Welcome to the Q1 2018 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. And please note that this conference is being recorded. I’ll now turn the call over to Nicole Noutsios, Investor Relations. Nicole, you may begin.

Thank you, Operator. Hello, everyone and thank you for joining us today for Harmonic’s first quarter 2018 earnings conference call. With me today are Patrick Harshman, our CEO; and Sanjay Kalra, our CFO. Before we begin, I’d like to point out that in addition to the audio portion of webcast, we’ve also provided slides to this webcast, which you'll see by going to our webcast on our IR 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 statement section of today’s preliminary results press release. These documents identify important risk factors, which can cause actual results to differ materially from those contained in our projections or forward-looking statements. And please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP basis. These items, together with corresponding GAAP numbers and a reconciliation to GAAP, are contained in today's press release, which we’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 or on our website. And now, I’ll turn the call over to our CEO, Patrick Harshman. Patrick?

Thanks, Nicole, and welcome everyone to the call today. We are pleased to be reporting a positive quarter with solid year-over-year financial improvement that was enabled by growing success of our key strategic initiatives. In fact, the first quarter was a pivotal quarter as we achieved meaningful strategic milestones in both our CableOS and video software transformations. The result financial headlines on the year-over-year bookings were up 25%, revenue was up 8%, gross profit was up 15% and operating income improved by approximately $12 million. The key driver of this financial performance was our CableOS initiative which is continuing to gain momentum in the marketplace. To underlie this momentum, I'm very pleased to announce today that we have secured a new greater than $50 million multiyear supply agreement with the Tier 1 international cable operator. This win involved a very competitive formal RFP process substantiating both our technology leadership and our ability to compete effectively in the marketplace. While we currently anticipate the financial impact in 2018 to be modest as this engagement ramps up, this is a major strategic win and an important step forward for our CableOS program. In aggregate, we now have over 15 CableOS commercial deployments and advanced trials underway with over 200,000 consumer devices served up nearly 100% from last quarter. And behind the scenes, we continue to raise the bar in both virtualization and remote five technology including filing several additional patents during the quarter. On our last earnings call we discussed that in addition to centralized architecture commercial deployments early distributed architectures field trials were maturing. For this quarter, I'm pleased to announce that we have deployed our first scale commercial distributed architecture network now live in certain end consumers and we secured our first greater than a million dollar purchase order for…

Thank you, Patrick, and thank you all for joining our call this afternoon. As you just heard, we delivered a strong start to 2018. We delivered strong results across a number of financial metrics. Revenue, gross margins and EPS were all at or near the high-end of our guidance range and expenses came in at the low end. We maintained a good cash position and ended the quarter with a book-to-bill ratio greater than 1.1 which means we are maintaining a strong backlog as we head into the rest of this year. As we turn to Slide 6 to review our Q1 results, I would like to remind you that the numbers I'd be referring to are on a non-GAAP basis. Revenue was $90.2 million compared to $101.1 million in Q4 '17 and $83.5 million in Q1 '17. We delivered year-over-year growth in the quarter driven by strength in cable access segment premium from cable edge. Cable access segment revenue was $18.5 million compared to $13.5 million in Q4 and $9 million in the year ago period. As we previously communicated, the revenue ramp in cable access segment has begun. As the cable access segment continues to ramp, we expect to see inherent variability in revenue streams from new products and services throughout the year but continue to expect this segment to contribute 100 million of revenue in 2018. Video revenue was $71.7 million compared to $87.6 million in Q4 and $74.5 million in the same quarter last year. The sequential comparison reflects typical seasonality while year-over-year comparison reflect the timing difference of professional services relating to lower SaaS bookings this quarter and also product mix shift to more software. As I will discuss momentarily, video segment margin and gross profit increased year-over-year. We had one greater than 10% revenue…

Thanks Sanjay. We want to close by reviewing our strategic priorities. For our cable access business, objective number one is to continue to successfully scale our first wins of CableOS deployments encompassing both centralized and distributed architectures. Leveraging this growing CableOS market momentum objective number two is to secure new design wins with additional operators both Tier 1 and midsize and smaller customers. And our third objective is to deliver on a $100 million 2019 cable access segment revenue target further position this business for both industry leadership and as Sanjay says profitable growth. Turning to Video side of the house, objective number one is to further accelerate the success and growth of over the top platform, across regions in media and service provider verticals. Our second objective is to continue to extend our SaaS offerings thereby expanding our addressable market and further enhancing our customer value proposition. And our third objective is to deliver consistent segment profitability just as we’ve done over the past three quarters. Our continued focus on these priorities enabled tangible strategic and financial progress in the first quarter 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 the remainder of 2019. So, with that, let’s now open the call for your questions.

[Operator Instructions] And our first question comes from Matthew Galinko of Sidoti. Your line is now open.

I think you started breaking out SaaS ARR last quarter, I was wondering if you could give us an update on that metric?

The SaaS ARR last year we ended the year 2017 with approximately $9 million and is moving to $9.6 million at the end of Q1 and that’s in continuation of our additional bookings we got at the same time with the increase run rate of quarterly revenues from the previously booked deals. So it’s approximately 5% increase in the quarter.

And do you still have the expectation or could you just kind of update your expectation on what the SaaS mix looks like in 2018 or what you are targeting?

So SaaS bookings as you see last year was approximately 5% and this year for the complete full 2018 we are still expecting around 5% although Q1 fell a little short like 1% as I mentioned in my prepared remarks. But throughout the year we believe we’ll be able to capture that and bring back to 5%. So overall our expectation our still the same and we believe the ARR is going to continuously grow quarter-over-quarter that's how we saw that happening in 2017 and we believe 2018 also every quarter we should expect the growth in ARR.

One more if you don’t mind, I think you talked last quarter about starting into a Tier 2 operators with CableOS, any updates on that initiative? Do you have any ongoing trials or field deployments in Tier 2 operators?

But just to say Matt that it’s going well. I highlighted here over 15 commercial deployments and advanced trials and that is - represents a mixture of a Tier 1 and smaller operators. Frankly Tier 1 continues to be the main strategic focus of the business, but as the technology further hardens and matures and we get a little bit more breathing room from some of the Tier 1 engagements, we've been able to spread our wings continuously. And we’re making good progress with the medium-size and some smaller guys. So its work in progress, long-term we see a big part of the opportunity being with the mid size and - smaller guys and yes we’re encouraged by the progress we have driven so far in Q1.

And our next question comes from Steven Frankel of Dougherty. Your line is now open.

Patrick let’s start with this large new international CableOS win, maybe characterize for us why you think you won that deal and how is this going to be deployed. Is this a Greenfield or is it rip and replace - how is the customer planning on deploying the technology?

So fair questions. Look as I have said several times, we think what we’ve done is quite powerful it’s aligned strategically with the broader technology vision of the Tier 1 operators worldwide. It’s a strong push behind network function virtualization et cetera and so what we’ve done resonate so with the other things with their pushing and the broader parts of the technology platform. So we’re engaged with Tier 1’s right around the world. And so it’s exciting to see this particular customer us to come out on top of their ERP process and we think with the combination of the technology capability mapping up with their vision and us proving out in their lab. So they tested and banged down, convinced themselves that it's not just a compelling vision but in facts that it's real. So the second part of the question, we expected to be a mix of Greenfield and rip and replace. Part of the opportunity is it is connected to indeed pushing fiber deeper, gigabyte service deeper into the network. And so you'll see that part essentially being Greenfield if you will, but our understanding of the deployment plan is that its hybrid you'll see fiber going deeper in some areas and in other areas for common technology and operational efficiency all the advantages of virtualization, we think there will be another element which is as you say rip and replace.

And can you update us on where the backlog is in the CableOS business now?

So Steve we generally do not break out the backlog by video and cable segment historically we haven't done that. However, I’m happy to share that directionally our backlog has increased from Q4 to Q1. It’s going up in the right direction and in fact in the right quantity as well as we would expect which will support our guidance for Q2 and our annual expectation for the growth.

And was this - go back to this big deployment that sounds like that’s a mix of a piece with remote five and another piece that may not have the remote five element?

Yes, I mean as a reminder the heart of the system the CableOS software stack is kind of agnostic to where the five is, whether it's a next door in a centralized data center or whether its push down deep in the network. That's part of the beauty of the system or indeed you can have different five locations for different subregions, different traffic patterns, different consumer profiles et cetera. So it’s our software stack deployed centrally and the long-term plan is to have so-called five in some parts of the network applied remotely deep into the network and other parts more conventionally or centrally as the terminology goes.

And what can tell us about your major customer, we’ve been kind of waiting for the next stage of that relationship to develop. What's happening with that field trial and development process?

Well, I think you're referring to Comcast and the news that we can report because we are obligated to report is that they were greater than 10% customer as Sanjay mentioned they were 14% of revenue customer which is good news. There are a very key customer obviously the number one cable operator in the world and so to be doing volume business with them is I think a very positive for us. And frankly it's been sometime since we've had any customer represent 10% of revenue. So that's the detail that we can share. More broadly beyond that I can simply tell you that going back to last conversation in the international win, we think that what we’re doing is it represents a new and change, but it's really capture the imaginations of most of the Tier 1’s worldwide. And so in our view you know it’s really isn’t a question of if but it's when and we’re pushing hard and we think we're making good progress across the board. And I think I have to leave at that, please understand I can’t comment any more specifically on Comcast or any other specific operator.

More quickly so on this Comcast again, of that 14% is that the mix of video and cable access or that was cheaply cable access revenue in the quarter?

No, that’s a mix of total revenue not any particular segment but in total.

But on backlog, I’m asking was there contribution from both businesses?

Yes, there is contribution from both.

And then on the 606 impact how much of that revenue headwind is in Q2 guide?

So what we experienced in Q1 a very small insignificant piece around 500/600 K net impact that’s very similar what we are expecting in Q2 as well. And as we learn more 606 we’ve taken an approach for the 5 million impact on the guidance but Q2 is already baked in the Q2 guidance very similar to the impact of Q1.

So obviously the anticipated impacts scale is up in the back of the year if the…?

Exactly I would suggest like in terms modeling purposes in the back so Q3 and Q4 for easy purposes split equally into two quarters.

And our next question comes from Tim Savageaux of Northland. Your line is now open.

I’ll add my congratulations as well on a solid quarter and several notable milestones and I want to follow back up on the Tier 1 international award that you referenced as well. And maybe try and relate that to what looks to be an expanding universe of field trials and deployments I think you said 15 up from 12. If I recall properly but as you look across that universe of trials and early deployments I guess is what you announced with the Tier 1 international operator typical of the size of opportunity that you're pursuing within that group unusually large for Comcast we assume the opportunity maybe several times. What you announced with international operator, but can you give us a sense of and also having mentioned some Tier 2 opportunities is what you announced here today kind of indicative of the average kind of opportunity you’re pursuing in this base of trials?

Well I think you have start - the place where we think that this is evolving towards a $2 billion market. So that's really frames the opportunity that we think we’re pursuing. Cable worldwide is dominated by what we call the Tier 1 they are the big guy. And so the spend in this category amongst the top 10 cable operators is certainly north of $50 million. So as we think about the opportunities were pursuing with Tier 1 this is absolutely indicative or maybe even smaller than the eventual opportunity. That being said it’s not always the case it’s probably the minority of the cases of the opportunity we’re pursuing that are formally constructed as an RFP for certain project with a certain size. And for us its really more about gaining design wins and leveraging footprints to grow, and grow, and grow and really get after our objective is to be number one in this $2 billion space. So, we've got fetch a little bit and I think its representative of what we see it is not the small side as we think about our Tier 1 opportunities. It’s bigger than the opportunity that we think in front of us for the tens or dozens of midsize and smaller operators. So we’re finding it coming in all shapes and sizes Tim and but it's a great step forward and not only because of that customer win but because it is kind of a small cable community. And so what we were building here is credibility as well as a footprint with anyone operator. And so we’re encouraged by that progress that we think it's coming out on top in $2 billion space is not going to happen overnight but it’s going to be step-by-step. And this is a pretty encouraging step forward.

Got it and…

And Tim I like just add that it's not only just the size, but also what does the gross margin profile come with the deal is very important for us as we expect of our growth and we ramp. So this deal not only in terms of size, but with the margins which we’re expecting on the deal falls exactly within our expectations for this CableOS success.

Appreciate that color and while we’re CableOS margins they’re notably strong in the first quarter and I imagine that sort of mix related in some way. Although it looks like kind of implicit in the guidance you might expect that to come down throughout the year I might imagine through greater mix of note shipments or what have you. But if you can while you're there in terms of baseline margin expectations for CableOS if you could a little bit about the drivers of the strength in Q1 and whether indeed you see that moderating a bit as maybe more hardware oriented aspects of the deployments begin?

So if you look at last year, our margins for CableOS were like 29.9% or like less than 30%. And definitely Q1 we expected the ramp to happen together with the margins and it’s coming in line with our expectations. The margins in Q1 as you said are great, but at the same time during this year while coming up with the guidance not only for the quarter but for whole year we have considered the range of approximately 40% to 50% and yes it could vary among the quarters. There is some variability among each quarter how that mix plays up, but our expectation is stay within 40% to 50%.

And final question for now over on the video side you mentioned is a key objective to maintain profitability there I wonder if you try and maybe put a few more metrics around that. And with regard to potential operating margin targets on the video side it does seem given high 50s gross margins that double-digit operating margins could be achievable over time as you look out through the end of the year and kind of what's sort of implied in your annual guide if you could update your thoughts or expectations there on the operating margin side for the video segment?

I mean we got good margins 2.8% in Q1 and while I can share that we expect to be profitable in the video segment in fact in both segments we expect to be profitable from an operating profit standpoint. In terms of percentages they would fluctuate within the year among various quarters, but overall I believe we will be close to 5% or less than 5% around that at the same time they will be some variability among each quarter.

Thanks very much I pass it on.

Let me just add on that Sanjay, I think it’s important to remember that we’re in the midst of a transition from what was traditional appliance or into broadcast business to a much more software and overtime SaaS centric over-the-top streaming business. So you'll see I think some of variability in terms the way the model is working and I think our objective is to kind of walk before we run. I think you're absolutely right if we look longer-term and even beyond this year we see a business where the gross margin profiles are continuing to improve and we see the overall profitability continue and improve. I mean near-term objective is executing that transition and doing in a way that we’re keeping the bottom line healthy and stable. So I’d say we’re kind of in the walk phase there, but we do look forward to if you will or running ultimately with a higher operating margin profile but we’ll keep posted on that long-term objective.

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

Just first wanted to verify that I got one of these numbers down correctly. I believe the cable access gross margin for the quarter was 46.7% is that correct?

Yes.

And so just sort of I think maybe falling onto the previous question. Is there something specific about how the business would flow in with new customers that would help us think about the trending? For example, when you sign up a new customer is there initially a significant software contribution that would boost gross margin that would then tail lower as the hardware aspect the nodes are shipped hence a lower gross margin as you follow on. Is that the right way to think about it I guess I'm trying to understand what led to the surprisingly strong contribution gross margin in the March quarter?

So, the guidance we gave during the quarter and the margins which came in I think they pretty much sync up, so I think it came within our expectations. Honestly, we're not surprised because that's what we were working towards in this quarter, at the same time to go back on your earlier part of the question the mix how software products, licensing and service is going to play, is going to vary among quarter-to-quarter. Every customer would have would have a different need, there will be different timing of shipments of each of these but the timing would vary. The timing would vary not only in terms of the margin but also in terms of the dollar value of revenue and expected margins as a result. So there is software, definitely a software piece is a big in CableOS but also there are services our customers which are in the early phase of deployment needs additional services and support from us which are pretty healthy margins as well, so I think it's all a mix of how all these things are playing together and coming in for this strong margin compared to last year and our expectation for the whole year as well.

So I think, Patrick sort of referred to this as a transition year which makes a lot of sense if we sort of bridge 17 into 18 as a transition period. I'm wondering if you thought or could quantify what your long term objectives would be in terms of a gross margin and operating margin profile for the company?

Yes, as I said earlier we have 40% to 50% margin expectation this year for cable access segment which is a mix of various things. At the same time the long term objective is definitely going to be higher than 50% but how much it's hard to quantify and give guidance at this time. I think as Patrick said we have to walk before we run, so I would not rather set a high expectation right now but we want to be successful this year the way we have delivered over results this quarter and once that is behind us then I think we can think about guiding more or guiding ahead to based on how things will play out.

And I just wanted to check on, in terms of the over-the-top business that you've talked about, is that primarily the result of the production and play out products if not what's driving it and how material should we think about over the top within the overall revenue.

It's not primarily the production and play out, it's actually more on the delivery to consumer side. So two big drivers are bit Simon are our new virtual NPPD place where you see so-called skinny bundle trying to being rolled out to domestically and internationally. We are an increasingly involved player in enabling those kinds of services and also touching P&P maybe this is where you're going with your question by virtue of our historic production and play out area we have a lot of relationships with content owners and media companies who are starting to go direct to consumer, and we're playing a role also in these direct-to-consumer over the top streaming services. So, those are two key drivers of the overact type activity. Admittedly, the traditional broadcast infrastructure is declining. The over the top stuff is growing fast, so net-net we're kind of treading water but we think by continuing to expand our position, our capability and over the top, we're striving for making it a net topline growth driver for us.

And one last one just switching back to the CableOS and the CCAP aspects of this business with the nodes, could you talk about where you see the competitive environment today? Thank you.

If you would allow me Simon let me just take half a step back at the risk of flooding the water further on the whole margin question because I think it relates to the follow on question. It is important to understand that our CableOS software itself is kind of agnostic whether it's a distributed architecture or a so-called centralized architecture. Now we'll certainly I think the big disruption if you will that starting to come into the whole cable access space is around distributed networks. I think we can see more clearly that we're going to have a leadership position there and we can forecast playing strongly there. I think what is a little bit more of a question mark is how successful will be over time, actually capturing part of that centralized market if you will which will have a relatively higher software component and that's a little bit of the uncertainty that we have forecasting the mix. But its - I think it’s always key to understand that our business and our success is not wholly or exclusively predicated on putting nodes out there and redoing the access network and indeed most of the deployments we've done to-date have geared towards the majority of activities geared towards centralized. Now all that being said, I think your question was about specifically around remote five. We don't know, what we don't know about what our competitors are up to but we had our first software - virtualized CMTS working in 2016 and we've been working feverishly with the leading customer since then to further enhance and mature and advance the platform. So our belief based on things like the recent RFP win that we've talked about here in the feedback we're getting from our customers is that we've maintained a quite a strong lead in both the whole virtualized part of the equation, as well as the remote five piece of things. I hope it doesn't sound at all like overconfidence with there's other good companies participating in this market and we're very mindful of that but we're completely focused as I mentioned - prepared remarks we've continued to file patents in this area and we’re learning a lot in the field and putting that back into the design cycle. So, our understanding is that we maintain a pretty strong lead in the market and something that will be working very hard to maintain this as we go forward.

And our next question comes from George Notter of Jefferies. Your line is now open.

This is Carl here for George. Thanks for taking the question. I wonder if you could give us any additional color on how many customers you had in the quarter that are driving the year-over-year improvement in the cable access segment right now. I would assume that that would be your large commercial deployment mainly and then some additional revenue from the field trials that you mentioned.

It is a mix, we disclosed here 15 commercial deployments and let’s say advanced trials worldwide and while our strategic emphasis continues to be on Tier 1, that represents a mix of larger and medium and even a couple of smaller accounts. So, it's still I think, it's still a relatively modest a cross-section of the total global cable landscape but it's something that continues to expand. Of course our strategy is drive real success with the early players and then use that as a platform to build on and bring in more customers.

And would that be mostly the commercial deployment or would - I guess I'm trying to get a sense for how big the collection of field trials are versus the commercial deployments, is there anything further you can give us on that?

Of the 15 - let me be clear it's not just one or two commercial deployments, it is a mix but the revenue that were driving the revenue outlook for this coming quarter of the coming year definitely relies on multiple customers contributing.

And one last for me, you mentioned to the R&D cost savings in your prepared remarks. I'm just wondering if you could give us a sense for how we should think about that going forward. Is there - do you have any kind of a dollar value target or should we just think of R&D growing slower than revenue or becoming a smaller percentage of revenue in a given quarter. How should we think about your initiatives on R&D and the cost savings you're getting from going to software platforms and SaaS products?

Carl the savings that we saw in Q1 and even we kicked off these initiatives in last year around Q4, so we’re realizing those benefits this quarter. At the same time our guidance for the whole year as well as Q2 entails theses savings are benefits already. So if you save it in the OpEx guidance of 49 to 51 and maybe take the midpoint and use that as a run-rate for the whole year, that should address the savings already. So that’s an initiative we took last year and it's playing well in accordance with those expectations.

And should we think of that trend continuing into the next year and like how - what's the duration of that trajectory you think or is there a point one when those savings are kind of fully backed into the financial results?

Well specifically for R&D as the initiatives have been put into place and we are realizing those benefits while we would expect that to continue even in beyond 2018 but at this point in time, I’m really reluctant to go out beyond 2018 and give more color for 2019. So I think 2018 we are well in the range of 49 to 51 a quarter where R&D definitely is a big piece but directionally the store savings should continue every year.

And our next question comes from Tim Savageaux of Northland. Your line is now open.

I want to follow-up briefly or want to comment again about the Tier 1 international win. I think you mentioned that your expectation was for a modest revenue impact in calendar 2018, just want to kind of focus back on that and sort of along the lines of some of the previous questions about, as you look and reiterate your $100 million target here, I think we can assume perhaps a polarity of that comes from your largest customer but it seems like that diversifying pretty nicely. So as you reiterate that target it seals that new win kind of doesn't have any influence on that but can you talk about what if anything you do expect from this new win in 2018 and whether that’s kind of supporting your $100 million target or more than 2019 thing.

Yes, so I’d like to provide some color on that basically as we said this is a multiyear agreement and its going to provide some modest revenue in 2018 and the reason being although it’s a $50 million agreement which got signed. At the same time it ramps up next year 2019 and then they will see most of the revenue. This year we will see some shipments related to that but as the customer also prepares for it and get’s ready for CableOS implementations, there is going to be a time lag between when we shift and how it ramps in 2019. And as our backlog drills and as a business continues, this is supporting. It underpins the confidence on the technology and not only the $100 million target we have for this year but basically there are more years to come and we have to start building backlog for that right now and this is definitely heading in the right direction for that purpose.

So that ends the Q&A. Thank you all for joining us today. We appreciate your participation and we look forward to talking with you all soon.

Thank you very much.

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