Welcome to the Q1 2019 Harmonic Earnings Conference Call. My name is Gigi 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 call is being recorded. I will now turn the call over to Nicole Noutsios, Investor Relations. Nicole you may begin.

Thank you, operator. Hello everyone and thank you for joining us today for Harmonic's first quarter 2019 earnings conference call. With me today 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 the webcast, we've also provided slides to this webcast which you'll see by going on the webcast portion of our IR site. During this call, we will provide projections and other forward-looking statements regarding future events or future financial performance of the company. 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 statements section of today's preliminary results press release. These documents identify important risk factors which can cause actual results to differ materially from those contained in our projections or forward-looking statements. And 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 posted on our website and filed with the SEC on Form 8-K. We also discuss historical, financial, and other statistical information regarding our business and operations and some of this information is included in the press release. But the remainder of the information will be available on a recorded version of this call or on our website. And now I'd like to turn the call over to our CEO, Patrick Harshman.

Well thanks Nicole and welcome everyone to the Q1 call. Starting with our financial headlines, revenue was $80.1 million, gross margin was 54.5%, EPS was minus $0.05, and we generated $4.2 million of cash from operations. Strategically, there was a lot of positive activity that we're looking forward to updating you on today. At the top level, our CableOS initiative continues to progress. Our lead tier one customers made good progress in preparing for Q2 and Q3 launches in multiple global cities, while our first wave of midsize cable customers further expanded their CableOS deployments with total cable modems served over 670,000 at quarter end. In our Video segment, we saw a material step-up in both SaaS deal pipeline and in new SaaS customers and we delivered our seventh consecutive quarter of Video segment profitability. Now, taking a closer look at our Cable Access segment, there's no question CableOS momentum is strong and building. We've continued to expand and diversify our customer base. The global number of commercial deployments and field trials was 32 at quarter end. Among these are several bellwether Tier 1s including four of the top eight North American and European cable operators. As anticipated, this activity has not gone unnoticed by other operators and during the quarter, we signed an important new agreement with the National Cable Television Cooperative to jointly offer CableOS to the co-op's over 750 cable operator members. For the end of Q1, paid CableOS deployments were powering DOCSIS 3.1 broadband service for over 670,000 residential and business cable subscribers, up 24% sequentially demonstrating that our fully virtualized technology can and is being deployed and operated at scale. We've also continued to extend our competitive advantage through new innovations. Since the beginning of the year, we've made eight new unique patent filings further…

Thanks, Patrick and thank you all for joining our call this afternoon. Before I share with you my detailed quarterly remarks, I would like to remind you that the financial results I'll be referring to are provided on a non-GAAP basis. For the first quarter of 2019, revenue was $80.1 million at low-end of our expectations. However, this was balanced by strong gross margins of 54.5% at high end of our expectations and lower operating expenses of $47.5 million, resulting in a $0.05 EPS loss, which are the mid-point of our guidance range. These results were coupled with strong cash of $69.9 million and book-to-bill ratio greater than one positioning us well for the rest of the year. Turning to slide six to take a closer look at our Q1 results. Revenue of $80.1 million compares to $113.6 million in Q4, 2018 and $90.2 million in Q1, 2018. The sequential decline reflects typical seasonality, while the year-over-year decline reflects broad and customer transitions in both segments, which I will cover momentarily. We will now turn to our segment revenue and results. Cable Access revenue was $12.9 million, above the mid-point of our guidance range compared to $24.1 million in Q4, 2018 and $18.5 million in the year ago period. While we steadily ramp the CableOS and DAA activity in our Cable Access segment over the past four quarters, you will recall that our Q1 guidance anticipated a pause by a couple of Tier 1 customers, who were temporarily slowing to implement trial informed improvements to their system architectures before volume deployment. As I will explain momentarily when I discuss guidance, we expect this delay to be resolved during the second quarter. In our Video segment, we reported revenue of $67.2 million compared to $89.5 million in Q4, and $71.7 million…

Okay. Thanks Sanjay. Perhaps tackling your final comments there we want to wrap it up by highlighting our strategic priorities, and expectations for the remainder of the year. For Cable Access business, our objectives are to further scale our current CableOS deployments to secure new design wins with additional operators, such as, the National Cable Television Cooperative members. And most importantly for this year to ensure our Tier 1 customers', volume DAA deployments through the second half are successful. For Video segment, our objectives are to continue our journey to becoming the leading live over-the-top streaming solution provider, to leverage our SaaS offerings and associated relationships with Microsoft Azure and Akamai. To expand our addressed market, tapping into new higher-growth customers and business models like, we recently announced INDYCAR relationship. And to deliver consistent segment profitability just as we've done over the past seven quarters. So I'm going to close by thanking our strategic customers and partners, our talented team members, and our stockholders for your continued support. With that, we'd now like to open up the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question is from John Marchetti from Stifel. Your line is now open. Q – John Marchetti: Thanks very much. Just wanted to jump in real quickly here Patrick on the guidance and the outlook particularly in the CableOS segment, not surprisingly given the guide for Q2 it implies obviously a very, very healthy ramp just to even get to the low end of the full year outlook. You mentioned one customer coming in, a little bit in 2Q seeing that hopefully expand into Q3 and Q4 as we go through the year, just curious if -- from your perspective if that visibility relative to where we were this time last quarter has actually improved? If you're actually seeing some of that momentum or if it's more still just dialogue at this point, just trying to get a little bit more comfortable with that implied second-half ramp. A – Patrick Harshman: Yeah. Thanks John. The visibility has definitely -- has improved substantially. We -- frankly we had good visibility in the fall as we mentioned and Sanjay just alluded to, coming out of a couple of a significant scale trial activities. So there was a couple of major architectural change decisions made by our lead customers. And going into the beginning of the year, frankly, there was a little bit of uncertainty about the exact timeframe that those could be implemented and how we would kind of get back on track. But the good news is all that work is just about done. And we feel as though, we're largely currently getting back on track. And as a result of that, we've got extremely detailed insights into plans for the remainder of this quarter and the remainder…

And then maybe, if I can just sneak one last one in on the Video side real quick. Sanjay, could you quantify at all maybe what the actual, sort of, revenue headwind that we're facing? As SaaS has ramped up it seems a little bit quicker than you had anticipated certainly in the first half of this year and it looks like that's expected to continue just given the reduction to the full year outlook.

Yes, John. So let me tell you that for the first quarter, we expected approximately 5% of our bookings to come from SaaS. And for the whole year we are planning 5% to 10%. In Q1, we were slightly behind the plan and for the reasons, which I discussed in my prepared remarks, but all the opportunities are still with us and still in the pipeline and as the year progresses, we should be able to close them. And the headwinds in terms of SaaS are actually of two categories; one is just a ratable recognition versus upfront, which is kind of baked in the plan. But the second headwind basically is the delay of, sort of, ratable revenue itself. And as the booking expectations are now being based on a longer sales cycle. You know so they'll take more time to close versus the plan. So -- and if with the SaaS bookings are getting delayed versus our planned timing, we will see more or less headwind for that for recognition. And the impact is also coming on appliance bookings as well for the same reason. So the impact is modest as of now in Q1, but as the pipeline time-to-close improves, we may be able to get back and hence we have taken a prudent approach for the Video business for the year.

Thanks. I will jump back in the queue.

Thank you.

Thank you. Rich Valera from Needham & Company is online with a question.

Thank you. Looking at that back-half ramp Patrick, I'm wondering if you could give any color on your expectations for kind of the hardware-software mix there? You know, clearly if its hardware that would require a very significant production ramp for you, but if you could give any color around how you think about that in terms of kind of nodes versus licensing that you can kind of turn on with a key?

Well, it's going to be really the first real volume of the whole package. So we do expect as these are DAA. We do expect it to be node-rich and frankly, heavier than on average in the past. And I think that's what is behind some of the margin trends that Sanjay communicated. But we expect to go along with that the CableOS software licenses. So as we've noted in the past at least qualitatively you can expect and we expect more hardware revenue than license revenue, but probably more gross profit associated with the software licenses giving us on balance the target margins for the CableOS business that we've talked about. So it's -- we think it's going to be the things that we've been looking forward to for a while the balanced mix of the two. Sanjay, anything else to elaborate on that?

Yes. No -- I'll just give some more color. In terms of the guidance, if you look at, the guidance for Cable segment is-- margins we used are in the range of 35% to 45% and I think midpoint close to 40% is what we would expect depending upon how the product shift-mix changes. But you know, we will see both in Q3 and Q4 how it shapes up but I think having an average of 40% is the right mix. And if you see like last year we got close to 44% as well and we had a decent mix of hardware and software. So I think the mix is going to improve in outer years. And as the DAA rolls out completely, we may shift of more licensing coming on later. But this year 35% to 45% is a range we've used. And from our experience of mostly simple order Q1 which was primarily hardware-dominated we came at 35% in our guidance for purely Q2. So I think that gives a shape for the mix for the second half.

Got it. And one more if I could around your Tier 1 customers. Patrick, it sounds like from your comments that there are three total Tier 1s you expect to ramp in the second half? Just wanted to clarify that. And then I was hoping you could repeat and/or add to the comments around your international Tier 1 customers that sounds like you're expecting significant bookings from in Q2 if not I think you expect to be your largest bookings customer. So if you could just elaborate on those two points I'd appreciate it.

Sure. So just the beginning we've highlighted among our customers, we said there's four of the top eight operators. So what we're referring here specifically the Tier 1 is four out of the top eight across if you look at North America and Europe combined. So there's domestic and international in there. And indeed three of the four, we expect to really get rolling with significant volume before the year end. One of those three we -- is on the cusp of getting going here in Q2. And the other two, we expect to be kind of the light to turn green in Q3. So that's, I guess, I think that's one part of it. The fourth Tier 1 I think we're a little less confident about when real volume starts. They're perhaps a little bit behind the other three. So one of the first three is, I just want it to tie-back to something we've talked about before. one of the three who is going to get going in a high-volume way is the same international operator, unfortunately, still unnamed that we referred to a couple of quarters ago, when we said we signed the largest contract in company history over $50 million deal. And the point that I wanted to highlight here is, although, we've yet to recognize revenue, and in fact, although they have yet to start deploying in the field in volume, their confidence has risen to a level where against that contract now, they've started a significant flow of orders to us. And in fact in terms of order input, they were our largest booking customer in the first quarter. And we've already had a strong start to the second quarter with this customer as well. And so we're convinced enough that we have ramped up our pipeline additionally from where it was in the fall to accommodate this additional value – volume, excuse me. And so we're looking forward to that activity really being a big impact, as part of the combined Tier 1 activity between now and year-end. I'll pause there. Rich does that answer the question?

Yes. That's exactly what I was asking for. Thanks Patrick.

All right. Well, thank you.

Thank you. Steven Frankel from Dougherty, your line is now open.

Good afternoon. Patrick I'd like to go at this visibility question maybe a little different way and maybe you can help me connect the dots. So you mentioned that you have increased visibility, you have a customer that's going to ramp in Q2. We don't see that ramp in the revenue. Is that because the ramping to is actually that customer putting the remote find notes that they purchased last year out in the field and starting to ramp up deployments? Or are you saying there's a revenue ramp at that customer that's not in the guidance you gave us today?

They're -- it's mostly the former Steve. As you do recall, clearly, we booked and we shipped a pretty heavy volume of nodes in the back a third of last year in anticipation of this ramp starting really the end of the year. We had that pause. And some of them have been consumed. We now expect the consumption to really grow. So the Q2 part -- the biggest part of the Q2 ramp with this customer is consuming stuff that's already been purchased and delivered.

Okay. Great.

Steve to that point, I'd like to point out some data points, which are very clear to us in -- from the numbers. And if you look at our total backlog as I pointed in my prepared remarks, Cable backlog is up 38% quarter-over-quarter. If you look at inventory, it's up -- it's 72 days versus 45 days or 56 days in comparable periods. And this number of days is up primarily because of our DAA nodes, which we've been manufacturing. And not only just the inventory, if you look at our off-balance sheet purchase obligations, including inventory for our total Cable business it's up 24% quarter-over-quarter and actually 60% year-over-year. And the other trend we see in the Q1 bookings and also the Q2 bookings to-date for Cable are in a very similar ratio of what we expect the ratio of annual Video and Cable revenue to be. So the bookings -- current bookings are aligning in the same fashion as we expect the revenue to shape up, which gives us a lot of confidence that it's coming back in shape. And as Patrick pointed out, we have this more than $50 million deal with a large Tier 1. We received significant piece of bookings in this quarter and that's approximately $9 million we have received of that. And the revenue of that is very minimal at this point. So, all these facts give us the confidence for the second half.

Great. And then on the Video SaaS transition where do you expect this new metric of SaaS plus service to be by for the full year?

So we had 35% recurring revenue for Q1 as I pointed out approximately. And -- but there's a split. Video was approximately 36% and Cable is 28%. Our expectation for full year is total around to be 30% plus. But again for Video and Cable, the ratios are different. So let me tell for Video for the whole year, it's going to be a little higher than Q1, because of our growing SaaS portion, say, is going to grow 36% plus. But for Cable, as second half ramps for CableOS that revenue will mainly qualify for appliance integration category and i.e. the non-recurring category. So we should expect SaaS and service revenue not as high as we saw in Q1, so it could drop to 10% to 15%. But overall for the whole company we expect it to stay at 30% plus. And we believe this is a very strong indicator of significant and stable income cash generation, especially where we are transition in both the segments. And if you leave the percentages apart if you just look at the absolute dollars, we believe the total absolute dollars has to grow. We expect the absolute dollars to grow from -- exceed from high $20s million to at least mid $30s million.

Okay. And then on this SaaS move, would you characterize these as new or -- new customers like an IndyCar? Or are you also seeing increased demand from your traditional broadcast customers that are now essentially moving away from appliances to SaaS as they bring up incremental applications? A – Patrick Harshman: It's definitely both Steve. For example, recent press releases covered both. IndyCar is absolutely a new kind of customer. And particularly we think they're -- increasingly we think that there's a real sweet spot around new players dealing with live sports. That being said, we also announced PCCW who is the incumbent telecom operator in Hong Kong and a real mind share leader in the broader Asia Theater. And that's a case where they're a traditional -- historically they've been a traditional appliance customer and they are pivoting now to SaaS. So we're dealing with both. And in particular the latter the traditional guys I think it's where I'd characterize it as a headwind. Where traditionally we would close a new appliance deal quite quickly having that dialogue around okay what are the new economics what's the new operating model. If they pivot to a SaaS platform it's -- there is a learning process there. And I think it's understandable. But ultimately it's a very positive trend that more and more of incumbents are looking at this. And it's also a positive trend that we are expanding the addressable market to new over-the-top players. Q – Steven Frankel: Okay, great. Thank you so much. A – Patrick Harshman: Thank you.

Thank you. Simon Leopold from Raymond James is online with a question. Q – Victor Chiu: Hi guys. This is Victor Chiu in for Simon. Thanks for the detail and the insight into the expectations for the second half Cable growth. I was just wondering, if you could help us understand the dynamic maybe a little bit of the expected growth from these three or four cable customers. Are they replacing entire chunks of legacy footprint? Are they adding virtual CCAP from new deployments or a mix of both? A – Patrick Harshman: It's a mix of both. Let me I guess make two comments. DAA is all about pushing fiber deeper and significantly stepping up the capacity of the network to deliver kind of the quantum step-up in broadband data rates to consumers. Some operators have already started that with legacy and are now going to pivot and that's the case of one of our lead Tier one customers. And others are kind of waiting for this to begin the initiative of pushing fiber that much deeper. So it is a little bit of both with these particular Tier 1s. But Victor by focusing so much on the Tier 1s I want to make sure it doesn't get lost if you'll allow me the fact that it's not just about that. I know there's been a lot of interest and we put a lot of focus, we have a lot of focus on scaling our Tier one customers. But at the same time, I don't want -- I hope it's not lost that even before we get to a Tier 1, we're just under 700000 connected cable modems at the end of the quarter. And that whole -- that part of the customer base is growing and frankly most…

Thank you.

Thank you.

Thank you. George Notter from Jefferies is online with a question.

Hi, guys. Thanks very much. I guess, I wanted to dig in a bit here on CableOS. If I go back two-and-a-half years ago, when you signed this warrant arrangement with Comcast and we know that nine months ago you completed field trials there. We can see that certainly in the vesting of the warrants and the differential between GAAP and non-GAAP revenue. I guess, I'm just curious if this whole narrative now, we're talking to multiple Tier 1s ramping up does this include Comcast or are we talking about other operators in the mix here?

Well, George, I can't comment specifically on Comcast other than -- in terms of relating it back to any of my comments about timing. The Comcast relationship, stemming back from that original agreement, continues to be extremely important to our company. And our -- it is a top priority of our business in general and our CableOS initiative in particular to be a successful technology partner deployed in volume by Comcast. Other than that, I won't say more about Comcast in particular. But I think it's -- of course, by highlighting that there's several Tier 1s, four out of the top eight across North America and Europe, the point there is that, no matter how you cut it, there's others involved besides Comcast. We think that what we're working on and what we started working on with Comcast a couple years ago is just the right idea. And particularly the forward -- most forward-looking of the operators, we think they've come around to that kind of thinking. And it's not just they've come around to it, there's now substantial investment and activity there. So we -- our aspiration is that Comcast is an important contributor to revenue and gross profit going forward, but by no means the only contributor. And our ambition over the next several years is to be number one in this space. I mean, I'll be clear about it. And if you take a look at that market research or perhaps you were there at the light reading event in Denver a couple of weeks ago, but it is -- that research is clear that the majority of the spend is going to be in virtualized CMTS and associated DAA components. And -- so, our view is that the company that is number one in virtualized -- and virtualized in DAA is going to be number one in this market and that is our ambition. It's turned out to be a longer journey than we thought, particularly the end-to-end DAA system involves a lot of other components, not just the virtualized CMTS. So what's happened is, is the pie has gotten larger, but also more complex. That complexity has manifested itself as more time to market. And the good news is the resultant opportunity and the resultant resonance with more than just one operator, have both moved in a very positive direction from our perspective.

Got it. And then, I guess, maybe that's an interesting segue. You mentioned that you're not seeing competitive products in lab trials, it sounds like anywhere. I guess, I'm wondering, why do you think that is, just your opinion? I mean it seems to me that virtual CCAP has been, kind of, in the forefront, I think, of the conversation around this industry for a number of years now. I mean, two, three years, certainly. I mean, why do you think there aren't competing products in the labs that you're seeing? And any views there? Thanks.

I don't really know George. I mean, I will tell you that we've invested a lot and it's nontrivial. It's taken a long time. And frankly, we had to head start, because we also had experience with cloud native coming from the video side. So even before we started this initiative, we had already started at the corporate level to pivot ourselves into a software and cloud kind of company. So I think that was a little bit of wind at our back. And I think that there's also been a -- until relatively recently, I think, you'll recall this, but there's been a lot of skepticism or questions out there. Is software scalable? Is it going to work, et cetera, et cetera? So I think it's -- I think, that there's been some doubters and naysayers out there. And so, it may be the case that some of our competitors legitimately viably didn't really believe that this technology was going to be the right answer until more recently. Now, listen, I'll emphasize again, I don't know what I don't know and maybe they're just about to release something new and exciting that we're completely unaware of. And I -- that could be the case too. But I think -- yes, I think I'll stay on the fact that it's difficult, it's time-consuming. It takes a unique skill set, which is quite distinct from what I would say the traditional CMTS development capabilities are. And that takes some time to assemble from the time when you actually believe that this is the right architectural direction.

Got it. Great. Thank you very much.

Thank you, George.

Thank you. Tim Savageaux from Northland Capital is online with a question.

Good afternoon. Lot of numbers swimming around in my head here. So a quick question on that kind of backlog and bookings and then kind of a broader question on Cable Access. You mentioned a 40% sequential increase in backlog on the cable side.

On Cable for Cable. Yes.

Right. And was there also a comment about bookings sort of from a proportional standpoint being kind of more in line with where you expect the year to come out from a revenue standpoint or what should effect? Obviously the backlog increase implies a book-to-bill above 1. I guess to make it quick how far above I guess would be one question. And given the ramp that you're expecting in the second half I'd imagine -- you talked about a rebound in bookings, but it's not as if they were down for Cable in Q2. But I guess further growth would you expect that backlog growth to accelerate in Q2?

Yes. We do expect the backlog growth to accelerate in Q2 for both segments. But what I was pointing earlier was 38% is an increase only in Cable backlog we have seen in Q1 compared to prior quarter Q4. And bookings in Q1 as well as the bookings in Q2 today which I mentioned was the new bookings happening are in the same proportion of revenue expectation i.e. in the same proportion of Video and Cable. So yes, these are giving us more confidence in terms of how the year should be shaping up.

Great. And the Cable Access question is I think coming out of last quarter at least part of my takeaway might have been that it may not have necessarily been Harmonic's technology per se, but challenges on the customer's part and operationalizing that technology which is around a pretty large scale project. And as you've seen the year has developed I guess how would you distinguish between those two issues which is to say the maturity of your hardware and software technology relative to the customer's capability to operationalize it? And has that -- to the extent you comment about increased visibility is that part of it? Or what kind of visibility do you have on that front?

Operationalization is certainly early part of it Tim. But the bigger issue is -- I would say falls under the umbrella of integration, particularly the DAA architecture is broad. It involves not only the CMTS component it involves a lot of additional external networking equipment. It's tied in because it also carries legacy video services as well as new video services over IP. There is integration with both new and legacy set-top boxes other video devices et cetera. So it becomes a pretty big broad integration project specifically around DAA. So sometime around last fall really the pivot for us it's never 100% black and white, but I'd say pivoted away from kind of getting the virtualized CMTS ready and was more end-to-end integration. And then working through issues some of which touched us, others which were really independent of us. And it's those integration and system-level issues that have been I think taking a little bit longer than anyone expected over the past several months and that we actually think we're now just nearly clear off. And of course that ties into the -- well that's just maybe another way of saying operationalization what you just said. So that said, and that's one of the reasons that Tim if I could -- why we continue to hammer on the fact that where we have kind of just the clean, let me call it a centralized deployment of CableOS as a centralized CMTS. We're nearly 1 million, we're trending towards 1 million connected cable modems and the systems are stable working well and performing from a business metric point of view just as good as the -- just as reliably as the CMTS systems that they replaced. So we're more confident than ever that the core CableOS as a CMTS is increasingly I would say rock-solid. And now we're really getting there together with our customers in these broader end-to-end systems -- DAA systems. And it's going to be exciting to see these things launched here over the next several months.

Thanks very much.

Okay. Well thank you Tim and thank you everybody else for joining the call today. We're excited about where we're headed with the business. We're going to make good progress this quarter and toward the rest of the year and we're looking forward to you on updating -- we're looking to updating you all on our continuing progress. Thanks very much.

Okay. Thank you.

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