Welcome to the Second Quarter 2024 Harmonic Earnings Conference Call. My name is Amy, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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 second quarter 2024 financial results conference call. With me today are Nimrod Ben-Natan, President and CEO; and Walter Jankovic, 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 for the webcast, which you may view by going to our webcast on our Investor Relations Web site. Now turning to slide two, 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 you on 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 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 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 Web site. And now, I'll turn the call over to our CEO, Nimrod Ben-Natan. Nimrod?

Thanks, David, and welcome everyone to our second quarter earnings call. Now turning to slide three, today we reported second quarter results that were at the high-end of our guidance in both our Broadband and Video segments. These results demonstrate the solid execution of our operating plans. Before I go into the highlights of each business, I would like to make a few opening remarks. Our year-to-date results, full-year 2024 projections, and continued market momentum give us confidence that our broadband strategy remains on track for strong multiyear growth. During our June Analyst Day, we outlined our long-term growth plans, and today I'm going to provide updates on our progress. Profitability is improving in our Video business as our rightsizing actions have taken hold and we are focused on a growing pipeline of new Tier 1 SaaS and larger scale appliance opportunities. Many of us watched the exciting opening ceremony of the Olympics through streaming on Peacock, and it is events like these that highlight our video SaaS capability to provide pristine quality at scale with the highest reliability. In a few minutes I will provide a status update on the actions we have taken and the opportunities ahead of us. Finally, with our focus to-date, we are reaffirming our full-year 2024 revenue guidance in both Broadband and Video, and Walter will provide more details. Now turning to slide four, specifically to our Broadband business, Harmonic had another solid quarter of execution on our key programs. We reported segment revenue of $92.9 million compared to $97.1 million in the prior year, and up 17% sequentially, which was at the high end of our expectations. The number of global customers deploying our cOS solutions reached 118, up 20% year-over-year, corresponding with over 30 million DOCSIS cable modems now served worldwide. This…

Thanks, Nimrod, 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 Q2 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 second quarter results included revenue that was at the high end of our guidance and profitability in both businesses, which exceeded our expectations. At the operations level, we exceeded the midpoint of broadband revenue guidance and exceeded the high end of revenue guidance in video. In terms of profitability, our overall second quarter non-GAAP adjusted EBITDA and EPS beat the high end of our guidance range. I'll call out some of our second quarter highlights here on slide seven. For the quarter, we reported total revenue of $138.7 million, which rose 14% quarter-over-quarter, EPS of $0.08, bookings of $72.4 million, and a book-to-bill of 0.5. At quarter-end, our backlog and deferred revenue was $613.1 million leaving us in a solid position while giving us greater visibility for the balance of the year. I would also like to note that in Q2, we recorded a GAAP net loss of $12.5 million or negative $0.11 EPS, which included restructuring costs of $11.5 million and $9 million in lease related asset impairments and other charges. The restructuring costs are part of the plan announced during our prior quarter earnings call to reduce headcount and streamline our cost structure in the video business. The $9 million in lease related asset impairments and other charges reflect a reduction of our leased office space as we optimize our footprint and cost…

Thanks, Walter. In summary, Harmonic delivered another strong quarter, capping solid year-to-date financial and operational execution. Our company continues to be exceptionally well-positioned for sustained growth, and to create greater value for our shareholders. Looking forward, we're committed to implementing our 2024 and long-term growth plans. We thank you all for your continued support and look forward to speaking with you again on our next earnings call and updating you on our progress. Let's now open up the call for questions.

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

Great, thank you for taking the question, I've got two. The first one is actually regarding the SaaS Video business. I'd like to see if you could help us understand a little bit better the, I guess, structure of your terms. And really what I'm getting at is I'm wondering how material the Olympics could be and, more generically, how we should think about that business going forward? Basically, do you get paid by how many times events are viewed? Do you get paid by events or agreements? That kind of detail would just be helpful for us to think about modeling. Thank you.

Okay, Simon, it's Walter. I'll take that question in terms of the commercial model of our SaaS Video business. So, first of all, the model generally works on minutes streamed and number of events, that's the core tenet of the model. In addition to that, if we provide the content delivery, the CDN part of it, it's going to flex based on the number of viewers in terms of that part of the model. And when you look at the targeted ad insertion part of the model, this part of the model is based on impressions, so the number of people thorough the impressions metric, so very much variable in terms of that part of the business. So, really, there's three key elements of the business, and it just depends what the customer has signed up to in terms of ad insertion if they're a targeted ad insertion customer, if they're obviously a streaming customer it's based on minutes streamed, the number of events. And then if we provide the content delivery, that's based on number of viewers and flexes in that manner. Have I helped to explain that?

Yes. I guess just a quick one, is the Olympic, as an event, material enough to move the numbers or if it's sort of just in the noise relative to the overall streaming activity?

Yes, it's going to be immaterial. It's not going to be material based on the commercial model.

In the overall market, it does seem as if broadband competition is heating up, particularly with the, say, traditional telcos expanding efforts around fixed wireless and around fiber to the home, it's not clear to us if the cable operators really have adjusted their strategies in response. And maybe they would argue that they're already investing adequately. We're just wondering whether or not from your perspective you're noticing any change in the competitive environment for your customers or whether this is sort of an ongoing evolution? Thank you.

Well, we think that what they predicted a few years back is actually materializing in terms of the competition, fiber. I don't think they predicted the fixed wireless, but they predicted that there will be competition in the long-term plan to keep investing in the network to make it more competitive is more important than ever before. And I think what we hear from them is that what we were on for them is important. Obviously, they have different strategies in terms of what exactly they do and how quickly they do that. But I think the urgency is high, and this is what we're hearing from them.

Thank you very much.

Thanks, Simon.

Our next question comes from Ryan Koontz with Needham & Company. Your line is open.

Thanks for the question, and a nice quarter and outlook. Want to ask you about DOCSIS 4.0 and how would you frame your competitive position there, Nimrod, relative to hardware? I know you guys have the leading software solution, but relative to this new hardware product, how would you frame the competitive environment there for DOCSIS 4.0?

I think with the move to unified, there is a requirement to support the two flavors of DOCSIS 4.0. And I think we've got a unique leadership position as we have been working on the full duplex flavor of 4.0 for quite some time. And it's shipping, and in production. And the unified is combining that along with the FDD, the extended spectrum. So, in short, I would say I believe, although we never discount any competition, that we've got a significant lead.

That's great, was hoping to hear that. And on your new fiber wins, can you give us any feel for what sorts of customers these are coming from, is it mainly North America or global or primarily cable still? I know you've talked about a couple of wins in traditional telco. Anything you could share there on the fiber wins just on a broad sense?

Well, [Palego] (ph) specifically is a pure telco. We talked about that, that this is a new win with a new product in a new market. The other wins we talk about or that I mention is for the other new product is an international customer that is cable, telco, and wireless, so this is more of a converge, but they are cable as well. And well, I think that's pretty much what we announced in terms of wins so far.

Okay, that's great. And just a clarification from Walter on the gross margin beat on Video. It was my understanding, I thought that the SaaS business actually had lower gross margin than the Appliance business because it lacked scale. Is that no longer true, that the SaaS, now margins may be better than Appliance?

Well, when you look at the overall appliance margin, including new product that's shipping out combined with the SLAs and you look at where we are with SaaS, as mentioned earlier, we have taken some cost reduction actions across the board in video and some of that is enhancing our margin profile in SaaS as well. And we are getting to a larger scale as demonstrated with now running at $14 million in Q2. So, the margins are improving.

Got it. That's all I've got. Thanks for the questions.

Okay. Thanks, Ryan.

Thank you. And our next question comes from the line of Steven Frankel with Rosenblatt Securities. Your line is open.

Hi, good afternoon. Thanks for the opportunity to ask questions. I'd like to follow-up on this comment of shorter lead times around the broadband business and where do you think the lead times are? And is it materially different between a 4.0 product and your 3.1 or 3.1 enhanced products at this point?

Hey, Steve, it's Walter. I'll start on that one. So, specifically with regards to lead times, before we had indicated, we've got lead times out there of 50 weeks on certain products. Custom products, you're going to have longer lead times. The non-custom products, definitely we're seeing some movement downward in terms of the lead times. And then, specifically with regards to the earlier remarks that I made in regards to what we're seeing with ordering patterns, I just want to make sure that's clear as well. Some of our larger customers can put their orders in, in shorter lead time to us based on giving us binding forecast, so we can go out there and procure. So, I just want to make sure that that's clear as well in terms of one of the other fundamental differences there in terms of orders and turning around orders when we get them.

And Walter, could you repeat what you said about the magnitude of the orders in July?

Yes. In July alone, we in broadband, we have booked orders that far exceed what we booked in broadband for all of Q2. And those orders are for product that's going to be shipped out in the second-half of this year.

Perfect. And then, maybe, Nimrod, just to comment on where we are with DOCSIS 3.1 Enhanced, you had a -- if I go back to SCTE in September, it looked like a large group of customers that were interested in this and would finally get them going. Is that still to come? Are those products not quite ready for Prime Time yet and therefore those customers haven't gotten deployed yet?

So, I want to clarify that everything that, in fact, we ever shipped from Remote 5 point of view is extended 3.1 capable. You've got the hardware to do that. We enabled a software release earlier in the year, so that's available. Really, what they wait for is availability of Modems. And 4.0 Modems are subject to new modem from MaxLinear and I think there is a camp of others that are so called JDA and the new class of 3.1 is coming later this year. So, it's really a modem-dependent issue at the moment, which they are looking to test and once they feel comfortable, they will move forward with that.

Great. Thank you so much. I'll jump back in the queue.

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

Hi, guys. Thanks very much. I guess I wanted to ask about the ramp in expectations over the second-half of the year. If I do some back the envelope math here, at midpoint, you're doing $182 million in sales in September and then I think nearly $220 million sales in Q4. So, assuming I have my math correct, it's a pretty significant ramp. And I heard certainly what you said about the order rates picking up and that's great. But can you give us a little bit more insight into where that ramp comes from? I assume we're talking about your two largest customers on the broadband side of the business, but any more you can tell us that kind of reinforces your confidence in that ramp over the balance of the year? Thanks.

Yes, certainly. Hey, George, it's Walter. So, first of all, it is dependent and it's based on the top two customers in terms of what we expect for the second-half of the year. And so, therefore we do expect a big contribution based on the top 2. However, we also have growth in our non-top two, so, for the rest of the market in terms of customers in both Q3 and Q4 timeframe. So, we've looked through in terms of our backlog, in terms of the commitments, in terms of all of our expectations to ensure that we could come back and reaffirm what we've told you over the last couple of quarters in terms of our guidance for the full-year on broadband. So, that's a little more color in terms of where is the growth coming from and what you should expect to see in terms of top two versus the rest of the market.

Got it. And then, I think also not that long ago, we talked about some excess inventory at some of these larger customers. I assume that's worked off now or is that still part of the narrative? How do you think about it?

Well, generally, we've got one customer who's just starting to ramp and starting to build out of their network. And then, with another large customer, we've got the transition to FDX and as you could see from our results in Q2, that's going to plan in terms of the ramp up associated with that technology transition. So, I think -- you think about it from those two perspectives in terms of each of those customers and what they're doing and where they are with regards to their build out plans.

Okay. Thanks very much. Appreciate it.

Okay. Thanks, George.

Our last question comes from the line of Tim Savageaux with Northland Capital Markets. Your line is open.

Hi, good afternoon, and congrats on the results and reiterated outlook. And I guess my question was sort of along the same line, maybe try to get a little more specific. In that, clearly, Charter came off your 10% customer list here in the quarter, giving the timing of their kind of upgrade, whether it was exactly July 9th or not. It seems like that order input is probably closely aligned with that. So, should we assume, and I'll get your other top customer in a minute, but there have been some pretty dramatic moves quarter-to-quarter. Should we assume what you're guiding for Q3 is the real, you've seen some Charter revenue to date, but the real beginning of the upgrade in earnest?

Well, I think, Tim, we can't speak specifically about any customer's ramp in any detail here. I think what we're going to see is, what I mentioned to the earlier question from George in terms of top two customers contributing significantly to the second-half. So, I am indicating that part of it just in terms of the concentration, where is the growth coming from and that's probably all I'm going to say about specifically about any of the customers. I think there's also this non-top two customers where we're seeing traction. We mentioned today, and Nimrod mentioned this in terms of another Tier-1 win with Telecentro. So, we are gaining traction across the rest of the market and that also factors into our second-half projections.

Okay. Well, maybe if I could follow-up on that a little bit. And well, first, Walter, did you say 50% of the backlog shippable next 12 months? Just want to make sure I got that number right.

52%.

Over 50%?

52%.

Okay, great. Sorry. You're cutting out a little bit.

Yes, we were very specific with it. Yes.

Well that's refreshing. Well, in that context and I say this, look in Q1 '23, you had a real big bump in orders, right, coincident with your announcement in the Charter relationship in a 2.07 book-to-bill. I think your backlog was up $170 million. I think your orders were up $200 million from Q4?

And this kind of figures in with the lead time conversation as well, I mean, looking at what you shipped to date, it doesn't seem to come close to that type of number, and you seem to be getting follow-on orders here, which is interesting. And I guess my overall question is, how would you characterize what's in the longer-term backlog? Is that multiyear because you talk about shortening lead times in the run rate of the hardware, what's in the other 48% as much color as you can give in terms of broadband versus video and just the type of agreements we're talking about. Thanks.

Yes. I think the way I would characterize the other 48% in terms of anything that's beyond one year. Obviously, when folks are committing to a longer term, there's a couple of factors. One factor is it's a commitment to build as part of the commercial commitment. There's also -- when you think about hardware versus software, I think I've mentioned this before, is that there's certain lead time around hardware. So, some of that backlog is definitely on the cOS license basis. And then, we've got other things that are longer-term commitments around SLAs and things of that nature that go out further than 12 months. So, that's how I would characterize the different elements of what is in there beyond the one year.

Great. And last question for me, has that changed much in the last few quarters? Got a long time at this point.

No, I think, no, not much at all over the last couple of quarters. If you go back to last quarter, it was close to that same level.

Okay. Thanks a lot.

Okay. Thanks, Tim.

Okay. One moment please. And we have a follow-up question from George Notter with Jefferies. Your line is open.

Hi, thanks for letting me ask a follow-up. All right, so as I look at your 10% customer information, I've got Comcast at about $65 million this quarter. And if I look back at some of the biggest quarters from Comcast about 1.5 years ago, there was a $79 million quarter, a $74 million quarter. Although, I know that there was some inventory bill during those periods of time. So, it kind of feels like Comcast's run rate of business in terms of maybe organic installations of your equipment, feels like it's around $60 million, $65 million kind of where you're at right now. So, when I look at the ramp in expectations over the second-half of the year, I guess, I assume it's just heavily, heavily skewed to Charter. And implicitly, it feels like you're saying Charter is going to go and become as big, or bigger than Comcast in terms of their sizing for you guys. Do I have the right kind of general view of where the revenue ramp comes from? Is that appropriate or no?

Okay. George, without getting into -- as you know, we can't get into specifics in guiding each customer here. I think you're making certain assumptions around one versus the other. And I'm not going to comment are your assumptions correct or not correct. I think what you -- what we said previously in our prior earnings calls, we have been very explicit about the technology transition on FDX and the ramp-up of that over the year. And we explained that going back to the beginning of this year and the expectation of what that's going to do to our numbers in terms of first-half versus second-half. We were clear about that. Without getting into specifics around any other customer or specific numbers or guidance around the customers, I think there's -- these two customers are significant. I've highlighted that earlier. And I think it's fair to say that they're both contributing, but I'm not going to give specific numbers on one versus the other.

Okay. Fair enough. Thank you very much. I appreciate it.

Okay. Thanks, George.

And I'm showing no further questions at this time. I would now like to turn the conference back to Nimrod for closing remarks.

Thank you all for joining us today for the call. Have a good day.

And this concludes today's conference call. Thank you for participating. You may now disconnect.