Welcome to the Third Quarter 2017 Harmonic Earnings Conference Call. My name is Skyler and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I’ll now turn the call over to Blair King, Harmonic’s Director of Investor Relations. Blair King, you may begin.

Thank you, Skyler. Hello, everyone and thank you for joining us today for Harmonic’s third quarter 2017 earnings conference call. With me at our headquarters in San Jose, California are Patrick Harshman, our CEO; and Sanjay Kalra, our CFO. Before we begin, I’d like to point out that in addition to the audio portion of this call, we’ve also provided slides for this webcast, which you can see by going to the Investor Relations Page on harmonicinc.com. Turning to Slide 2, during this call, we will provide projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are only current expectations and actual events or results may differ materially. We refer you to documents Harmonic files with the SEC, including our most recent 10-Q and 10-K reports and the forward-looking statement section of today’s preliminary results press release. These documents identify important risk factors which could cause actual results to differ materially from those contained in our projections or forward-looking statements. Please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP basis. These items, together with corresponding GAAP numbers and a reconciliation to GAAP, are contained in today’s press release, which we’ve posted on our Web site 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 on a recorded version of this call on our Web site. So with that, I’ll turn the -- now turn the call over to our CEO, Patrick Harshman. Patrick?

Okay. Thanks, Blair, and thank you all for joining the call today. Let’s get started by turning to our Slide 3, where you can see the third quarter revenue was $91.6 million, just above the high-end of our guidance range. Video segment led the way of 15% sequentially, powered by a growing demand for live over-the-top platform. As anticipated, Cable Edge revenue continued to decline in front of the major market and product transitions that we will discuss shortly. Book-to-bill was again greater than 1 as new orders came in at approximately $96 million, up 5% sequentially. These new orders included a growing mix of video software and related services, and material CableOS commitments and driving our backlog in deferred revenue to over $200 million, a record level for the company. Gross margin in the quarter rose to 53%, driven by higher video segment gross margins will offset slightly by lower Cable Edge segment gross margin due to both declining legacy product volume and heavy new product introduction costs. The result was a profitable video segment and an expected Cable Edge segment loss resulting in a combined net non-GAAP EPS loss of a $0.01. So with that brief summary, let's turn to our video business on Slide 4. The key message here is that video revenue in the quarter was $84 million, up 15% sequentially accompanied by expanded gross margin and over 8% segment operating income that Sanjay will discuss shortly. This rebound was driven by a resurgence of new project spending, particularly in the areas of media play out and premium quality live over-the-top and by competitive share gains. Subset of this over-the-top business came in the form of new SaaS commitments. Total contract value from new SaaS over-the-top deals accounted for 6% of total company bookings, increasing over-the-top…

Thank you, Patrick. I would also like to thank everyone for joining our call today. During today’s discussion, I will cover two topics. First, our financial results for Q3 '17, and second our financial guidance for Q4 '17. Please note that the numbers I'd be referring to here are on a non-GAAP basis. Let's turn to Slide 6, and start with our Q3 '17 results. Revenue was $91.6 million exceeding the upper end of our guidance range compared to $82.3 million in Q2 and $101.7 million in Q3 '16. Video segment revenue was $84.2 million, also above the high-end of our guidance and compared to $73.4 million in Q2 and $91.7 million in the same quarter last year. Q3 Cable Edge segment revenue was $7.4 million, slightly below the low end of our guidance. These results compared to $8.9 million in Q2 and $10 million in the year-ago period. Our Cable Edge revenue is not expected to improve materially until CableOS shipments begin ramping, we get expected to begin late in the current quarter and pick up pace throughout 2018. Gross margin was $49 million in Q3 compared to $39.4 million in Q2 and $53.4 million in Q3, '16. Gross margin as a percentage of revenue was 53.4% in Q3, 47.9% in Q2, and 52.5% in Q3, 16. Video segment gross margin was 57.4% in Q3, 51.4% in Q2, and 54.1% in Q3 '16. The higher margin was a result of a favorable product mix, mid higher composition of video products with more software content shift this quarter. Cable Edge gross margin was 9.2% in Q3, 19% in Q2, and 37.3% in Q3 '16. The sequential and year-over-year decline is a combination of declining legacy product volumes and new product introduction costs. Operating expenses for Q3 was $47.7 million, just…

Okay. Thanks, Sanjay. Now turning to our Slide 10, we want to close by reiterating our strategic priorities for the second half of the year. For video business, objective number one is to capitalize on the ongoing market transitions to further accelerate the growth and success of over-the-top platform. Objective number two, maintaining alignment of our investments with customer demand to further improve the profitability of our traditional video broadcast product lines. And objective number three is to deliver high single-digit operating margin in our video business, again in the fourth quarter, just as we did in the third quarter. On the Cable Edge side of the house, objective number one is to continue to successfully scale our CableOS deployments, encompassing both centralized and distributed architectures, leveraging growing CableOS market momentum, and industry architectural transformation. Objective number two is to secure new design wins with additional Tier 1 operators. And objective number three is to exit the year with sufficient backlog, bookings, and new customer momentum to meet or exceed $100 million 2018 revenue target, positioning the business segment for return to the black and compelling growth well into the future. Our focus on these priorities enabled solid Q3 execution, and together with our strong backlog and opportunity pipeline, this gives us confidence as we head into the fourth quarter. As I know many of you already appreciate the major market transitions from traditional Pay TV to over-the-top and from traditional cable access to NFE with distributed edge, create both risk and opportunity. The internal investments and strategic shifts from Harmonic is made over the past several years have positioned our company to not only survive these crosswinds, but to thrive as premium over-the-top video in related cable access transitions to take hold. The results we presented today in both our over-the-top and CableOS areas make it clear that we're seeing real success in the marketplace and real progress toward driving renewed growth, profitability, and shareholder value. So with that, let's now open the call up to your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Timothy Savageaux with Northland Capital. Your line is now open.

Hi. Good afternoon. And congratulations on a good quarter. Question is on both sides of the business. First on the kind of Cable Edge side, among other things you're guiding to -- bit of a ramp here into Q4, and especially on the top line as well as a pretty dramatic improvement in gross margin as well, I wonder if we look at that ramp -- can that give us some indication of to the extent that revenues get more material, how that revenue should rollout from -- whether it's kind of a head end versus node, hardware versus software type perspective. Implicit in your guidance I think it's something like an incremental gross margin of 60% to just look at the revenue and margin guidance. Is there any sort of notion of kind of what would lead and what would lag from a hardware and software margin perspective or just the overall cadence of rollout on the Cable Edge side, head end versus node or however you want to try to address it.

l:

Okay. Well then to the extent that is CableOS driven and we're talking about incremental margin certainly well above 50%, I mean, would you want to revisit or comment on gross margin targets or prospects into 2018, having kind of reaffirmed that target of $100 million in revenue realizing there are likely still some legacy in there, is a drag, but what sort of -- to the extent and you tell me whether this modest ramp in Q4 can be looked at as a microcosm of what we might expect when the ramp gets more significant. But with that in mind is realizing that you've got some -- the law of small numbers here that might not be that meaningful. Any commentary on where you expect CableOS gross margins to sort out there relative to what looks to be a pretty modest operating expense base that you're carrying right now on the cable side?

Yes. Tim, so in Q3 as you said, there is a -- its a small numbers in Q3. The revenue is small as well. The margin is small. I mean, the margin is like, if you increase the margin by $0.5 million, the percent is kind of close to doubles of what it is. So, definitely it is a lot small number. But in Q4, its more on the CableOS side of shipments which does include software as well as hardware. And software -- with the software the margins would be up ticking in Q4 compared to Q3.

Okay, great. And moving on to the video side, I mean, you saw a nice uptick in the business here. I guess my question is, maybe to dig into the drivers there. I think you mentioned over-the-top, it's kind of a key driver, is there anymore metrics or big customers or deployments to put around that? And in general, I mean, I think visibility both on the plus and minus side has been a challenge on the video side of the business. Now that you seem to have some better visibility on the nature of the SaaS transition, which makes me think you might have some better visibility kind of on the overall quarterly pace in the business. So, question is about the specifics of the strength that you saw and also just your overall views on go-forward visibility in that business in general?

Well, hi, Tim. It's Patrick. Maybe I will take that one. Indeed, we were encouraged by the quarter. Frankly, the -- let me call the legacy business largely feeding into legacy Pay TV with actually stronger than -- relatively stronger than we expected. At the same time, we are seeing a more significant ramp and what I term or we term OTT 2.0. The initial wave of OTT was largely about video-on-demand and frankly there isn't that not much opportunity for Harmonic there. But as OTT now pivots to include live services, sports, etcetera, that really does come back to our sweet spot. And there's no question that there is a beginning wave of deployments and transition of, let me call them legacy broadcast services to OTT 2.0 that’s happening worldwide. I think that transition is still early days. We don't want to get too far out ahead of ourselves, but we were encouraged by what we saw in the third quarter. We're encouraged by the not only the backlog, but the pipeline that we have for the fourth quarter, that's what informs our guidance and our continuing positivity [ph] on the video business in the fourth quarter. And I think what we prefer to do is, let's deliver a solid fourth quarter and then we will assess and provide you an update. So we're cautiously optimistic that the -- that we've kind of rounded a corner in terms of this wave of OTT becoming more material and correspondingly our visibility improving. But I think we'd like to see another quarter that before we declare victory, but it does feel encouraging coming out of Q3 and into Q4.

Got it. Thanks. I will pass through.

Our next question comes from Simon Leopold with Raymond James. Your line is now open.

Hi, guys. This is Victor Sze in for Simon Leopold. So you spoke a bit about the impact of OTT services impacting the pace of investments for cable operators. Given the commentary from some of the service providers this quarter, do you believe we are seeing inflection point in terms of Pay TV investments? And if that's the case, is there some sort of a contrast there with regards to your outlook and your targets for cable -- CableOS and Cable Edge in 2018? And, I guess, just what specifically is driving your optimism in your confidence in hitting the target?

Let's say, I think you -- Victor you touched on two different things there. I mean, they’re in fact somewhat related. I think one of the drivers for CableOS and frankly new a transformation of the cable network is that the cable network is going to be under increasing pressure from over-the-top video services, delivered by both the cable operators themselves as well as third parties, Hulu or MLB or what have you, as well as things like 5G, a mobile service etcetera, a lot of which we heard about in the recent cable company conference calls. So over-the-top is a driver of more bandwidth than the network and I think that’s part of what creates the new $3 million opportunity, the growth that we see on the cable access side of the business. So let's put that to one side. So clearly there is going to be a lot of spend. Clearly there is a need for a fresh look at the cable access architecture to handle all this traffic. Then the video side of our business, we deal with actually helping companies that create that traffic, if you will. And that's a combination, I mean, actually cable operators themselves are -- they’re important, but a modest piece of the overall picture. We do with whole manner of legacy Pay TV providers, cable operators, satellite direct-to-home operators, telecom operators, brand new over-the-top startups and a lot of media companies who for the first time are getting into the active direct-to-consumer services on their own. So that's -- it's a pretty -- we're trying to do business with everybody in the video side of the house that is in the business of creating and launching and delivering new over-the-top service, traditional or new entrant. And as mentioned in the answer…

That’s definitely helpful. And just off of that, I mean, would accelerating declines of the legacy business be a point of caution to your target or does your target kind of incorporate that and see it -- you see enough growth in your new products to offset that, that's your target kind of incorporates -- the impact of [indiscernible] acceleration and declining like these products.

Yes. So, Simon, [indiscernible] if you see the history of our video business, there is a decline every year. However, if you look at our backlog and the bookings, they’re growing. We have a record backlog of more than $200 million ending this quarter and we expect book-to-bill ratio more than one again in Q4. We believe we will exit this year with a much higher backlog to underpin our confidence for 2018 success. So even though, historically we have seen the decline in video product revenue, at the same time the bookings do support and the [indiscernible] to OTT, Patrick, just mentioned is all part of it and that had all been factored into the bookings.

Great. Thank you.

Thank you.

Our next question comes from Steven Frankel with Dougherty. Your line is now open.

Hi. Good afternoon. Patrick, maybe let’s start with just a high-level look at this goal of $100 million plus from CableOS in 2018. Does that require winning significantly more Tier 1s or with the customers you have today either firm or in trial just having them rollout in '18 gets you to that $100 million?

You know, Steve, it's -- we need to have confirm design wins with additional customers. So we don't have every single dollar tied to, when we call it an existing customer. That being said, the visibility is pretty good compared to normal. We've got a good pipeline and that number comes from a -- the cable industry doesn't have that many players, so we're engaged with a lot. I’ve talked about advanced trials already deployments with 10. We’ve got a pipeline that goes much larger than those. So you can imagine a kind of a typical statistical waiting kind of methodology. Indeed, a couple of the largest gets us a big chunk of the money -- the forecast that we are making. There is a difference to be made up, but we have more than ample pipeline or more than ample customer engagements to give us confidence in that number based on the ongoing engagements we have.

Okay. And that early European customer that you had, is there been any material follow-on business from that customer?

Short answer is, yes. I mean, it depends on how we want to define material, but there has been real follow-on business and that deployment continues to expand.

Okay. And if dare to pocket this new Tier 1 CableOS customer, could you give us any more detail on may be to where they're located, U.S, Europe, Latin America and why you think you won?

Well, I'll respectfully decline on the first part. But why we won, this is a case where -- actually the -- not just that it's a good idea in principle, but the reality of the need for distributed and virtualization really comes into play in a specific part of the network frankly and we’ve challenged on, hey, what does a cable operator need another supplier? There is incumbents etcetera, etcetera. This is a particular operator who I think actually came at initially from that point of view. They have a specific problem to solve. The CableOS was able to solve uniquely from both a technical point of view and from a commercial point of view. And I wouldn’t go as far as to say they were reluctant, but it was really, really the proof was in the putting of a -- of extensive technical testing and capability that uniquely solved a meaningful problem that made the difference. And I think that goes to the broader point here. These architectural changes were talking about aren't just kind of this theoretical good idea, a kind of thing. As mentioned just a moment ago, these networks are coming under unprecedented pressure with the amount of over-the-top video traffic coursing across them, broader high-speed data consumption going up and up, and in many cases improving subscription, there is a -- there's pressure on these networks and there's problems for our customers to solve.

Okay. And then on the video business, How is the mix transferring -- transforming between proprietary hardware and customers doing either software or either bundled with pass-through hardware or virtualization?

I don’t think we have exact numbers that we can share with you, but I'd say the percentage of our business that we're doing based on our traditional proprietary, which really means ASIC based hardware, is much less than a half and probably less than a third of the overall video business that we're doing. The lion share of the business today is software that either we deliver on a white box server or the customer procures and installs on their own server infrastructure. And the, let’s say, the far end of the curve is either SaaS deployed or on-premises, but nonetheless cloud native deployment that our customer is doing. So we kind of have three buckets, if you will. I don’t know, I’ve got a bell curve pictured in mind. I don’t know if that works for you or not, the middle is probably the software deliver on a white box server or installed on a server is a kind of a bare metal or virtual machine by our customer. The far end of the curve is cloud native and the opposite end of the curve is -- let me call a traditional ASIC based hardware. So it's definitely become less than 40% or a third of the business, but it's still there and maybe that relates to the broader point, Steve. What we’re talking a lot about over-the-top and there is no doubt that transition is ongoing. I don't want to make it sound as -- we don’t want to make it sound as though it's a 100% 1 or 0 kind of shift, particularly outside of the U.S., where things were somewhat can move a little bit more slowly. There's still a solid $1 billion plus market for what I will call traditional broadcast infrastructure and continuing to fully exploit that market is absolutely important to the business for the foreseeable future.

Okay. And one last quick one. You’ve mentioned multiple times about the shift to OTT and live events, especially sports. Are there any particular events you might point to in the last quarter or two that you believe you played a key role in their successful OTT implementation?

Well, I -- there is two parts to the highlighting of live sports. Number one, any live -- any over to -- in these new over-the-top services that are carrying live events. I mean, for example, you can see the World Series or football or whatever that’s going on now, those services are delivered live to improve the skinny bundles and other streaming services. So one comment is that Harmonic is playing an increasing role in a number of these implementations behind the scenes. That's really where the activity is now. The second comment was, as we think about where our business can possibly go and we look at addressable market expansion opportunities, we are starting to look at, let me call them special events. I mean, don’t attach too much -- a specificity to this, but we're thinking about the Olympics or the upcoming World Cup, if you will. We see more opportunities around those kind of events. So, particularly, given that people distributing those events are now targeting not only small screens which is relatively easier technology job, but in fact are thinking about delivering those signals over-the-top to 60-inch screen. And by the way with super low latency that that is no later than its being delivered to the traditional broadcast pipe. So the goal doesn’t appear magically 12 seconds later, which the example of software doesn’t work. So this is -- the second category is where we’re starting to nibble around the edges. But as we think about our business and where we might go, we see that as a -- an intriguing addressable market expansion opportunity.

Great. Thank you so much.

Thank you.

Our next question comes from George Notter with Jefferies. Your line is now open.

Hey, guys. Thanks very much. I guess, I wanted to ask about CableOS. You mentioned the order from a second Tier 1 MSO, I was curious about that. Is that for commercial deployments or is that trial deployments? I guess, I'm just trying to understand the nature and size of the commitment there? And then, also a broader question, I guess, I was thinking more about the move of HFC networks to distributed access architectures and the timing around that. I guess, I'm wondering if you guys see the adoption of CableOS is being tied to either DOCSIS 3.1 or DOCSIS Full Duplex or deep fiber deployments, how do you see yourselves in the realm of those source of initiatives with the cable operators? Thanks.

Okay. So thanks for the question, George. The first part of the question is, and this -- and the design win that we have, it's an early order and we have to prove ourselves out and see that scale. But the point is we received an initial order and we’re excited to be -- to moving be moving forward with this. It will be a process, but we're in the door. I think it's the key point. The second point of question about architecture, we're currently involved in trials and discussions that involve all variations of what you just spoke to. As I believe you were in the Denver event and you held last week or whenever it was over the cable -- Tech Community got together. There's a lot of different permutations of what people are looking at with distributed? One is DOCSIS traffic is distributed just to the interesting note locations. Another variant is nodes are pushed further or fibers pushed deeper. And as you mentioned there's a third variable there which is the RF split changes. So you’ve got capability for higher upstream. The bottom line is we can support all of those, and I go even further into say actually that’s part of the beauty of having a virtualized or off software core is that you can very easily inflexibly support all of that giving a huge amount of agility to a cable operators who may be looking at different versions of what you just explained for different neighborhoods, different business opportunities, or consumers versus small businesses etcetera. So we don’t see ourselves tied to any one of those, particularly variance of the HFC architecture permutations that we see ourselves as enabling all of them and indeed that's reflected in the engagements that we currently have ongoing.

Got it. Thank you.

Thank you.

Our next question comes from Greg Mesniaeff with Drexel Hamilton. Your line is now open.

Thank you. Question on CableOS. Given the $100 million run rate bar that you guys said, how much of that it's going to have to come from market share gains given the current growth of the TAM in your view?

Well, I mean, not that. It's a tough one to answer exactly, because the market is transitioning. So I think we would be hesitant to colleges market share gain because it’s not a static market. It's kind of not -- it’s an imperfect analogy, Greg but -- I mean, think about gasoline combustion engines moving to electric, and we're coming in with an electric version. I mean, is that market share gain or is feeding into a new growing part of the market. I guess it's a little bit of both, but I think that's one way to think about what’s going on here with our technology and we're clearly the innovator and out way ahead in the -- and what we are -- if you will, in the electric motor part of this.

Sure. Sure. But, I guess, what I was trying to say was that even with a robust pick up in the TAM growth, there is still going to have to be some gains in market share from direct competitors to kind of get into that level.

Well, there are some case. But the market today is, I think, everyone thinks as well over a 1.5 billion, or maybe close to $2 billion in the neighborhood. So we are -- $100 million is a relatively modest portion of that. And then you layer on to that the fact, but some portion of that existing market is transitioning and to the last question some of it is -- some of the market is expanding. People are pushing fiber deeper push people are upgrading their data handling capabilities. So this is not necessarily a rip and replace of things that worked fine, but this is part of a ongoing operator strategy of pushing more high-speed data deeper in to the network.

Sure.

So, we are new to the market. We have a sliver of market share today. So from one perspective, I would agree that all of it is kind of market share. We're going to see a part of the CCAP market, part of which is going to Harmonic. But I think from another perspective we will predominately be going into applications where either virtualization and/or distributed access really make a difference for customers and from that perspective I think that we’re plowing into new territory. I'm sorry for the -- that was a wishy-washy answer, but I think it's a little bit above.

No, fair enough. I was -- my follow-up to that is with all the inputs you’re getting from your key customers, what's your best take on when we will see for lack of a better term a hockey stick here, in terms of growth? In terms of like what -- is it first half of next year or is it middle of next year or is it second half of next year?

So, I think it's a little bit early. We've -- we stuck to and we done kind of a another bottoms up in anticipation of this earnings release on our view. Our pipeline as mentioned a moment ago, for '18 we still feel good about that number. In fact, we probably feel a little bit better because of the expanding customer dialogues and relationships and the lack of dependence on anyone or two particular customers, so the pipeline of engagements are clearly there. Other than sizing the breadbasket for you, it's just too early for us to give you any kind of a quarter-by-quarter shape to how that will play out. I do hope that we are able to give you a little more color on our next call, Greg.

Okay, fair enough. Thank you.

All right. Thank you.

And we have a follow-up question from the line of Timothy Savageaux with Northland Capital. Your line is now open.

Hi. I had a quick follow-up on the new Tier 1 customer announcement. Though a lot of that’s been covered. Although I will just add the following, I suppose, which is as you look at that opportunity at least on what you said in thus far, it's sort of -- it seems like it could be a solution to a specific problem a relatively niche opportunity. So would you care to size that opportunity, given you’ve already noted it's a global Tier 1 top five operators. Relative to some of the bigger deals you already have in-house or in any way sort of talk to whether that’s kind of a network wide opportunity for you or pretty specific -- in understanding things will start and fairly targeted fashions. Is there any way for you to relate the nature of this new Tier 1 win to your current Tier 1 when, number one. And then, number two, at least based on some of the work I’ve done coming out of the show in recently, it doesn’t seem crazy to maybe assume that over time your initial Tier 1 customer couldn’t run at a $100 million a year run rate. Are you kind of taking that off the table and I’m understanding that you might now want to have that degree of concentration, but any comment on that front either?

Difficult questions to answer, really while at the same time respecting the confidential we have with our customers, frankly. Let me answer it this way and forgive me for more generalities on the first part. But I think that what we’ve developed is an amazing platform, that has unique advantages either on a centralized or distributed approach. The key for us is getting the foot in the door. As it is I think always for a new market entrant, you got to find the -- the specific use case. I'm thinking of a company in the switching area that had super high-speed switching and they found a niche with finance companies who needed super low latency, and that was their foot [ph] in the door, but then they get going and then growth starts coming. And so, I believe that what we’ve developed is not at all a niche product. It's the product that the market -- its not only once, but it's going to need. Our path into different operators, just going to come in different ways. Some operators are going to embrace us and say philosophically we get it. This is where we want to go. Others are going to say, I’m not so sure yet, but if you consult this specific problem for me, that's way in the door. I expect we are going to come in the side door, the back door, the front door with different kind of operators. But the key thing is as once we get in there Tim I think we're going to do an amazing job. I think that the capabilities of platform are going to become self-evident and our goal is to become not a niche, but the predominant solution. I mean, that's certainly has to play out. But that's…

Okay, thanks.

All right. Well, thank you very much. And I think that that brings us to the top of the hour and we should wrap things up. Just in summary, let me reiterate that we're executing on our plan to capitalize on the new wave of global investments in both premium quality OTT as we discussed, virtualized CCAP and this distributed cable access architecture. From an operating perspective, our third quarter results demonstrate that we've made good progress repositioning the business. And looking ahead, we remain focused on both profitably and from -- on both profitability, excuse me, and driving positive free cash flow, while of course continuing to deliver differentiated new technologies and services to the market that really will build long-term value. We appreciate your support and thank you all for joining the call today. We look forward to speaking with you again soon. Thank you.

Thank you

Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.