 10% of revenue in the fourth quarter and our top 10 customers in Q4 represented only 34% of revenue, reflecting the continued progress we’ve made in diversifying our business. We saw continued strength in 2011 from our growing customer base of satellite and telco customers, which represented 23% of sales as well as from our cable customers worldwide, which represented 45% of our business.

In recent quarters, we have seen particularly strong growth in our broadcast and media customers, which represented 32% of sales in 2011. For the year, our broadcast and media revenue grew 17% on a pro forma basis. Despite quarter-to-quarter fluctuations in our overall revenue mix, our strategy of continued diversification across different geographies and markets is succeeding.

As you can see on slide 15, we continue to maintain a strong balance sheet. We ended the quarter with a cash balance of $161.8 million, up about $21 million from the end of the prior quarter and $41 million from the end of 2010. Our receivables balance was $109.9 million and we are pleased to see our DSOs decreased to 70 days in Q4, down from 76 days in Q3.

Our inventory was $70.6 million, up from the prior quarter reflecting increased sales activity in the second half of the quarter and a build of disk drive inventory to offset disruptions caused by the floods in Thailand. As a result, our inventory turns were down slightly to 4. Finally, our capital spending was $4.9 million in a quarter and $17.3 million for the full year.

Moving to slide 16, based on Q4 bookings and worldwide customer demand moving into Q1 which is generally our slowest period of the year, we remain cautiously optimistic. We did not see a budget flush in Q4, which may reflect some level of continued caution by many of our customers regarding the global economic environment. Taking all this into consideration, we expect net revenue for the first quarter of 2012 to be in the range of $132 million to $142 million. We believe the impact of the Thailand floods on our gross margin will continue for the next couple of quarters and have as much as a 50 basis point impact in each quarter.

Non-GAAP gross margins in the first quarter anticipated to be in the range of 50% to 52%. Product and geographic mix will continue to influence whether we are on the high or low end of that gross margin range. Our target for non-GAAP operating expense for the first quarter is $55 million to $57 million, reflecting the timing of employee compensation expense and our increased marketing activities this quarter. Our headcount was 1145 at the end of the fourth quarter, up 9 from the previous quarter and 39 from the end of 2010.

Finally, we currently anticipate our non-GAAP tax rate for 2012 will remain at approximately 25% based on the fact that the R&D tax credit has not been extended.

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

Patrick Harshman – Chief Executive Officer

Well, thanks Carolyn. Summarizing 2011 was a strong year for Harmonic. We delivered record revenue in our video-centric strategy and we will have to leverage an increasingly broad and global customer base to deliver real growth.

Our integration of Omneon extended our business into new markets driving significant growth in our broadcast and media revenue. While we delivered record revenue and 12% operating income in what was a tough year for many companies, we believe we can perform even better. We remain focused on leveraging our expanding customer relationships and product advancements to deliver even greater value to the marketplace and further strengthen our financial performance.

Moving to 2012 with good momentum and broad technological and market leadership and proven expertise in enabling our global customers to produce and deliver compelling new high-definition, on-demand, and Internet-based video services. We believe the global proliferation of video content and media outlets, along with increasing demand for higher quality video in every format delivered over bandwidth constrained networks plays into our core strengths. And we are therefore quite excited about the future.

And with that, we’ll end the formal portion of the call. And Carolyn and I would like to open it up to any questions that you might have. Jarrett?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mark Sue with RBC Capital Markets.

Mark Sue – RBC Capital Markets

Thank you. As we start the year, have you given some thought on how we might be thinking about the revenue growth outlook for Harmonic in 2012, particularly as you make improvements to your international sales force and as we see more dynamic trends across a broader base of customers. Could you just kind of help us frame the year that would be great?

Patrick Harshman

Well, Mark, I am glad you highlighted international. As I said in the prepared remarks, we are pleased with the fact that we are able to grow international business by 14% last year. And that does stand in somewhat stark contrast to our domestic business growing only a couple of points. We continue to feel quite confident about our international business and opportunity for growth. And frankly, our visibility in turn in international opportunities at this point in time we feel is greater than that into our domestic business. So, we feel, as Carolyn said, cautiously optimistic about our ability to continue to push forward through our international business that we have a little bit more of a question mark around the domestic market dynamics.

And here we are not talking about our business specifically, but some of the more broad trends that we see in the communications and high tech landscape. Because of this uncertainty around the domestic business in particular, we have elected not to provide full year guidance at this time. And we are just going to continue to do everything we can to execute. You can expect us to absolutely continue to press very hard on our international business and we think we can in fact do even more there. And we are confident that as spending rebounds in the U.S., we are extremely well-positioned to take advantage of it here at home too.

Mark Sue – RBC Capital Markets

Got it. And then maybe for Carolyn, I think 15% operating margins were sort of the target last year and I think I still have your IOU from 2011. So, maybe if we could think about the moving parts as it relates to operating margins this year and what you might be thinking of in terms of a target for investors?

Carolyn Aver

Sir, you are right. I think I have been pretty focused on that in my time here. I think that again as Patrick said we are not yet giving full year guidance. Having said that, I think our short to mid-term target to operating margin definitely continues to be 15%. At this point, I am not sure I see that we will be there for the whole of the fiscal year. We certainly would hope as if and as we expect to see revenue growth through the year that we would hit that in the latter part of the year, but not sort of prepared to give exact guidance yet, still definitely a target and working our way there.

Mark Sue – RBC Capital Markets

Understood. Okay, thank you and good luck.

Carolyn Aver

Thanks.

Operator

The next question comes from Mark Mckechnie with ThinkEquity.

Mark Mckechnie – ThinkEquity

I am sorry my questions have been asked and answered. Thanks.

Operator

Your next question comes from Blair King with Avondale Partners.

Blair King – Avondale Partners

Hi guys. Thanks for taking the question. Patrick, you had mentioned a fairly large multi-screen opportunity that I guess you closed in the most recent quarter. I was wondering if you could give us a little bit of color around that activity and then more broadly around the sustainability of that kind of activity both in the U.S. as well as in the international markets be really helpful to understand? Thanks.

Patrick Harshman

Blair, it’s still very much an evolving market. And although we are actually impressed with the growth that we delivered in that sub-segment, it’s still a smaller piece of our overall video processing pie. So, I want to kind of frame that at the outset for you. I highlighted in my prepared comments, I’d say, two distinct trends that we see and what is more generally called multi-screen. One is true multi-screen, which is going to appliances other than TVs. And here we see a pretty consistent trend of service providers, really with the U.S. operators leading the way in terms of securing the content rights and offering their customers the ability to wirelessly get to their iPads, their iPhones, their PCs inside the home for their subscribers.

And I highlighted a win there and actually we saw a couple of wins there. And we see actually some developed markets that being a trend that’s beginning overseas as well. So, that was certainly a one component of our multi-screen business. At the same time, I also spoke to pure over-the-top, which is not that is the operator who owns the network is not the one necessarily delivering the service. And here we are also pretty excited by the activity that we saw number of wins spanning service providers as well as content players, live things like sports and on-demand things like movies. And I just like to reemphasize the point again that particularly coming out of CES, we talked about multi-screen a year ago, it really was lower resolution video to a small screen. Now, for over the top, I mean, I think the topic has really changed to how can you deliver really good looking quality video, that’s coming through a Sony Blu-ray player or an Xbox or what have you to a Samsung or a Panasonic or sharp light screen device. This was on display just about everywhere you saw it in Las Vegas recently.

And there from our perspective that’s where it really gets exciting, HD video over a bandwidth-constrained uncertain environment of the open internet has a challenging problem indeed. And it’s one where we think that the success that we have had in the back half of the year is really just the beginning and we are looking forward to this market moving forward and maturing and we are looking forward to doing great things in it.

Blair King – Avondale Partners

Hey, super. One last follow-up if I might, Carolyn, the order that you received for the tablet driven order that you received in the first quarter of 2011, did that order achieved any revenue recognition in the quarter or do you expect it to achieve revenue recognition in the first quarter?

Carolyn Aver

It did. Thanks. Yeah, we recognized that whole order in the quarter, so that customer accepted that, that project went live, and we recognized it.

Blair King – Avondale Partners

Okay, thank you very much.

Patrick Harshman

Thank you, Blair.

Operator

The next question comes from Larry Harris with CL King & Associates.

Larry Harris – CL King & Associates

Thank you. This is somewhat I guess related to the multi-screen from a product perspective. What is the status of the Electra 9000? Did that start shipping in the fourth quarter or started shipping now if you could provide some sort of sense as to where we are with respect to orders or sales for that particular product?

Patrick Harshman

I am pleased to tell you we had one customer who just couldn’t wait. So, we actually set an early version of it for revenue in the fourth quarter and so that's pretty exciting. The 9000 will be formally released this quarter as we said and we will continue to add capabilities soon as we go forward. But we have – it's generating a lot of interest. It's in a number of other customer labs, and we’re pretty excited by the response that we're seeing for the marketplace.

Larry Harris – CL King & Associates

Do you think it might have similar ramp to the 8000 several years ago when people will focus just on HD.

Patrick Harshman

I think overtime, yes, I think it won’t be as quick Larry, not this much because of the product, but because there is still a number of issues – business issues, network issues etcetera that circle around, this whole topic of multi-screen. For all of our customers around HD was kind of a slam dunk, the set-top box and the TVs were out there and ready for it. They owned the rights. It wasn’t a question of rights and so they were – we were to grab our late technology and just kind of head to the racetrack and it’s a little bit more complicated as you know around multi-screen.

But on the other hand, I think time has been our friend. I think that the fact the people are starting – starting to dawn on people that multi-screen is more than just small screens, it’s actually HD video to these connected TV devices really makes the case. I think it’s causing people who weren’t previously thinking about this kind of technology, I think to really pause and to reconsider. And so, I don't anticipate maybe a rocket to the moon in the second quarter, but I think it's going to over the course of the year it's going to gain real momentum. Then I think it’s going to be pretty fundamental and redefining the way people think about the technology to really take advantage of this market opportunity.

Larry Harris – CL King & Associates

Great. And you’ve spoken about international, the sales being up 14% year-over-year, were there any specific geographic regions that were particularly strong or particularly soft and was there any impact at all because of some of the economic issues in Europe?

Patrick Harshman

So, into last part first, no, we didn't see, I mean – let me backup. Europe was quite strong for us. The truth is the business in Southern Europe was pretty slow that was more than compensated though by strength we saw at Northern Europe. So, overall Europe met and in fact exceeded our expectations for the year. Beyond that, there was no real particular area of great strength. I think we would acknowledge that Asia turned out not to be as quite the fastest growers we had hoped. We attribute that largely to the fact that Japan an important market for Harmonic and a very important market for the historic Omneon business was quite slow for obvious reasons last year. And that did cause a drag on our overall Asia-Pacific numbers. But outside of that, Europe both Western and Eastern Europe was strong, India was strong, we had a good year on Latin America. So, the strength was pretty robust and other than slowness in certain specific Southern European countries, kind of knock wood, but we have not seen any overall drag in Europe yet.

Larry Harris – CL King & Associates

Alright, thank you.

Patrick Harshman

Thank you, Larry.

Operator

The next question comes from Simon Leopold with Morgan Keegan.

Simon Leopold – Morgan Keegan

Couple of things, I want to clarity first, one was your service business was quite strong in the quarter and I just want to see if there was anything particular or we should think of it more as a seasonal pattern for services that made that one standout.

Carolyn Aver

Simon, I think as you know we've been investing in professional services. We've always had kind of the maintenance support revenue, and we've been focused quite a bit on professional services. The pop came from the professional services side of the business and part of that is engagements we had underway or the way in which those get recognized from time-to-time. So, I think that’s an indication that we’re starting to do a little more of that business and a couple of those engagement happened to fall in the quarter. I think like other parts of our business there might be up and down a little bit, over a quarters because it doesn’t big enough yet to be predictable, but certainly a good indication that our customers are valuing the knowledge that we can bring to especially some of these new initiatives.

Simon Leopold – Morgan Keegan

And you mentioned Comcast fell out of the 10% customer ranks for the quarter, but was for the full year. What was the business with Comcast for the full year?

Carolyn Aver

Because we are going to disclose that in our K it was about $59 million.

Simon Leopold – Morgan Keegan

And then you talked about that you gave us some guidance for the first quarter operating expenses a little bit of sequential increase and based on what you’re describing it sounds like primarily that increase shows up in sales and marketing efforts. Did I hear you correctly?

Carolyn Aver

Yeah NAB is this quarter, so that’s going to come back up again and then payroll taxes and those kinds of things across the board.

Simon Leopold – Morgan Keegan

Great and then more maybe a longer term question for Patrick. When we think about your full reporting segments how do you rank them in terms of let say a full year outlook in terms of growth prospects what do you see is the most promising on down?

Patrick Harshman

You’re talking about the different product categories?

Simon Leopold – Morgan Keegan

Yeah, so your segment video processing production and play-out, edge and access, and services. I just want to get a sense of sort of the relative expectations you have for growth from each.

Patrick Harshman

Okay. I think right now video processing was last year and continues to be at the top of the list. We had a slower year on the product front with production and playout, but we remain very excited about those products in fact the fourth quarter was our strongest booking quarter yet for those products. So, I would probably rank that second in the short-term. In near-term we see more modest growth as we’ve been saying from our edge and access products, although we do think that will accelerate for some industry trends. And we’ve just talked about service and support. We see that perhaps maybe not quite as fast as the fastest growing product but it’s up there. And in a scenario we will continue to be focused. I mean, putting it altogether, Simon we feel very good about the portfolio of our product line that we have and feel very good that there is a substantial growth opportunities really right across them.

Simon Leopold – Morgan Keegan

I appreciate that. Thank you.

Patrick Harshman

Thank you. Simon.

Operator

Next question comes from William Stein with Credit Suisse.

William Stein – Credit Suisse

First, the deferred revenue on the balance sheet came down quite a bit especially year-over-year. Is that a linked to the rev rec of that tablet order?

Carolyn Aver

Yeah.

William Stein – Credit Suisse

Yeah okay.

Carolyn Aver

And I guess the other thing so it’s that and the new accounting rules that we instituted this year caused us to defer less things. So what you’ve seen over the course of the year as a shift of deferred revenue going down, but backlog going up. So that what we call backlog, which is really backlog and deferred revenue has stayed relatively flat or increased over the year. So, we are having a shift of things coming out of deferred revenue and moving into a true dated backlog if you will.

William Stein – Credit Suisse

Got it and the budget flush commentary did that relate to any specific region or end market i.e. cable, telco, satellite, media or was that across the board in terms of market and GEOs.

Patrick Harshman

The statement was across the board, I mean I will say that historically the effect has been strongest in the cable segment and strongest in U.S. cable. So, with that being said we didn’t see much of it there or anywhere else, Will.

William Stein – Credit Suisse

Okay. And can you talk a little bit about the sales force integration with Omneon? This has been kind of a concerning issue especially to see the different product groupings, the revenue is maybe as evidenced by one of the earlier questions. A little bit hard for us to predict I think. Can you comment about how the sales force integration is going and their ability to sell the full solution, the full slate of products?

Patrick Harshman

Yeah. So, we have continue to get better throughout the year and the fact that the video processing grew as much as it did last year, 17% and if you kind of look at the numbers you see a lot of that came to the medium broadcast space, which meant a lot of that was actually happening being driven by the Omneon sales force. That element of it has gone extremely well. I think we’ve acknowledge the cross-selling the other way hasn’t progressed quite as much as we would like. So, we have made progress. I think we have seen some real benefit, but we still think that there is some more benefit to our execution to ring out of it and we are just continuing to make steady progress.

Let me just stepping back from the fact it is couple of different companies come together. We do have the challenge of more products and more technology than we ever had under our roof. So, for us is our overall sales organization just getting our arms around the capabilities that we have, this is complex stuff. We’ll acknowledgment that internal training and influencing literacy is a challenge that we're having a step up to as a company and I think that we will continue to get better. But I give ourselves decent grades last year as evidenced by the fact that we have been able to sell as much of video processing into the broadcast market as we do.

William Stein – Credit Suisse

Thanks for that. If I can just have one short follow-up Carolyn, you talked about this 15% operating margin goal that may not be hit this year for the full year and with the revenue growth is, do you have a view of what revenue growth you need to achieve in order to hit the 15% operating margin goal?

Carolyn Aver

I think that we were – I don’t know that I want to – it certainly has to be double-digit growth I think for us to be able do that for a few quarters a share. I do think fourth quarter should be a strong quarter depends on what happens how strong Q4 is, you can certainly get there without it, but I think really it’s we got to be up in the double-digit.

William Stein – Credit Suisse

Got it, okay. Thank you, guys.

Patrick Harshman

Thank you.

Operator

(Operator Instruction) Your next question comes from James Kissner with Jefferies & Company.

James Kissner – Jefferies & Company

First question I just want to clarify on broadcast, media, and other the strength there, if I back out – subtract out the production and play-out revenues last several quarters, it looks like there sort of that segment excluding that is up quite a bit and I am wondering is that all video processing or is the software and services component that’s grown a lot sequentially that also having an impact?

Patrick Harshman

It’s both, but principally video processing, James.

James Kissner – Jefferies & Company

Okay. So, broader question here in your outlook, your comments about domestic service providers being cautious. I guess, could this be – how do you know that just caution and just not as cyclical downturn in investment in video processing? I mean, could you make the argument that you know as great as multi-screen is, it’s obviously not as big an investment wave is among domestic service providers as new HD channels were. And just HD channel counts are getting pretty mature (indiscernible) video, how many more encoders do you need? I mean is that just an incorrect interpretation? How do you distinguish between just caution and just a cyclical downturn in this business in North America?

Patrick Harshman

The part of our commentary was looking beyond our own company and looking out what’s happening in the broader space, both companies that are working primarily with cable companies as well as people who are working with carriers. And I mean you’re probably looking at the same earnings announcements and projections that I am and we have not seen a huge amount of tremendous growth there and that’s kind of across different technologies and applications. So, as part of the broader commentary or the context in which we look at what we’re experiencing I mean just one thing you say.

I mean the second thing is that, we view the competitive environment and the pace of technological changes is having never been greater. There is both a tremendous opportunity as well as a tremendous threat for just about every service provider out there. This past week one cable operator announced decreased subscribers and I think telecom operator announced the big pickup in video subscriber. So, we see a lot of very and that’s nothing even to do with this over the top business. So, there is an aggressive competitive environment and we think we believe that the retaining customers rolling out new services to generate new revenue streams is critical to our domestic as well as international customers’ futures.

And we believe that the core services that will do this are all one way or another intimately related to new video services. And so we continue on a relative basis to be quite bullish about the opportunity for video, and what we see is a strategic importance video-related initiatives on the strategic priorities of our large service provider customers.

James Kissner – Jefferies & Company

Okay. That’s helpful. I have more questions and I’ll take them off-line. Thanks a lot.

Patrick Harshman

Okay, thanks.

Operator

No further questions at the time.

Patrick Harshman – Chief Executive Officer

Okay, Jarrett. It sounds as though we’ve got no more questions, and so we are going to grab the baton and go. Thank you everybody for joining us very much. Let me reiterate that we are excited about the momentum that we see really around the global with an expanding number of customers. We see tremendous opportunity to do new things. We remain incredibly focused as a company, not only to continue to lead from a technological point of view, but also to deliver great operating results. We are very focused, we are very committed to success, and we look forward to talking with you again in the near future. Thanks very much everyone.

Operator

Thank you for participating. This concludes today’s conference. You may disconnect.

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