Welcome to the Q1 2022 Harmonic Earnings Conference Call. My name is Val, and I'll be your operator on today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to David Hanover, Investor Relations. David, you may begin.

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's First Quarter 2022 Financial Results Conference Call. With me today are Patrick Harshman, President and Chief Executive Officer; and Sanjay Kalra, Chief Financial Officer. Before we begin, I'd like to point out that in addition to our audio portion of the webcast, we've also provided slides to this webcast, which you may see by going to our webcast on our Investor Relations website. Now going to Slide 2. 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 filed 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 during this call are determined on a non-GAAP basis. These metrics, 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 will also discuss historical financial and other statistical information regarding our business and operation, and some of this information is included in the press release. The remainder of the information will be available on a recorded version of this call or on our website. And now, I'll turn the call over to our CEO, Patrick Harshman. Patrick?

So, thanks, David, and welcome, everyone, to our first quarter call. So during the first quarter of 2022, Harmonic carried forward the strong business momentum we achieved in 2021. Revenue was up 32% year-over-year to $147.4 million. EPS was $0.08 and book-to-bill was 1.4%, all of which drove further growth of our backlog and deferred revenue to a record level at quarter end. Among the business highlights enabling these corporate results were Cable Access segment revenue growth of 98%, Video segment SaaS revenue growth of 75% year-over-year and solid bottom line contributions from both segments. The robust demand we continue to see for our solutions and our consistent execution despite significant supply chain and global geopolitical challenges, make a strong statement about the health and management of our business and our confidence in delivering sustained market leadership, growth and value creation for our customers and stockholders as we continue in 2022 and beyond. Taking a closer look at our Cable Access segment, we delivered another exceptional quarter. Segment revenue was up 98% year-over-year. By quarter end, we had 77 broadband service providers were deploying on CableOS, up 45% year-over-year. And broadband modem served grew to 6.1 million, up 100% year-over-year and still only about 10% of the currently addressable footprint defined by our wins to date. As Sanjay will discuss momentarily, adjusted segment EBITDA margin was approximately 12%, an impressive result considering persistent supply chain cost and capacity headwinds. Despite these challenges, overall market conditions are trending favorably for our broadband access business. Consumer and enterprise demand for broadband capacity is strong and growing, and competition between broadband service providers is heating up worldwide. Against this market backdrop, our competitive position has never been strong. The distributed architectures we invented have become a de facto industry standard. It's becoming clearer…

Thanks, Patrick, and thank you all for joining us today. Before I discuss our quarterly results and outlook, I'd like to remind everyone that the financial results I'll be referring to are provided on a non-GAAP basis. As David mentioned earlier, our Q1 press release and earnings presentation includes reconciliations of non-GAAP financial measures to GAAP that are discussed on this call. Both of these are available on our website. For the first quarter of 2022, we delivered solid financial results that were near or above the top of our guidance ranges. These results demonstrate the strength of our businesses, which continue to perform well despite challenges related to the war in Ukraine, the pandemic and our supply chain. Before I run through our quarterly financials in more detail, I brief please review key highlights here on Slide 7. We reported record first quarter revenue of $147.4 million, along with solid EPS of $0.08. The considerable business momentum we saw in 2021 continued in the first quarter of 2022, with bookings of $205.5 million and a book-to-bill ratio of 1.4%. This drove another record backlog and deferred revenue position at quarter end of $497.3 million. Considering the strong first quarter performance and the positive market and competitive trends mentioned by Patrick, we are raising our full-year revenue, adjusted EBITDA and EPS guidance. Now let's review our first quarter financials in more detail. Turning to Slide 8. As I just mentioned, total company Q1 revenue was $147.4 million, up 32.1% year-over-year and down 5.4% sequentially from a seasonally strong Q4. Looking first at our Cable Access business segment. Revenue for the quarter was $81.6 million, up 97.8% year-over-year and 17% sequentially, reflecting both the continued ramp-up of existing customers and new customer wins, including some early success we are seeing with…

Okay. Thanks, Sanjay. We'd like to conclude by summarizing our priorities for the remainder of the year. At the corporate level, in 2022, we intend to extend our market reach, leadership and deployment velocity to create even greater value for our customers and our shareholders. For Cable Access business, this means that our objectives remain driving volume deployments with our Tier 1 customers, winning and scaling with new global operators and expanding our address market for a unique converged solution for DOCSIS and fiber-to-the-home applications. As the results demonstrate, we've already made solid progress in all three of these fronts during the first quarter. For Video segment, we continue to focus on accelerating the growth of our streaming SaaS customer base, extending the breadth of our streaming SaaS solution to enable even faster growth and leveraging the traditional broadcast appliance business to profitably enable these transformations. And here again, we delivered good progress in all three of these areas during the first quarter. We're looking forward to the rest of 2022, and we appreciate your continued support. And with that, let's now open up the call to your questions.

Thank you. [Operator Instructions] Our first question comes from Simon Leopold of Raymond James. Your line is open.

Two, if I may. The first one is, could you help us understand your exposure either directly or indirectly to the lockdowns in China and what you've assumed in terms of your ability to operate? Are you identifying alternate sources? Or do you expect it to be short lived? Just trying to understand how you've factored that into this guidance? And then I've got a follow-up.

Okay. Well, first, the headline that Simon is, that it is factored into the guidance. We sell some products, again, primarily video in China. So there is a, I'd say, a modest revenue headwind there that has been factored into the guidance that we shared. And as your question anticipates or understands, we do some limited amount of component sourcing. We don't do any manufacturing. We don't do any R&D in China. And fortunately, the areas from which we source our - the subset of components that we source to build some of the hardware products that we do elsewhere, we're not so far impacted significantly by the lockdowns. We have thought about the implications of the lockdowns spread to the areas where we're doing business. And as best as we can, we've factored in those risk factors into the guidance that we provided.

Thanks. And then in terms of the follow-up, in the past, we've talked about, I guess, the penetration rates of CableOS in terms of the number of subscribers turned on to the network, relative to the number of total subscribers for the customer base. Where does that metric stand? And do you - how do you see that evolving over the next year or two?

Well, at quarter end, about 6 million modems had been - our systems had been deployed to serve 6 million modems exclusively for our CableOS software predominantly, also through our hardware. And that represents 100% year-over-year growth. In other words, that metric was about $3 million a year ago. And that is - if we add up the modems served by the customers that have now begun or in the process of deploying our solutions, that's about 10% of the footprint. So in other words, it's about a $60 million cable modem footprint that we are currently addressing. So, I guess a couple of things. Clearly, there's a ton of runway left with those customers who have already selected and are deploying us, not to mention the pipeline of newer customers that we're pursuing or the add-on, fiber-to-the-home applications we're going after. If you look in our guidance for this year, I think the midpoint of the guidance is about 45% or thereabouts, Sanjay, in very round numbers, I mean, and it's not correlated 100%, Simon. But that implies roughly 50% more business than last year and roughly 50% more subscribers. So, you might add our customers to add an aggregate, I don't know, roughly 4.5 million more cable modems over the course of 2022. I mean, please, that's a - back of the envelope kind of a number just to help, I think, give you the ZIP code of the way we see this evolving. I'll stop there. Does that help?

That's really very helpful. That's exactly what I was looking for.

I'll just add. At the midpoint of the guidance, the cable margins are approximately 42.5%.

That's really very helpful. That's exactly what I was looking for. I'll just say at the midpoint of the guidance, the cable margins are approximately 42.5%.

Our next question comes from Ryan Koontz of Needham. Your line is open.

A nice quarter there, especially on the cable front. And if you could provide us any color on kind of the mix in the quarter. It sounds like hardware, obviously, saw some headwinds on supply chain costs that kind of moved through the flow and impacted this quarter? And how should we think about that mix as it sits both in the quarter and in your backlog as well, would be helpful.

Yes. So the mix in the quarter for hardware is modestly up in Q2 compared to Q1. At the same time, in Q1, as I mentioned, the margins were at the lower end, 38%. And that came in primarily because we had non-recurring premium costs, which are largely behind us. That said, if you look at the mix overall for the year and compare it to the last year, there's just a modest increase in hardware versus software. And that plays all into the margins for the whole year as well, which are pretty much flat at midpoint.

Right. So your outlook here for the rest of the year on cable, you sound pretty confident. You're not going to see a ton of variability there, and there should be a floor on the margin front?

That's right.

That's great. And just a follow-up, if I could. As you think about the supply chain impacts there, Sanjay, any other major concerns you have? Obviously, there's a lot of moving parts here, but I assume no major changes in your view of supply chain going forward here?

No major changes from where we are. That said, supply chain challenge still remains a big challenge, which we deal with every day. And based on where we see, in terms of capacity constraints, we see some improvement, and hence, we have expanded the high end of our revenue range. That said, in terms of the margin pressures, I think we are pretty much flat.

Our next question comes from Kyle McNealy of Jefferies. Your line is open.

This is Kyle on for George Notter. I wanted to get a sense if you could tell us kind of some of your activity with Tier 1 cable operators and how many of them are in progress with trials right now currently for CableOS. I know you used to give a number that was similar to that and now you're moving to deploying customers, which is great. But wanted to get a sense, if we can get update on what the pipeline looks like, specifically for Tier 1s.

We're involved with a number of - let me take a step back, Kyle, forgive me first. I think previously, we've talked about nine Tier 1 wins. That's where we are. Of those, I don't know, four to five are actively deploying and the remaining four to five are still in the process of really getting off the ground. So, that's the story from a currently deploying perspective. If we go even further up the pipeline of activity, indeed, we are engaged with several additional Tier 1s, both in the Americas and outside of the Americas who are in various stages of evaluating the solution. We remain quite optimistic that we will continue to see new customers, both large as well as medium and smaller and continue to adopt our platform in 2022 and beyond.

Okay. Great. And one more for me. This one is regarding your progress with FTTP deployments. That activity certainly sounds pretty positive. Can you give us a sense for what types of deployments these are - your first ones are? Are they edge-outs by cable operators or kind of more substantial brownfield upgrades? How much of their footprint are they upgrading? And are there any pure-play FTTP customers in there at all?

So I'll start with the last one first. There are a couple of smaller pure fiber-to-the-home players. But the focus so far and the success so far has been with cable operators or hybrid fiber cable operators. And let's face it, every cable operator is over time becoming a hybrid operator. We see fiber being used to two main applications. One is greenfields, new housing developments, businesses, et cetera. And as your question alluded to, we also see growing strategic use of fiber and brownfields. So, this is going after a high-end customers where maybe a fiber offering is needed or use surgically to compete with competitive fiber offerings. Our product slots in really well in those kind of applications where we see fiber being used, let's say, surgically or so-called fiber islands is another term being used in the industry to kind of overlay existing cable infrastructure with pockets of fiber. So, we see all of the above being used and we think our solution works really well for these hybrid kind of applications and business models.

Our next question comes from Tim Savageaux of Northland Securities. Your line is open.

And yes, congrats on the very, very strong results and increased outlook yet again for Cable Access. And that's kind of part of my - leads to my at least first question, which is on the - back on the PON side. To what extent, I guess, is PON revenue material to either that guidance increase or to the overall cable access revenue number for calendar '22? And competitively, I wonder if you might comment, you had CommScope announced a PON platform this morning. Would be interested in your thoughts on the overall competitive landscape and maybe try to relate the extent of your leadership in kind of the virtualized distributed DOCSIS world, maybe relate that to where you think you are in the PON world amongst the same customer base?

Okay. Thanks for the question, Tim. I'll try to address that. Sanjay, please feel to jump in. So on the first part of the question, look, the demand has been strong. The backlog and deferred revenue has been strong. It's principally driven by the data over cable products and solutions. Fiber-to-the-home is certainly part of that. Our ability to raise guidance is more to do with our view of kind of expanding supply chain capacity that increased demand. Put differently, the outlook for our business continues to be capacity constrained, not demand constrained. So from the beginning, fiber is part of that. But yes, the increase is not so much due to incremental fiber demand as it is our ability to - our increased confidence in squeezing more through the supply chain. That being said, why I think the second part of your question is how are we competitively positioned on the fiber front? We think we're uniquely positioned, Tim. And that's from two perspectives. Number one, we do think not just in cable, but more broadly in telecom. We think our cloud-native core platform is really unique and really out front. And so both within the context of DOCSIS, but also within the context of fiber platforms, doing the core data handling, provisioning, interfacing the system all in a cloud-native way we think is unique, is powerful and is out ahead of just about everyone else were aware in the broadband space in general. And certainly, our ability to do that in a converged way for DOCSIS and fiber solution in kind of one common provisioning, for example, is pretty powerful and is part of what's gaining residence. The other part of the power of the solution is the out of the network, the platform conversion. Our OLTs, if you don't mind me getting a little bit more technical, the fiber components are hardened, Ethernet switch capability, all of it drops right into the existing node platforms we've already been deploying. So particularly if you're a cable operator who's been deploying DAA for cable initially, whether you intend it to or not, you've already actually deployed a fiber-to-the-home platform through which the software exists centrally and through which you can very easily through plug-in upgrades extend to fiber. So, this is - we think this is uniquely powerful. This is not just us going to market with some kind of additional adjacent product. This is a truly integrated solution. Last week at CableLabs, there was a really interesting workshop for the industry, attended very well by a number of cable operators, some really exciting demonstrations were done. And our converged DOCSIS and fiber capability was prominently highlighted by ourselves and by customers. And I think it really speaks to the unique opportunity we have here in the [indiscernible].

And maybe if I could follow up there. I mean, I think you mentioned maybe you are running ahead of some of the targets you outlined at the Analyst Day for Cable Access. You can feel free to increase those targets, if you like, but it sounds like may or maybe not yet. But as you look at maybe the two equations are two factors that might be driving that, which is your share of the market and overall growth in the market. You set out some TAM estimates back then. Would you say that the market has expanded faster than you thought since the Analyst Day on either the data over cable PON side or both? Or has Harmonic been more successful kind of capturing customers and gaining share? Would be interested in that dynamic.

It's more the latter than the former, which is not to say that we're not excited about the growth of the market. But what we do now believe relative to nine months ago or whenever it was, when we held our Analyst Day, Tim, is that we believe that we will capture an even larger share of the spend. And that's particularly true on the hardware side of the equation. It means that we expect top line growth ahead of what we projected. Yes, it does mean a blended gross margin down, but it means EBIT dollars and EBIT dollar margin percentage greater than what we projected at that time, which we think net-net is positive news. And so it's more a reflection of our growing confidence in our ability to command more share, Tim, and lead this market than it is in belief of even faster market growth, although a big part of why we're here is we believe that this is a pretty exciting market to be attacked.

[Operator Instructions] I'm showing no further questions at this time. I'd like to turn the call back over to Patrick Harshman for any closing remarks.

Okay. Well, thank you very much, all, for joining us today. Clearly, we had a strong quarter. I hope it also comes across clearly that we're excited about our opportunities. We're focused on execution. Both our cable business and our video business are well on track with not only the 2022 targets that we outlined, but the longer-range targets. We expect us to continue to execute in the context of an interesting market, let us say. And clearly, the opportunities outweigh the challenges, and we're excited about what lies ahead. We appreciate your time today, and we appreciate your support. And we look forward to talking with you next time. Thanks all. Have a good day.

Thank you all.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.