Welcome to the Q4 2017 Harmonic Earnings Conference Call. My name is Candice and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I’ll now turn the call over to Blair King, Harmonic’s Director of Investor Relations. Blair King, you may begin.

Thank you, Candice. Hello, everyone and thank you for joining us today for Harmonic’s fourth quarter 2017 earnings conference call. With me at our headquarters in San Jose, California are Patrick Harshman, our CEO; and Sanjay Kalra, our CFO. Before we begin, I’d like to point out that in addition to the audio portion of this call, we’ve also provided slides for this webcast, which you can see by going to the Investor Relations Page on harmonicinc.com. Turning to Slide 2, during this call, we will provide projections and other forward-looking statements regarding future events or the future financial performance of the company. Such statements are only current expectations and actual events or results may differ materially. We refer you to documents Harmonic files with the SEC, including our most recent 10-Q and 10-K reports and the forward-looking statement section of today’s preliminary results press release. These documents identify important risk factors, which could cause actual results to differ materially from those contained in our projections or forward-looking statements. 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’ve 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, but the remainder of the information will be available on a recorded version of this call on our website. And I’ll turn the call over to our CEO, Patrick Harshman. Patrick?

Okay. Thanks, Blair, and thank you all for joining the call today. Let's turn to our Slide 3 and get started. The fourth quarter revenue was $101 million, just above the high end of our guidance and up 10% sequentially, capping a pretty strong second half of the year, after a tough first half. Gross margin were 50%, non-GAAP EPS was $0.00 and we generated approximately $9 million in cash from operations. Behind these financial headlines, were several positive business developments, as the strategic investments we've been making in transforming our business are really starting to come together. New product and service bookings totaled $123 million up 28% sequentially, making this our strongest bookings quarter in several years. This translates to 1.2 book-to-bill ratio, positioning the business with record backlog and deferred revenue of about $224 million further reflecting our continuing transformation to a more software, services and SaaS centric model. The strong order input was driven principally by our video segment where we saw catch-up of deals originally anticipated to close earlier in the year, but also continuing growth of new over-the-top CapEx and software-as-a-service rents. As a result, we drove not only increased video segment backlog, but also greater than 6.5% segment operating margin for the second quarter in a row. It's good to see a stable and profitable video business with an increasingly strong software and services and SaaS backlog. And turning to our cable business, several important milestones were also achieved during the fourth quarter, including new design wins as they bring the number of CableOS commercial deployments and advanced field trials to over 12. There is a lot happening with our CableOS initiative, so let's turn the page here and take a closer look. So, turning to Slide 4, CableOS activity around the globe has…

Thank you, Patrick and thank you all for joining our call this afternoon. As you just heard from Patrick, we had a good quarter. Revenue was at the high-end of our guidance range, gross margin dollars, expenses and earnings came in around the middle of our guidance range and we drove good cash generation and our book-to-bill ratio greater than 1.2 means we're entering 2018 with a solid financial foundation. So, let's get started and turn to Slide 6 to review our Q4 results. Please recall the numbers I'll be referring to are on a non-GAAP basis. Revenue was $101.1 million exceeding the upper end of our guidance range. This compares to $91.6 million in Q3 '17 and $113.8 million in Q4 '16. Video revenue was $87.6 million also above the high-end of our diet compared to $84.2 million in Q3 and $104.8 million in the same quarter last year. Looking the Cable Edge segment, revenue was $13.5 million compared to $7.4 million in Q3 and $9 million in the year ago period. This was a solid finish to 2017 for both of our segments. Gross margin as a percentage of revenue was 50.1% in Q4 down from 53.4% in Q3 and 56.1% in Q4 '16. Video segment gross margin was the reason for temporary decline 53.2% in Q4 versus 57.4% in Q3 and 57.7% in Q4 '16. This lower Q4 video segment margin was a result of product mix as we close out a couple of older projects that had a high mix of legacy hardware-based appliance. With these behind us, we expect video segment gross margins to rebound back to recent levels, Cable Edge gross margin was 29.9% in Q4, 9.2% in Q3 and 37% in Q4 '16. The modest year-over-year decline is a combination of declining legacy…

Okay. Thank you, Sanjay. Turning now to Slide 10, we want to close by reply reiterating our strategic priorities. For a Cable Edge business objective number one is to continue to successfully scale our first wave of CableOS deployments encompassing both centralized as well as newer distribute architectures. Leveraging this growing CableOS market momentum, our second objective is to secure new design wins with additional operators both Tier 1 and increasingly small and midsize operators. And objective number three is to deliver on $100 million 2018 revenue target, further positioning this business for both industry leadership and compelling profitable growth. Turning to the Video side of the house first objective is to further accelerate the success and growth of over the top platform, across regions in media and service provider verticals. Objective number two is to continue to extend or SaaS offerings thereby expanding our addressable market and further enhancing our customer value proposition. And objective number three is to deliver consistent segment profitability just as we did in the second half of 2017. As Sanjay just highlighted our focus on these priorities enabled solid execution in the second half of '17 and together with our healthy backlog and project pipeline we remain confident and committed to driving renewed growth, profitability and shareholder value as we head into 2018. So, with that, I'd like to now open up the call for your questions.

[Operator Instruction] And our first question comes from Steven Frankel of Dougherty. Your line is now open.

Good afternoon. Patrick, I wonder if you might begin by updating us on the dollar value in CableOS backlog. And then as a follow up to that, where does it take to get the deployment started? It doesn't seem like there are any material deployments in the Q1 guide. So how should we expect the year to scale up if you're going to hit this $100 million bogie?

The backlog coming into 2018 is roughly unchanged, approximately $20 million from where it was a quarter ago. We booked more business and we’ve burned some of the old backlog in the fourth quarter which was manifest in the uptick the sign in segment revenue. We definitely expect a lot of the things that we're working on and there are an increasing number of things as I've highlighted Steve to really start to flip to revenue and increasing way as we go through the course of the year. There's not a huge amount of that that happens in the first quarter, but the amount of work that's underway that we think begins to get burned in the second, third and quarters is actually increasingly - we're seeing confidence. There's a lot to cross the depth and the breadth of the work has given us increased confidence in our four-year target.

And how are you feeling about your competitive lead today given that, it's taken your while to get to deployment. How do you think you have and how you maintain it?

Well we're not aware of any other solution out there that offers a virtualized or software-based solution on one hand. And on the other hand, the new products that we've seen released to the market, the newer hardware-based products are behind us in terms of just raw performance, power consumption, density, efficiency the like. I want to reemphasize that the delay relative to our earlier expectations is less about product not being ready and it's more about customers really getting their minds and their arms around what can be done. Once you start thinking about all virtualize access network. Indeed, the com deployment that we've been able to now announce is quite advanced and quite mature and I think speaks to the readiness and the capability at scale of the technology. I think what we are seeing though is that, we've got a lot of a lot of global customers who are increasingly convinced that virtualization and software is the way to go. But figure out how they want to roll that out to bringing their ideas to the solution to bear is in the name of the game. If you don't mind me digressing for just a moment I saw in today's news that five of the leading global wireless operators in the 5G area have banded together and with a unified credo of going all virtualization in their networks and core to the proposition of the target is innovation and agility on that platform which I think is absolutely necessary to the ultimate success and growth of 5G. And I think there's a strong analogy actually to what we're seeing in the cable arena. So admittedly we first walked into this a year and a half ago thinking okay we're just bringing a better CMT as to bear. And I think with this has turned out to be is not just about a better mousetrap, but it's in fact it's about a whole different way of deploying an access architecture and that is --it actually makes us feel more strongly about our competitive lead, the work we're doing our competitors - with our customers makes us feel better about our competitive positioning. And while I regret the additional time it's taken to get to market, I think that actually in retrospect it makes sense given the magnitude of change that's being contemplated and planned by an increasing number of number of customers.

Right. I just I just like to add in terms of the backlog question, if you look the backlog has increased year over year by $36 million to approximately 30% of that is cable and I would say approximately 70% of that is radio. I know this is a split of the increase and not of the total backlog itself. So directionally both the businesses are progressing since last year. Compared to Q3, the backlog increase by 24 but all of that is video but that doesn't mean you know there is no new CableOS bookings during Q4. Rather the burn rate for Cable backlog to revenue is much faster in Q4 and more backlog has converted revenue than new orders coming in. At the same time this 30% of cable and 70 percent of video, it totally aligns with how we see the business, like if you see the video and cable business we were 90% on video and 10% on cable last year. In fact, in ’18 the way we see in our guidance book you one or the whole year we are close to 75/25 of video and cable. And this increase in backlog in the same proportion underpins our confidence that the trend we see in the business and the revenue forecasting is aligning with the backlog increase we are seeing.

And what does it take to get operating margins in the video business to double digits, you've kind of stabilized them here in the mid-single digits, how much more revenue do you need to get it to double digits?

Well so getting to the margins is it's a mix of gross - operating margins is a mix of gross margins as well as OpEx. If you see this quarter 101 million revenue and at the current OpEx level its 6.5%. I believe as OpEx is a where minimum which we have met is just a matter of gross margin dollars. It is close to 110, 120 on video that will be the benchmark to get to 10%. But at the same time, it's also a mix of how the SaaS transitions and how the other transitions you've seen in the market last year how do they play in this whole equation?

And then my last question and I'll jump back in the queue. I would have thought there would be expectations to generate material amount of cash in 2018 that's not implied in your guidance. Are you being conservative or is it a shift to more hardware with the CableOS remote side deployments that's going to hinder your cash generation in 2018?

Yeah. So, I mean we've seen during the whole year, we've made significant improvements in the DSOs and as we've seen the end up at 62. We believe this momentum - if this momentum continues and that's what we are driving towards. We believe we should end up similar to where we ended this year. But during this year because of the ramp in CableOS, there will be some investments in the working capital towards inventory for the R5 notes as you mentioned and that would move depending upon how the bookings and how the revenue turns around in quarter over quarter. So, we are keeping some room, some reserve for the working capital which will be deployed for R5 Notes and that may set up a small portion of cash hence you see the high end in 55 million, even though we ended 57 million this year. If that working capital, DSO improvements continue together with our R5 notes working capital needs are met you know I will not be surprised if we if we come out slightly about the high end, but all that needs to play out in the quarters.

Okay. Thank you.

Thank you. And next question comes from Simon Leopold of Raymond James. Your line is now open.

Hi guys, this is Victor Sze in for Simon Leopold. I wanted to circle back on the CableOS for a second. So just to be clear are your expectations for 2018 cable sales contingent on some specific deployments of CableOS opportunities that you're targeting? And just you know how material are you expecting it to be in 2018 relative to your $100 million target?

As we highlighted the vector we've got over 12 active commercial deployments and let’s say mature field trials and we've got a growing pipeline of seeing growing. So, I think the good news is the number isn't dependent on any one particular customer, but it's certainly assumes that this level of these will begin to turn into a greater volume over the course of the year. And....... …to turn into a greater volume over the course of the year. And based on our activities with the customers, the feedback from them, our insights into their plans, we see the work we're doing as providing adequate foundation for this forecast.

Okay. That's helpful. And the Com Hem announcement that you made is certainly encouraging, but I guess I wanted to see if there is any – have you -- are there any other operators outside of Com Hem that are discussing Virtual CCAP deployments I guess and can you speak about any other specific opportunities that are similar that you might be targeting?

Well thanks for giving me the opportunity to clarify. Everything we're doing is Virtual CCAP. So, when I say we've got 12 commercial deployments for mature field trials, I mean we have 12 Virtual CCAP deployments and/or mature field trials. So that's the name of the game for us Victor. Spanning both centralized deployments, which Com Hem and several others are as well as some of them, which begin to get into distributed stuff. So that's the value proposition we're bringing to the market. We're coming to market with a virtualized solution that is working. It's working demonstrably in the field at scale. We are in deployments, we're replacing brand CMTS and a kind of apples-to-apples way in terms of functionality but bringing extra capacity and extra efficiency and with a fully software core platform. So, if that's not clear, please continue to ask as I want to make sure that that is really clear.

Are these global deployments in the U.S. or…?

We're working globally, the biggest concentration in our -- of activity is in North America and Europe right now, but one of the benefits of having been in the market for years and having strong relationships with cable operators around the globe, means that we've got a real leg up in terms of dialogues and engagements with customers around the world. So, we're active in Latin America. We're active in Asia, but the biggest concentration of activity today is in North America and in Europe.

Okay. Great. That's very helpful. And just one last thing I guess, outside of the 12, I guess what if just in general, what are the different aspects of network integration interoperability that you think need to be addressed in order for more carriers to start considering deployment solutions?

I think we've shown now that there are -- that there is no fundamental issues and there's no real risk and I think particularly the Tier 1 operators, frankly they're dealing increasingly with cloud native technology and other aspects of their business for their applications etcetera. So, this is not some kind of black magic kind of stuff. Increasingly I think CTO's are saying, we're doing it everywhere else. Why aren’t we doing it in our access area and so there is no fundamental problem to be solved etcetera. I think look, the high-speed data platform is extremely profitable, it's extremely strategic for our customers. So, it's absolutely understandable that before they are or as they undertake, moving to next-generation technology, there is a careful vetting process, there's a careful integration process etcetera. Each operator is a little bit different. We're in the midst of that in different forms or fashions with different operators, but we're not seeing anything. There is no fundamental physics or problems being solved. So, it's pretty much straightforward integration work that is going on across these different engagements.

Thank you very much.

Well, thank you.

Thank you. And our next question comes from Jeff Bernstein of Cowen. Your line is now open.

Yeah hi. First off just want to Sanjay gold star on the capital management front. We would like to see that. I was hoping you guys could give us a little bit more detail about the competitive environment on the video side. The traditional competitors Ericsson and Cisco seems like their businesses are for sale or Ericsson I guess already took a hope note for theirs. Are Amazon elemental and Disney BAMTech the competitors now that you see in the market or you just give us as much detail as you can about that.

Well, it's an excellent question and it's one that I regret it's a little bit difficult to answer just because it's so fragmented. We consider AWS as an important strategic partner, indeed most of the public cloud deployments that we've done to date are running on AWS. So, we got some connectivity on Google as well, but indeed we compete with another part of that business and we tend to see BAMTech is more of a partner than a competitor. So particularly in the OTT area Jeff, it's just kind of fragmented and I think it's indicative of the big transition from traditional broadcast and Pay TV to new streaming models. That being said, on the legacy side of the business there is no doubt about it that the competitive situation has become I'd more benign. It's a growth challenge space, the legacy part of the video business and indeed we've seen some of the traditional large competitors weather somewhat and I think part of our healthy results in the second half of the year are indicative of us picking up market share there. That being said, I hope we made it clear, we're not hanging our hat on that part of the business. We're leaning in heavily, the shoulder is under the wheel on expanding what we're doing it over the top and not just in our traditional encoding, front-coding, but really expanding the footprint of what we're doing and its part of the SaaS whole discussion. We're bringing managed service capability to bear. Were bringing other system elements to bear. We're bringing the ability to offer turnkey service to bear and that is an evolving competitive environment where some one day we're competing with a player like Amazon and another we're partnering. And I hope that's not too much of a wishy-washy answer, but that's a little bit of the reality of a fast-moving and evolving space, but one that I think presents a lot of opportunities for us to be expanding our footprint.

So, it sounds like it's still sorting out a little bit as the technology and it's changing and DC resistance from customers to commit to competitors like a Disney or Amazon as the vendor or is that just seen as a separate area and therefore they are just as competitive as you are.

So, I think that's the real you've hit on a really interesting question. It's evolving more so because of the way they're evolving where the customers are thinking about their business. They're going from buying CapEx to considering moving to a service model and then you got to think well, who is my service partner and so we're seeing an evolution of thought where indeed some large media companies are saying hold on. Do I want to put my service on a potential competitor's platform? I think that this is all very real time so at a higher level than we're operating frankly. You've got big media companies thinking about is Amazon, is it a partner or is it a competitor? Same thing with Disney etcetera. So that said, that is also a pretty fluid situation. I think in that context, one of the Harmonic's positioning strategies is to position ourselves as clearly a best-in-class neutral technology platform and we think in that regard, for those media companies who are wary of putting their chips on the table of the company that actually competes with them for ad dollars or in the content sphere, we actually think what we're doing is pretty attractive and we think that there's some real mileage there. Without disclosing specific names, we've certainly had large customers turn to us saying hey we started out, we made the move to service, we went with one of the other managed service players, but management the word came down that we prefer not to do business with someone who is competing with us in another arena. So again, I am sorry, that's a circuitous kind of answer. Again, it's a fluid situation, but one that we see is opportunity rich for the way we're -- given the way we're positioned in the market. The other thing to add that despite of all this voice-leading environment we saw in video business like not only SaaS foundation headwinds, but their continuing customer M&A, if we look at our backlog and bookings this year, because being a record booking quarter, this is all primarily driven by video. So very strong backlog which positions a very strong year ahead of us on video.

Great. And then just on Cable Edge, you guys have bracketed the $100 million number for the year on guidance, but going back quite a while now, it was really a single North American customer not Com Hem that was going to be the driver of that and you've expanded the pipeline pretty significantly, but that number hasn't gone up. So, what's the problem with the North American guy and their deployment?

Look, I can't talk about any one customer with any specificity. That being said, I guess is the alternate in the room. So, I appreciate the question. There is this theory out there that I've heard that Harmonic is being used as a stalking horse or something like that etcetera and I want to tell you categorically, I and my team, we've been around. We've been around this industry for a while, that is not the case. We are convinced that the engagements that we're investing time and energy in are going to yield significant returns, that's for sure. That being said, as I've highlighted earlier, this move to a full cloud native virtualized solution, it's become bigger than us. It's about cloud-based routing. It's about whole new paradigms for the management. It's about the way you co-locate things with the rest of your cloud-based infrastructure and so I think what we've learnt unfortunately over the last 12 months is that as particularly our Tier 1 customers can gear up to make this change, there is a lot of moving parts that go beyond what we're doing, which we don't have control over and therefore we don't have exact control over the timing. So, I know it probably on the outside looking in, it’s frustrating is how can it's a black box and what's going on. But from our view, the activity and the complexity is indicative of seriousness and scale and that gives us continuing conviction in the long-term opportunity in our long-term opportunity for leadership here. It however has also taught us that be careful about the timing and I think what you're hearing from us in our guidance today is not backing off at all of the strength of the position with any one customer or any…

That's great. If you can get a Casa multiple on those revenues, I'd be really happy with that too.

Well, they’ve done extremely well. We're impressed with them. I think Gerry and the team are great, but keep in mind that if I recall currently they're a 10-year-old plus company right, and I'm not saying it's going to take us 10 years. I think we're four to five years into this. But on the other hand, it says that if you're four to five in and you're not actually throwing off that kind of cash, it doesn't mean the game is over by any means. Thank goodness for them, that they didn't throw in the towel or slowdown in five years. So, I'm not protecting another five years by any means. I think that we're making great progress and we're in great shape where the market is going, but I really feel Casa is a very instructive case study here.

Thanks for taking the questions.

Thank you.

Thank you. and that concludes our question-and-answer session for today. I'd like to turn the conference back over to Patrick Harshman for any closing remarks.

Thanks very much. Let's just wrap this up by highlighting that we're executing on our strategic transformation and plan to capitalize on this new wave of global customer investment and virtualized cable access networks as we've been discussing here both centralized and distributed and also the new premium quality over-the-top services that are going to flow over these new higher bandwidth and more agile access networks. Our fourth quarter and second half results and recent announcements I think clearly demonstrate that we're making real strategic and financial progress. Looking ahead, we're going to remain focused on both profitable growth and cash flow as Sanjay has highlighted while also delivering differentiated new technologies and services to the market that really will build long-term value as we've just discussed. We appreciate your support and thank you all for joining the call today. Thanks very much. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.