Welcome to the Third Quarter 2023 Harmonic Earnings Conference Call. My name is Carmen, and I'll be your operator for today's call. [Operator Instructions] Please note that today's 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 Third Quarter 2023 Financial Results Conference Call. With me today are Patrick Harshman, President and Chief Executive Officer; and Walter Jankovic, Chief Financial Officer. Before we begin, I'd like to point out that in addition to the audio portion of the webcast, we've also provided slides for this webcast, which you may view by going to our webcast on our Investor Relations website. Now turning 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 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 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 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, 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?

Well, thanks, David, and welcome, everyone, to our third quarter call. Today, we reported third quarter results, which were within our guidance range and expectations as we continue to make substantial progress in a number of key areas, including DOCSIS 4.0, fiber-to-the-home and Video SaaS. We ended the quarter with strong backlog and deferred revenue, showing our alignment with our customers' growth plans and giving us further confidence in our long-range growth prospects. Before diving into the details of the quarter, I mentioned 3 overarching points. First, regarding our broadband business, we're financially healthy. Our technology execution and differentiation remains very strong. We're uniquely positioned for a sustained period of network investment, and we therefore remain fully on track to deliver strong multiyear growth. Second, our Video SaaS business continues to deliver strong recurring revenue growth of 42% in the third quarter on a year-over-year basis, with several new customers recently won and being on-boarded. With Live sports still in the early innings of migrating to streaming platforms, we believe there is substantial runway for growth in our Video SaaS. And third, we're announcing that we have commenced a formal strategic review process for our Video business. Due to changes in the marketplace and our customer strategies, synergies between our broadband and video businesses are now less compelling. Additionally, we have received interest from several external parties for our video business. These factors, coupled with capital allocation planning led us to initiate the strategic review. Together with financial and legal advisers, we're assessing a range of alternatives for the Video business with a clear goal of optimizing long-term value. Walter will provide additional color momentarily. Moving now to our broadband segment highlights. We delivered segment revenue of $75.8 million, down from $91.9 million a year ago, largely as expected. The…

Thanks, Patrick, and thank you all for joining us today. Before I discuss our quarterly results as well as our 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 Q3 press release and earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP that are discussed on this call. Both of these are available on our website. Our third quarter results were within our guidance range, taking into account customer demand pushouts related to the larger macroeconomic environment that we referred to on our last earnings conference call. Before reviewing our Q3 2023 financials in detail, I'll call out the highlights here on Slide 7. For the quarter, we reported revenue of $127.2 million with EPS of $0.00 bookings of $96.3 million and near record backlog and deferred revenue of $627.2 million. In a few moments, I'll provide Q4 guidance. Turning to Slide 8. Total Q3 revenue was down 18.3% year-over-year, mainly due to the factors I mentioned earlier. Looking at broadband, Q3 revenue was $75.8 million. The year-over-year decline was due largely to inventory adjustments by our broadband customers. I want to note that during the third quarter, we were in the initial ramp stage of another Tier 1 customer. We expect to see the benefit of this ramp in Q4 as reflected in our revised guidance. In video, Q3 revenue was $51.4 million, while video appliance sales were lower due to the factors I noted earlier, video revenue included SaaS revenue of $12.5 million or 24% of segment revenue for the quarter, up 42% from the prior year. We continue to execute on the strategic transformation of our Video business with the continued growth of SaaS while also focusing on maximizing…

All right. Well, thank you, Walter. Let me just wrap it up by emphasizing your concluding thoughts there. Harmonic continues to be exceptionally well positioned to drive sustained growth and shareholder value creation. We're focused on these objectives and confidence in our ability to execute. And with that, we want to thank you for your continued support, and we will open it up for questions.

[Operator Instructions] Our first question is from Simon Leopold with Raymond James.

I'd like to try to squeeze in two, if I may. The first one is on its conference call, Charter publicly talked about some potential changes in the timing of its rollout. And I think what they indicated was they may do some more of their rural build-outs ahead of some of the other upgrade activity. And I want to see if you can share any thoughts on what that might mean for Harmonic. And then my second question, and sorry, I'll get both in is basically for some of these upgrade initiatives require upgrades to amplifiers, but there are carriers that have deployed fiber deep that don't need amplifiers to be upgraded to deploy the DA nodes from somebody like Harmonic. And what I'm looking for from you is some sense of how much of the market can be upgraded fiber deep without waiting for the availability of the associated amplifiers. Hopefully, those 2 questions make sense, and you can answer them.

Yes. Okay. Thank you, Simon. First, regarding Charter, we don't have anything really specific to say beyond what they themselves said about their plans. What I would remind you and everyone else is that from the beginning, we've been asked questions about charter schedule, et cetera. And I think our position from the beginning has been to take a wait-and-see attitude. We've been through these onboarding ramp-ups with a number of large customers. I think we've seen a lot. So we've got a lot of experience, and we're bringing a lot of that experience to bear. We are -- neither surprise or unprepared for short-term changes in schedule. That being said, we've got our eyes on the prize, which is the big picture. I think if you compare this to where we were a year ago, we've secured the second largest operator on the planet, Charter. We are their partner going forward. They're going to do extensive work across their networks over the next several years. And we think we're going to be a prime beneficiary and enabler of that exciting work. And nothing we have heard from them or think it changes the big picture of the opportunity and the trajectory of that work there. On the second question, it's a good question on DOCSIS 4. Indeed, what we've done on the core and the nodes is out ahead of what others have done on the so-called RF amplifier area, which is needed for, I would say, the majority of the DAA footprint. That being said, there is a significant to your question, and I can't give you an exact number, Simon. But there is a significant DAA opportunity where there is no amplifier technology needed. In fact, our estimation is I think the industry expects there to be RF amplifiers, let's say, roughly by a year from now, 5 quarters from now. And our view is that there is ample opportunity for investments for growth proactivity in DOCSIS 4.0 DAA that doesn't need amplifiers between now and then. So our -- that is our plan, to be involved in projects. And we think it mirrors some of our key customers' plans. We'll focus over the next year on DAA that doesn't involve amplifiers. And when the amplifier part technology is available, well, then the playing field will expand.

It comes from the line of Ryan Koontz with Needham & Company.

I want to follow up on Simon's question about DOCSIS 4. And just at a high level, what your view is of DAA mix going forward? I mean, obviously, we're in the very early stages of deployments down. Can you kind of share any thoughts? There was a lot of buzz at the C conference a couple of weeks back about this DOCSIS 3.1 kind of plus model to get higher speeds. And if you can kind of share any thoughts about the transition to DOCSIS 4 hardware that you have in mind over the next few quarters would be helpful. I have one follow-up, if you don't mind.

Yes. Look, let's -- thank you for the question. Let's separate 2 things. One, DAA, the architecture where you have centralized core, I think -- if you were at the show, you saw the industry is virtualized score. That's it. And then you've got distributed hardware at the edge devices. And we're going to see that as the predominant architecture going forward for DOCSIS 3.1 as well as DOCSIS 4.0 and as well as hybrid DOCSIS in fiber. And I think that, that more than ever before, it's clear that's the consensus of the industry and it's clear that Harmonic leads in that area. Now what's the mix going to be, I think, is the essence of your question between 3.1, 4.0, maybe a hybrid, this what we call Booster of 3.1 core, taking advantage of some DOCSIS 4 modem technology, we're going to see a mix of all of the above. And it's hard to exactly forecast. But our – it's getting too cliched. I mean, we're giving our customers an amazingly powerful Swiss Army knife that really allows them to be flexible, to be reactive to competitive as well as customer demand opportunity. And you're going to see a mix of all of it, Ryan. And I think if you were there in Denver, you saw we're way out in front on DOCSIS 3.1 now on this hybrid boosted 3.1 stuff on 4.0 as well as the overlay of fiber on top of that. So what's the exact mix, I'm not sure, but the key thing is for us is getting the customers to go with the Harmonic platform, so they've got that optionality. And I think more than ever before, we're positioned to take advantage of this.

Yes. I mean, certainly, the software platform you guys have is a huge differentiator that can do all that. And a quick question on the video side. You talked about the growth in streaming SaaS and the headwinds in appliances. Are you seeing a direct cannibalization of the appliance business? Or are these 2 separate customer businesses going in different directions? And maybe you can give us some light on that side of the world?

Look, it's a great question. Basically, there's overlap. As we pieced apart and we had a record quarter for new SaaS ads. So as we dug into it, we found about it was about 50-50 new customers or kind of new business models. But the other half was actually historic appliance customers moving to a SaaS model. So the SaaS is -- transformation is partly responsible in this past quarter, let's say, 50% responsible for the weakness we saw in appliance. Now the other part is really no different than you're seeing across the broader carrier landscape but it's inventory, its cost of capital, et cetera. Maybe you'll leave a little bit more headwinds internationally. So it's both, Ryan or a mix of the 2.

And it comes from the line of Steve Frankel with Rosenblatt.

Patrick, back on 4.0, and there's been a lot of discussion about the Broadcom ship availability and how it's impacting the amplifier side. Is there a similar supply chain concern around 4.0 nodes? Or do you have visibility into the chip supply you need to get those 4.0 nodes into the market?

The high level, there's a lot of complexity there, a lot of moving parts, but the high-level answer is we're in good shape. We've got excellent relationship with Broadcom that we're grateful for excellent alignment with our customers. And we think we're in good shape there.

Okay. And then in terms of the new tier -- you've got a new Tier 1 that's ramping, that's great news. There's been this other group of Tier 1 that kind of have been stuck in neutral or first year. What can you do to get that group of customers accelerated and moving forward?

Well, we come out of this recent event in Denver, extremely encouraged exactly on that question. If you roll back 12 months ago, think about it, there was uncertainty about Remote PHY versus Remote MAC. There was all the stress about FDX versus ESD. A lot of uncertainty and confusion. We come out a year later -- we come out of set with those questions essentially being answered. It's Remote PHY on DOCSIS 4.0, it's a unified product. So I think things that were holding back to customers from having clarity on their plans have -- I mean, the fog is really clearing. And the substance the specificity of discussions we're now having with leading Tier 1 who have yet to get on board as well as Tier 2s. It's -- we're quite encouraged. Now look, it doesn't mean we're going to be deploying with them next week. But as we look at the continued trajectory of this business, we're feeling that the industry and we, with our product and technology are in a very good place.

Okay. And then one last one. Would you characterize what the book-to-bill looked like on the broadband side. We talked about the weakness in video, but what -- where were we on the broadband side in the quarter?

Yes. Both of our businesses, Steve, its Walter here. We're below one in the quarter.

It comes from the line of Steve -- I'm sorry, George Notter with Jefferies.

I guess, I wanted to ask about just the integration of CableOS into customer network. I think you referenced charter earlier. But I'm just wondering, I know there's some integration that has to be done to get a big MSO like that up and running on CableOS. I'm just curious on where you are in that integration process. Is it done? Is there more to do? What does the timing of that look like?

Indeed, CableOS is a change in a couple of dimensions. We're a new company than historic CMTS provider. And it's a different technology approach is software. It's cloud native. It's with amazing telemetry tools. A few or others were at the recent broadband event, you heard Comcast speak very publicly about the massive operational advantages they are driving now from the system. All of those come after a number of transformations on the back end, the CableOS is really at the core of. So yes, with every customer coming on board, there is integration work. There is training in terms of adopting of new tools and approaches. And we've seen, George, with different customers that process take varying amounts of time. And I can't give you a specific answer on where we are on charter, except to say that we're making good progress there as we are with other customers who are in the midst of onboarding. The question is, it is not one of it, but it's of exact timing. And we think we're making good progress with leading customers who are onboarding with CableOS -- cOS, excuse me at this time.

Is there a sort of minimum and maximum that you guys have seen from your experience just in terms of the time it takes to integrate it? I guess, on one hand, I look at Comcast. It seems like it's like a number of years, certainly for Comcast or achieve sort of full velocity in terms of the deployment of the network there and maybe just other smaller customers that move much more quickly. But I guess I'm just wondering if there's kind of a range of timing that we should think about in terms of that integration process.

Well, you're right. If we go back to the very first and massive process with Comcast that took years for a variety of reasons, and it wasn't just a back office. There's a lot of learning, a lot of innovation all over the network that was happening at that time. Undoubtedly, times have improved dramatically since then. But we're still in the range of months or 2-year kind of a thing, depending on a lot of factors concerning the historic legacy network and the orientation and the priorities of the customer we're working with. We've seen deployments happen in less than 2 months, and we are involved with the processes that take closer to a year. And it's everything in between, although the median time is definitely shortening, George, as we all continue to gain more experience.

One moment for our last question, please. And it comes from the line of Timothy Savageaux with Northland Capital Markets.

A question about the overall topic would be gross margins on the broadband side. You're guiding to a pretty sharp increase and congrats on that and rebound in Q4 revenue in broadband. And I might have expected a pickup in gross margins there. If you look at the first half when you were kind of around the $100 million a quarter level, you're around 50% gross. So it does look like the mix is changing a bit. You mentioned a Tier 1 win ramping? Might that be more hardware heavy? So what sort of factors are affecting that guide not just relative to what you saw in Q3, but relative to what you saw in the first half? And then maybe more broadly, as you look at some of these bigger ramps, where do you think a reasonable expectation for broadband gross margins and mix to settle out?

Tim, thanks for the question. It's Walter here. So just with regards to the gross margins for Q4, your inclination in terms of the product mix that we're seeing in Q4 specifically as we ramp up in initial stages of a Tier 1 is definitely impacting that margin in terms of it being more centric towards the notes. And so that's a big part of the gross margin guide that we've provided for Q4. And then more broadly, in terms of the question, as we look forward over a longer period of time, the product mix will shift as you get more ramp up and you get more into a steady state with certain customers, you'll have the mix between the nodes as well as the cOS and that will bring the margins to a higher level. And so when we've guided before in our prior comments, we said you kind of look at it over a 4-quarter rolling period, and that would give you a more representative view of what we should expect our margins to look like over the longer period...

Great. And my follow-up, it doesn't sound like you're expecting a big recovery with Comcast into Q4 and instead maybe this additional Tier 1 ramping well. First of all, is that a fair statement? And as you look at this strong Q4, do you think your concentration with Comcast will come down prior to -- obviously, we expect it to come down with Charter ramping in '24, but just talking about Q4 '23 by itself.

Yes. Just, Tim, on Q4 '23 specifically, very similar to what we mentioned back a quarter ago, our expectations in Q4 and continue to be in our guide for Q4 is a ramp-up of another Tier 1. So that, by nature, will reduce concentration across the largest customer in terms of the percent concentration. And so -- and we expect that concentration will continue to move in a direction of less concentration as we bring on more customers, including the Tier 1 as well as other customers as we move on through 2024.

And this concludes the question-and-answer period. I will turn the call over to Patrick Harshman for final comments.

Okay. Well, thank you all again for joining us today. We appreciate the dialogue and your support. We remain focused on driving the growth objectives that we've discussed here today and creating shareholder value. We look forward to our next opportunity to speak with you. Good day...

Thank you, ladies and gentlemen. With that, we thank you for your participation, and you may now disconnect.