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Harmonic Inc. (NASDAQ:HLIT)

Q1 2012 Earnings Call

April 24, 2012 5:00 pm ET


Patrick Harshman – President and Chief Executive Officer

Carolyn V. Aver – Chief Financial Officer


James Kissner – Jefferies & Co.

Mark McKechnie – Thinkequity Llc

Blair King – Avondale Partners LLC


Good afternoon. My name is Diane, and I will be your conference operator today. At this time, I would like to welcome everyone to the Harmonic First Quarter 2012 Earnings Conference 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 would now like to turn the call over to Carolyn Aver, Chief Financial Officer. Ma’am, you may begin your conference.

Carolyn V. Aver

Thank you, Diane, hello everybody. As Diane said, this is Carolyn Aver, I’m the CFO of Harmonic. 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 and clicking on the clicking on the first quarter earnings call button on the Events section of the homepage.

Now, 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 recently filed 10-K 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 Harshman

Thank you, Carolyn, and thank you everyone for joining us today. Turning now to our slide three, today, we reported our results for the first quarter of 2012, which were in line with the preliminary estimates that we announced earlier this month. We had disappointing first quarter revenue of approximately $128 million. We approximately got off to an unusually slow start, and our European business remains soft throughout the quarter. As one would expect, the weakness in Europe had the most significant impact on our revenue for the video processing and production and playout product categories. On the other hand, we had a very strong quarter for our cable business with particularly robust demand for edge and access products.

Our first quarter bookings tell us different story than revenue. Our bookings were record $142.5 million, up 8% from the first quarter last year; and generally in line with our original expectations. Excluding the continued softness in Europe, we saw solid momentum across every other geography, and we had record service and support bookings.

Our operating performance was also disappointing relative to recent quarters, as gross margin slipped to 47%, reflecting an unusual product mix driven by the software video processing and production and playout results in Europe and stronger edge and access sales. As a result, we realized non-GAAP earnings of $0.03 per share. And we also generated approximately $7 million of cash during the period.

Turning now to slide 4, our earnings call in January laid our three years of strategic focus for 2012. Continuing the broadband on global customer base, extending our product leadership position and then achieving operational excellence. We remained very focused on these initiatives, so let’s take a closer look at our progress over the past quarter.

Turning now to slide 5, we have indeed continued to broaden our global customer base for the first quarter. Excluding the softness in Europe, our strong bookings growth demonstrates our solid competitive momentum, in other regions worldwide. In particular we had record Latin America bookings and a strengthening Asia-Pacific business as demand from Japan is bouncing back.

At the same time, our global cable bookings where strong up 13% from the first quarter last year. As we did in 2011, we continue to expand our global footprint broadcast and media customers. Including our recent announcement from significant alliance with Modern VideoFilm, NBC, Home Depot. We also continued to expand our global footprint with video service providers driven by our broaden portfolio products and services. We will penetrate in deeper into our long-standing service provider customers and leaning over new customers, including our recently won IPTV project with a major teleco.

And turning to slide 6, well multi-screen video represents relatively small portion of today’s global video infrastructure spending, more engaged in an increasing number of deployments involving new approaches to producing and delivering over the top second screen services, this is spanning both on-demand and live broadcast.

Using several significant new Internet area, including our recently announced deployments of new high definition mobile and web services with Swisscom powered by our ProMedia Live platform and NBC Olympics use of our ProMedia and MediaGrid products, which would jointly enable content creation for, mobile video platform distribution and IPTV and VOD services in support of the upcoming London games. And we also closed our largest ever transcoding software deal with a major Internet player.

More generally, during the quarter we had record bookings for our ProMedia product line, which is our Intel based platform for multi-screen services that we launched last fall. To capitalize on this building marketplace momentum, we’ve continued to invest and expand our multi-screen technology leadership.

Just last week, we announced the introduction of our new ultra-dense ProStream transcoding appliance; a very exiting new product that is raising the bar for efficient transcoding of HD services, and generated quite a bit of interest in last week’s NAB event. We also recently demonstrated and announced the first multi-company MPEG DASH streaming video system in cooperation with Akamai and Qualcomm.

In summary, we are pleased with our continuing progress and increasingly strong competitive position in the multi-screen area. Looking ahead, it’s clear that consumption of premium video as the latest iPads, Internet connected TVs and other high-resolution screens is growing. And as they do, HD over the top services will proliferate, hence the marketplace will continue to struggle with [bank] accounts. And Harmonic’s distinct technology leadership and video quality, compression and bandwidth management will become an increasingly important competitive advantage.

Turning now to slide seven, we’ve also continued to extend our market leadership in the broadcast and media segment with the introduction of important new video products that complement the multi-screen products I just mentioned.

Our new ChannelPort playout server, which represents the most significant new playout product release since our Omneon acquisition is extremely well received in the last week’s NAB event; combining very innovative graphical channel branding and master control switching with our market leading Omneon playout server technology. Our ChannelPort enables broadcasters and media companies to speak the cost effective deployment of new television channels by upgrading rather than replacing their existing infrastructure.

This is really important for range of applications including growing out new international or targeted channels, and for infrastructure upgrades designed to reduce ongoing operational expense, which as you know is a key industry priority.

In a similar way, our new ProView 7100 incorporates very high performance transcoding and receiver decoder functionality into a single integrated platform further strengthening our growing content delivery portfolio. With a strong pipeline of compelling new products that similarly integrates historically separate video functions into new high-performance and operationally efficient appliances, coupled with expanding relationships with the operating media companies. We continue to see significant strategic opportunity and advantage for Harmonic in the broadcast and media area.

Turning now to slide eight, we’ve also continued to extend our leadership in cable edge and access. During the first quarter, our edge and access revenue increased 18% from the same period of 2011, driven in large part by the fast growing footprint of our new HectoQAM system, expands VOD, modular CMTS and switch digital video applications.

As you may recall, a study published in December by Infonetics reported that Harmonics had a commanding market share leadership position with approximately 40% of the edgeQAM market.

With the growing shipments HectoQAM, we believe we are continuing to gain market share. And keep in mind that while initial chassis sales of this new HectoQAM, carry lower gross margins, we expect future software license upgrades by our customers as their network traffic increases. This license strategy worked well for us and for our customers with the prior generation edgeQAM product, and the model becomes even more powerful with our higher QAM density HectoQAM product.

We’re also moving forward with our closely related strategic CCAP and we continue to see very positive customer response for our CCAP architecture and approach. And we’re expanding cable edge footprints and market share gains in response to all these product innovations, be clearly the fact for our largest cable customers see us as a long-term strategic partner in this cable edge space. Our further CCAP client shipments are planned for the first half of 2015.

Turning now to slide nine, the first quarter 2012 also underscores how our broad and deep expertise in video infrastructure sets us apart in the marketplace.

Our services and support revenue represented 14% of our total revenue. And we have the highest services and support bookings in company history, which will mostly be recognized as revenue in future periods.

Our depth of knowledge, experience and service excellence is an increasingly important element of our value proposition as video infrastructure projects are becoming more complex and fast moving, and as our customers strive to reduce their operating expenses. We believe that no other company knows more about delivering premium video over next generation IP networks than Harmonic; and we’re seeing an expanding opportunity to exploit this advantage.

On that note, I’ll now turn the call back over to you Carolyn, to talk more about the results of the quarter and our financial outlook, and I’ll then wrap things with some final thoughts.

Carolyn V. Aver

Okay. On slide 10, our first quarter results were inline with the preliminary estimates we gave earlier this month. Our net revenue was $127.7 million, down 4% from the same period in 2011. As previously announced, net revenue was adversely impacted by an unexpectedly slower order rate in the early part of the quarter and a decline in demand from European customers throughout the quarter.

As Patrick noted, our bookings show a somewhat better story. Total bookings in the first quarter were a record $142.5 million, up 8% from the same period in 2011 with bookings strong across all markets and geographies except Europe.

As previously discussed, our gross margin for the first quarter of 2012 were impacted by the unusual revenue mix with lower video processing and production and playout sales and increased cable edgeQAM sales. Additionally, we continue to have a 25 to 50 basis point impact from the Thailand floods on the cost of disk drives.

Non-GAAP gross margins were 47% down approximately 400 basis points from the previous quarter and last year. Lastly, as we experienced with each new QAM product cycle, our new edgeQAM products initially carry lower gross margins, but are expected to enable future sales of higher margin software licenses.

Operating expenses for the first quarter of 2012 were $56.1 million, up 4% from the previous quarter and year ago, and in line with our original expectations for the quarter. The increase is largely due to an increase in R&D spending related to the new product introductions and investment earnings. Our headcount was 1164, at the end of the first quarter, up 19 from the end of the previous quarter and up 43 from the end of Q1 in 2011.

In the near term, we plant to carefully control our expense growth. The unexpected revenue shortfall and lower gross margins clearly impacted our bottom line. Non-GAAP net income for the first quarter of 2012 was 3.2 million or $0.03 per diluted share compared to $10.3 million or $0.09 per diluted share for the first quarter of 2011.

Turning to slide 11, let's look at our quarterly revenue and backlog in more detail. As noted net revenue for the first quarter was $127.7 million down 4% from that’s incurred a year ago, and after several quarters of steady growth.

On the other hand, our backlog and deferred revenue at the end of Q1, 2012 was $135.7 million up 9% from the previous quarter, and up 11% from the same period in 2011. The large component of the increase in backlog is due to service booking which will be recognized over the next several quarters. And a small component was an increase in production and playout backlog due to the timing of orders received in the first quarter.

Moving to slide 12, while we have continued to expand our revenue base across different geographies, product categories and markets, our revenue mix was unusual compared to recent quarters.

Our international revenue represented 52% of our total revenue in the first quarter of 2012 compared to 56% in the same period of 2011. This decline is primarily a result of softness in Europe. Weakness in Europe particularly impacted by video processing and production and playout revenues. For the first quarter, video processing represented 41% of our total revenue and production and playout represented 16% both down from recent quarters.

Our very positive area for the first quarter was that our edge and access revenue was up 18% from Q1 of 2011 and represented 29% of our total revenue driven by the success of our HectoQAM edge product. As Patrick mentioned, we also had record bookings for service and support, which represented 14% of our total revenue.

While most of these bookings will be recognized over edge revenue in the future periods, the strong service bookings indicate the growing activity level surrounding complex deployments and the competitive importance of our unique experience. While our largest customer for the quarter was again Comcast at 10% of revenue in the first quarter, none of our other customers were over 10% of revenue.

Our cable customers represented 46% of our business reflecting our strong edge and access sales and relative softness in Europe where cable represents a relatively smaller portion of our business.

Our satellite and telco customers represented 21% of sales, and our broadcast and media customers represented 31% of sales in the first quarter. Despite quarter-to-quarter fluctuations in revenue mix, which was especially through in this first quarter, we believe our strategy of continuing to expand and diversify our customer base around different geographies and markets is succeeding.

As you can see on slide 13, we continue to maintain a strong balance sheet. We ended the quarter with a cash balance of $168.5 million, up about $7 million from the end of the prior quarter, and about $51 million from the first quarter in 2011.

Our receivables balance was $111.8 million, and our DSOs were 80 days reflecting the very back-end loaded nature of this particular quarter. We’re pleased to our inventory at $65.5 million down from the prior quarter; as a result, our inventory turns were up slightly to 4.1.

Finally, our capital spending was $3.7 million in the first quarter, and we expect CapEx for 2012 to be between $15 million and $20 million comparable to last year.

Moving to slide 14, given our strong balance sheet, I’m confident in our ability to continue to generate cash, Harmonic today announced the plan to repurchase up to $25 million of common stock. We expect to make open-market purchases based on a number of factors including price, strategic priorities and other market conditions. These expected repurchases will be funded from available working capital and will counter delusion from incentive stock program.

Turning to slide 15, well, we are encouraged by the solid bookings and customer demand in most regions moving into Q2; and we do anticipate sequential growth in the second quarter. We still see some certain near-term visibility regarding European business, and many of our customers remain cautious regarding the global economic environment. Taking all this into consideration, we expect net revenue to be in the range of $130 million to $140 million in Q2.

Non-GAAP gross margins in the second quarter are anticipated to be in the range of 49% to 51%. This represents a rebound to more typical margins that was the expectation that continued softness in Europe will continue to tilt the product mix towards cable, edge and access products which carry a somewhat lower margin.

Product and geographic mix will continue to influence whether we are on the high or low end of our estimated range for gross margin. Additionally, we believe that 25 to 50 basis point impact we’ve seen from the disk drive issue will continue for the next several quarters. Our target for non-GAAP operating expense for the second quarter is $56 million to $57 million, reflecting our increased marketing activities in the second quarter, offset by our plans to moderate near-term hiring and other expenses.

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

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

Patrick Harshman

Thanks, Carolyn. And turning to our last slide, slide 16. In summary, the results of the first quarter do not dim our confidence in the fundamental growth opportunities before us, driven by the proliferation of video content and media outlets, the increasing demand for higher video quality in every format, and the challenges of Internet and mobile bandwidth constraints.

Moving into 2012, we’ve continued to strengthen our competitive position by expanding our technology leadership, expanding our global footprint, and continuing to invest in key strategic programs.

Well, our momentum is solid across most regions worldwide, we do face some near-term visibility challenges particularly in Europe. And as a result, we’re confident in our competitive position and fundamental opportunity, we plan to be cautious in our outlook for the second quarter. All the while, we will continue to execute our strategic initiatives and position the company for sustained competitiveness, growth and profit.

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 have. Diane?

Question-and-Answer Session


(Operator Instructions) Your first question comes from the line of Mark Sue with RBC Capital. Your line is open, sir. We’ll go to our next question. Our next question comes from James Kissner of Jefferies & Co.

James Kissner – Jefferies & Co.

Hi, can you hear me guys?

Patrick Harshman

Yes, we can.

Carolyn V. Aver

Yes we can.

James Kissner – Jefferies & Co.

Great, thank you. I just want to clarify, just giving all the discussion about Europe, could you help us perhaps quantify how much of your business overall is exposed to Europe, and perhaps how much Europe was sort of down either quarter-over-quarter or year-over-year?

Carolyn V. Aver

Sure, we haven't disclosed Europe specifically and we don’t want to get into that. Having said that, it’s certainly a significant part of our international revenue and you know, the largest piece of everything and probably approaches in any given quarter somewhere around half of international, I’d say without getting specific.

And again, I don’t know if we want to get into specifically how much it was down, but it was down significantly from a bookings perspective.

James Kissner – Jefferies & Co.

Okay. That’s helpful. Is there any way to characterizing, or do you feel like this was sort of a one quarter push or just sort of the Europe operators have just sort of said, like we just can’t given our revenue support, expanding our channel counts or service offerings, is there a way to sort of characterize what kind of – they’ve been spending here, seeing there was a temporary or longer term in nature in Europe?

Patrick Harshman

James, I will take that. I mean we are calling it as poor visibility. And the truth is we don’t know. The first quarter is always a little bit the strange quarter, it always gets up to a somewhat slower start. And so from that perspective, the earlier part of the quarter wasn’t a surprise, and what was the surprise is that we’re spending in Europe unlike elsewhere didn’t really start to pickup.

Now we had a record year on Europe last year including a record fourth quarter. So it’s a little bit strange from our perspective that things would really change or die that quickly. On the other hand, there are some pretty well known and documented macro economic things that are quite active over there. Other companies and are brought for broader state have certainly had their own commentary on Europe. And we also do a fair amount of business with the telecoms in Europe and apart from any global macro economic issues there is also some regulatory things that playing out.

So we see a number of possible reasons, we are fundamentally optimistic that the media business, the pay-TV business is a strong one in Europe. And so we – I think we are cautiously optimistic that this is not in anyway a prolonged downturn, but frankly, it’s not what’s we saw coming in the first quarter. And therefore, we are remaining somewhat cautious on to really see how that plays out. And we hope to have better visibility as we go through the second quarter here.

James Kissner – Jefferies & Co.

Okay, thank you. And just one last question and I’ll pass it on. I just want to turn to something for positive just – in terms like the growth drivers for the year, like which regions or countries would be even more helpful, do you think would be sort of the biggest needle movers in terms of growth this year, I mean I heard you say Latin American bookings were strong, I don’t know if that’s up a small base, I mean or countries like India really important to you growth opportunity this year? Could you just provide some additional picture sort of geographically where we should have look for potential growth opportunities this year?

Patrick Harshman

Yeah, so let’s – I mean closely oversimplified, let’s just break the rest of the world into two regions, let’s call one emerging markets, which I would include Latin America, places like India; I wouldn't include Japan there, but Southeast Asia and China. And there we actually said last year that was a significant – that would of a somewhat smaller base, we – I think kind of previous call that was – that could double the overall international growth rate.

Our international growth rate, you may remember last year on a pro forma basis was about 15%. So we saw about 30% growth and we call that broad emerging market arena. And what we’ve seen so far leads us to suspect, but that’s the kind of thing we can look forward to. We’ve been continuing to invest in our go-to-market capabilities in those markets Asia as well as Latin America that I’ve mentioned particular and we are quite optimistic.

On the other hand, I would point out that last year was a mixed year for us with our overall international business including Europe being up 15% with our domestic business roughly flat. And what is encouraging about this first quarter is that we really have seen our domestic customers also bounce back from a spending point of view. This past quarter was our strongest cable quarter in a couple of years and of course, well, we do business with cable operators all around globe, cable spending is generally driven by the large cable operators in the U.S. And coming out of recent NAB show, we saw a ton of broadcasters and media companies including from the U.S. and we are – we see ourselves gaining momentum and we hope that’s a more buoyant market than it was in 2011. And early returns in terms of an order rate in the first quarter were encouraging in that regard as well.

James Kissner – Jefferies & Co.

Thank you very much.

Patrick Harshman

Thank you.

Carolyn V. Aver

Operator? Diane, are you there?


And your next question comes from the line of Mark McKechnie from Thinkequity.

Mark McKechnie – Thinkequity Llc

Hi. I just have one question. On multiscreen front, can you comment on your competitive position versus [NVIDIA], they reported some pretty good coverage of cable and mobile operators in the recent S-1. And do you think there is still source provider for multiscreen with accounts or are you shipping products along the sidelines to these main carriers?

Patrick Harshman

I’d prefer not to comment any one specific company. But I would say that, as we’ve said in the past, this is a busy space, in addition to our traditional larger competitors, there’s a number of smaller companies, the one you mentioned is one of them. And this market is characterized by a lot of experimentation and trials and so we – I’m not aware of any single source basically in any account. I mean that’s perhaps too broad of a generalization, but in general that’s the case. We see a lot of experimentation and trailing going on and particularly as it’s often the case in our new market, these different little niches that evolve and different companies really carve out their spots in the early day in one niche or another.

And so there is a number of creative smaller companies that are out they’re working hard and particularly when they are – have lesser than commentary position or legacy customer base they can be very focused. And I think we’ve been very candid about the fact that out of the gate, a number of the smaller companies in particular got a number of smaller initial trials. What we really see is over the past 18 to 24 months, we think we’ve been really coming on strong.

A couple of things have happened. We’ve significantly increased our focus in this area, we started to leverage more and more of our video knowhow and expertise into products that address this space and I think that we’ve been having including the one that I mentioned here with mobile op – telecom operators likes VISCOM with media companies like NBC and they are over the top delivery, the Olympics, we see ourselves gaining more and more attraction.

And the other thing that’s important to note is that, the market itself is changing. And if you go back two years ago multiscreen was kind of a perhaps a grainy YouTube kind of video on a very small screen. Now actually the applications that catch the imagination of the leading service providers are very high quality video, it’s major league baseball to an iPad, it’s a very high quality HD movie streaming over an Xbox to a large screen Samsung Connected TV.

So the paradigm is no longer kind of a second tier quality experience, it’s a top tier quality experience, and this is really where Harmonics excels, it’s clearly deployed by the industry today, and as we see more and more HD content flowing in these kind of screens, over mobile networks, over the Internet, our expertise is really starting to shine. And so we’re excited about the direction of the market, we think it’s really coming to our core strength as a company.

Mark McKechnie – Thinkequity Llc

Thank you.

Patrick Harshman

Thank you.


(Operator Instructions) All right, and your next question comes from the line of Blair King from Avondale Partners.

Blair King – Avondale Partners LLC

Thank you for taking the call. A question, I guess Patrick perhaps for you just broadly in terms of obviously Europe, Europe has been weak, but obviously the broadcast and media end market space you’ve spent some time today talking about some optimism around, and clearly there is some market opportunities around some of these new products that you’ve introduced, the ProView 7100, sort of completely refreshed Omneon product line from quarters past. And as channel-in-a-box product that have all recently been introduced.

I know that the Omenon piece of business has been heavily weighted towards Europe. But maybe you could talk about how the distribution channel outside of Europe is being penetrated and where you are in that space, and what the opportunity for some of these new products might look like for you guys this year?

Patrick Harshman

Well, thanks for the question, you’re right. The company does enjoy particularly strong broadcast to media presence in Europe, but you are also right that one of the reasons why strategically Harmonic wanted to enter the broadcast to media space is because we see tremendous growth opportunity really right around the globe.

In fact the fair amount of the demand and opportunity we see in Latin America is around new content, new media companies, new channels being put up, new content being produced, and the same can be said for much of Asia. And as I mentioned, just a moment ago, we actually see, we see resurgence of activity among the broadcast and media companies in North America.

(inaudible) event that was held last week was, it was interesting, the pretty good presence and pretty good excitement and discussion of projects from the domestic, the Canadian operators and so that was encouraging for us. I think somewhat surprising was actually the strength of the presence from overseas. I was really impressed by the amount of Latin America traffic we saw in the booth, the number of people who came from Asia who made the trip. And I think that really, we don’t think that they do that just to, this economy doesn’t allow you to do that just for fun. The reason really they were there to discuss real projects.

And so we do see growing opportunity, broadcast to media, really right around in the globe. And we continue to get positive feedback on what we’re doing at the product level. And I think just as importantly many of these companies are also just looking for a company that they can really partner with and part of our strategy is to bring not only great products but service, support, capabilities, local presence, whether that being out of Singapore, out of Hong Kong, out of Beijing, out of Mexican City et cetera. And we feel so that message, our focus on the market from both the technology, as well as the service and support perspective is being well received by the broadcast and media industry, and we think it’s the right time.

Blair King – Avondale Partners LLC

Is there anyway we get a little more specific bill on the sort of the – just the success with the distribution channel, is it scratching the surface on the distribution channel, do you feel like you’ve established the distribution channel, is there still lot of work to do, I’m just trying to get a better sense for where you are.

Patrick Harshman

Yeah, okay. Actually the Omneon business for me acquired a little over a year ago had a fairly well developed and a strong distribution channel. One of our objectives was to leverage that channel to also bring historic Harmonic products to market. And I would say that we’ve made real progress, but there’s still a lot of opportunity or ways to go.

Candidly or relatively Harmonic historically, once it is good at leveraging the channel and it’s something that we’re learning. And in fact some of the people, the talent relationships that came in through Omneon had really helped that. So in deed some of the success that I spoke about in Latin America, the success in places like South East Asia, it’s definitely being driven in consort with reseller channels. So we think it’s going well and I can’t give you a specific number but it’s growing, it’s an important part of the growth strategy. We are pleased with the progress but candidly there is also work to do an opportunity to be here.

Blair King – Avondale Partners LLC

Right, and then just a couple of other quick question. One was, you had mentioned you would close this large multiscreen order this quarter. I think you said the largest one ever. And I suspect that’s a new bookings number for the second quarter. Can you give us a sense and when you think that closes books and revenue or do you book it in the second quarter do you think or is it one of these projects that might leak out?

Patrick Harshman

No, I mentioned a project that for us in terms of a file-based on demand transcoding project, this was our largest deal ever. It was booked in the first quarter and I don’t care when I think probably I don’t want give anymore color around Internet. These deals have historically been more modest in size in the traditional pay television life, encoding and transcoding deals player.

So what’s interesting is to start to see the size of some of this file-based work start to grow to be comparable and I think it’s speak to the fact that some of these Internet services are now involved in not just in the limited movie library, but they started to get more and more involved with television serious et cetera. So the movie libraries are growing.

The amount of video processing to do there is still less than in the live television world, where you are processing 1,000 and 1,000 channels of newly produced content everyday. But the world is slowly moving toward more on-demand model and that means the video processing demands or the on-demand (inaudible) are growing. And for us it’s a good sanity check, reality check to see that the size of our transactions on an area. Although still in general smaller than the large life deals that we do are starting to growing concept with the market development.

So we will keep you appraised on that trend, but we are pleased to be doing good business with new Internet guys as well as the traditional pay television service provider people as well. And that’s really the core of our strategy, it covers many different accounts, different business models as possible and get the most leverage out of our technology.

Blair King – Avondale Partners LLC

Thanks, and Carolyn, one last quick question, you did the on stock buyback, can you give us a sense for how aggressive you guys might be on that plan or how you chosen the $25 million or just some thoughts around how you guys plan to approach?

Carolyn V. Aver

Yeah, I think that – we aren’t going to buy that all back this quarter, I think we will be active this quarter in buying back. I think we’ll try to have a steady pace versus aggressive go out and buy it all at one time. I think we looked at several factors for that amount that include, the cash we’ve generated, it’s personally half the cash we’ve generated in the last four quarters, the amount of our dilution, our future strategic objectives and opportunities. So the first time we’ve done a buyback, we think it allows us – take a meaningful buy shares out, but at the same time leaves all our alternatives open to us, which was important to us.

Blair King – Avondale Partners LLC

Okay, thank you very much. I appreciate your time.

Carolyn V. Aver

Certainly, thanks.

Patrick Harshman

Okay, thanks.


Your last question comes from the line of Blair King from Avondale Partners.

Patrick Harshman

Okay. It sounds like Blair you where lost, thanks very much, and let me just finish the call by again thanking everyone for participating. And I want to reiterate our confidence in the fundamental trends behind this market. We’re certainly frustrated and disappointed by the slowness we see in a certain geography. At the same time, we’re encouraged by the robust response, the momentum that we see in all the geographies.

We’re continuing to push the competitive advantage that we have or continuing to invest, and we continue to see great opportunity for us to really make a difference in the marketplace, grow this business, grow a level of competitiveness and grow a level of profitability. Incredibly focused on growing a stronger – a healthy business and getting that to even stronger revenue growth and the kind of the earnings, the operating margins targets that we’ve laid to you before. And believe me that this company is incredibly focused on that and we see every opportunity to deliver on that vision.

Thanks very much everybody.


This concludes today’s call. You may now disconnect.

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