Welcome to the Q4 2019 Harmonic Earnings Conference Call. My name is Dwayne 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 would now like to turn the call over to Nicole Noutsios, Investor Relations. Nicole, you may begin.

Thank you, operator. Hello, everyone, and thank you for joining today, joining us today for Harmonic's fourth quarter and full year 2019 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 the webcast, we've also provided slides with this webcast, which you can see by going to our webcast on the IR website. 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 files with the SEC including our most recent 10-Q and 10-K reports in 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 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?

Well, thanks Nicole, and welcome everyone to our fourth quarter call. Harmonic delivered another strong quarter, capping a pivotal 2019 that was successful both financially and strategically. The financial headlines: A revenue of $122.2 million, up 7.5% year-over-year; 52.3% gross margin; and $0.12 non-GAAP EPS as both our Cable Access and Video businesses contributed meaningfully to our operation profit. Our strategic headlines are equally compelling. Over the course of the year, our virtualized CableOS solution leapfrogged the competition into the industry-leading position. While our live streaming video capabilities achieved significant new scale milestones. As a result, we're heading into 2020 with a transformed technology foundation with positive business momentum and uniquely positioned at the intersection of the core market dynamics of gigabit broadband access and streaming video. Taking a closer look at our Cable Access segment, where we had another strong quarter. Revenue was $43 million, up a little over 78% year-over-year, and operating margin was 8.5% as one of our new Tier 1 international customers began to contribute meaningfully. Full year revenue was $124.9 million, up 37% year-over-year. Highlighting continuing strong market momentum, during the quarter, we secured new design wins and received associated initial multimillion dollar purchase orders from two international Tier 1 operators. We expect to begin commercial deployments with these new operators in the first half of 2020. To the end of the fourth quarter, CableOS had been commercially deployed by 23 cable operators globally and the associated number of actively served cable modems grew to over 1 million. Approximately one quarter of these live cable modems are served through distributed access architectures, as DAA has matured and now become the fastest growing architecture we’re deploying. Most significantly, beyond direct financial benefits, both our virtualized, centralized and DAA deployments are now starting to deliver compelling consumer…

Thanks, Patrick, and thank you all for joining our call this afternoon. Before I share with you our quarterly results and outlook, I would like to remind you that the financial results I'd be referring to are provided on a non-GAAP basis. As you just heard from Patrick for the fourth quarter of 2019, we delivered strong financial results with revenue and EPS above the high end of our guidance range. Revenue was $122.2 million and gross margin was 52.3%, resulting in EPS of $0.12. We improved our working capital this quarter, ending with cash at $93.1 million and book-to-bill ratio of 1.15. We are entering 2020 with a solid financial foundation. Turning to slide nine. Q4 revenue was $122.2 million, compared to $115.7 million in Q3 ‘19 and $113.6 million in Q4 ‘18, resulting in 5.6% quarter-over-quarter growth and 7.5% year-over-year growth. Gross margin was 52.3% in Q4 compared to 67% in Q3 and 54.5% in Q4 ‘18. For the full year, total revenue was $402.9 million, down $1.8 million compared to 2018, but above the high-end of our guidance range, as our Cable revenue grew 37% and Video revenue declined 11%. We had three greater than 10% revenue customers during the quarter, Comcast contributed 20%, Charter contributed 14% and Vodafone contributed 13% of total revenue. Looking more closely at our Cable Access segment. Revenue was $43 million compared to $55.7 million in Q3 and $24.1 million in the year-ago period. Cable Access gross margin was 38.3% in Q4, compared to 77.1% in Q3, and 43.6% in Q4 ‘18, as DAA hardware shipments picked up. As anticipated, year-over-year growth was strong, reflecting growing success of our CableOS solution. Revenue and gross margin declined sequentially only because during the third quarter, we recorded one time software revenue of $37.5 million…

Okay. Thanks, Sanjay. On that note of execution, we want to finish by highlighting our strategic priorities for 2020. For Cable Access business, we’ll build on our success in 2019 by scaling our existing Tier 1 customer deployments, securing new design wins with additional global operators and successfully launching our complementary new managed services and fiber-to-the-home solutions. For Video segment, our objectives are to accelerate the growth of our live streaming business, to expand our addressed market to include new non-traditional screaming customers through our SaaS platform and to continue to deliver solid segment profitability. Finally, before closing, I want to recognize our employees for their passion and innovation to serve our customers, our customers for the collaboration and business, and our stockholders for their support as we continue to transition our business. Together, we've accomplished a lot and positioned ourselves for a compelling future. Thank you all. And with that, we'd like to now open up the call for some questions.

Thank you. We will begin the question-and-answer session. [Operator Instructions] I show our first question comes from John Marchetti from Stifel. Please proceed.

Thanks very much. Eric, I was hoping you could spend a minute. When I look at where we are from a projection perspective, as I look out into 2020, using the midpoint of your range, we're looking at about 2% growth. You've obviously had some new wins both internationally and domestic. There seems to be a lot going on here. Just curious how we think about all of this coming through and when we can maybe see a little bit faster growth rate materialize. Just curious where we are in this cycle maybe and how you think this plays out, not only ‘20 but as maybe we look a little bit more longer term?

Hey, John. This is Sanjay. Thanks for the question. I think, it's relevant to look at both Video and Cable separately for us. More in terms of Cable, if you look at the midpoint, it’s growing at 12%. But, we had this $37.5 million as a onetime software license pickup for Comcast in Q3. If we take that piece out from last year's numbers, we’re actually growing in Cable segment at midpoint by approximately 60%, which is very similar to what Dell'Oro in its market report projects as well. So, I think we have to take the $37.5 million out to do the comparison as that non-recurring and as one time. That said, for Video, at midpoint, it's a 3% decline versus at high point, it’s a similar number of range what we ended at this year. But, in terms of video, know that we are profitable and combined on gross margins and increasing ARR, we are on the right track for profitability and long-term value for Video business.

Okay. And just to be clear, Sanjay, the two international customers that were referenced in the remarks, those are two additional customers, or are those the ones that we mentioned last year and now they're actually contributing to results? I'm just trying to make sure I'm not missing something here.

The two we announced today are additional to what we said earlier. So, in total it's five, five Tier 1s. So, number one -- just to clarify, number one was Comcast which we all know, and we have discussed earlier. We have announced two Tier 1s with more than $50 million and more than $55 million, and today we announced two more, of course not the names, but in total they are five.

And any sense relative to those, the 50, 55 number? I mean, are these two new ones sort of in that same ballpark in terms of revenue contribution over time?

Why don’t I take that one, John? It’s Patrick. The short answer is yes. Both of them have the potential to deliver comparable numbers. They went after it a little bit differently. The ones we talked about previously for their own reasons, wanted to signed frame agreements with us. So, those are broad contracts as we've discussed and not orders, not sitting in the backlog, as Sanjay noted. These latest two took a different approach, no big frame agreement with some big headline multiyear financial number, but they, after extensive qualification processes, they qualified us to let's get going, and they placed initial multimillion dollar orders with us that in fact are part of the backlog that we reported today. And so, it's a different approach, no big frame agreement. But both of them, back to your original question, have the potential to deliver comparable results and scale over time.

Our next question comes from Simon Leopold from Raymond James.

Great. Thank you. Just a quick clarification upfront. You mentioned three greater than 10% customers. I got Vodafone at 13%, charter at 14%, but I missed Comcast. What was that one?

Comcast is at 20% for Q4.

Great. Thank you for that. And so, if we think about the disclosure you gave us on the modem penetration, you talked about, basically on CableOS being at 1 million modems, but you're talking about operators that have 45 million modems. How can we think about the value of that? I just feel like if we most like the current business by 45, we're overstating it. So, can you give us sort of some sense to think about what's the value of the opportunity?

Let's break it apart into two halves. Obviously, Comcast is part of that and nominally, a 50% of that. And as you know, we've -- you know the value of the software license agreement there. The additional opportunity, as we've discussed is hardware sales, which do scale with penetration of the service and services that we can deliver to Comcast. So, indeed, I think, the Comcast piece scales in one way. All of the others are priced right -- let’s say more conventionally, and that is a price per gigabit delivered on both the software license as well as the hardware assignment. So, for the rest of it, actually, we think that the linear scalability is about right. And so, we see substantial opportunity just converting the rest of their footprints. Now, converting the footprints is not a foregone conclusion. Our agreements with them don't require them to do that. But, we see -- to the extent we are delivering the operational and financial value that we think we are and that they're starting to tell us that we are. We like our chances of converting the rest of these operators to -- over time to being 100% or nearly really 100% based on CableOS.

And maybe just pivoting to the Video segment. In terms of the way this business is trending, it looks like you've got certainly the mix shift towards the return revenue. Do you see it returning to year-over-year growth at some point during 2020, or is that more of a 2021 event? Is that a metric you can even think about today of a quarter where you have year-over-year growth in Video?

Yes, it is. As you see from our annual guidance, which certainly strives to exceed, but we don't think that that happens in 2020. I think, it is important to remember that there's two distinct things going on here. One is a conversion to -- some of the customers to SaaS. But, even before we get there, there's a notion that we've rendered the whole product line as software. So, even if you're not going to SaaS, even if you're still doing capital purchasing or perpetual license purchasing of our products, increasingly often, you're not getting to the server or the enabling hardware from us, you're buying it directly from HP or Dell, let us say. And so, Simon, that creates a clear headwind on the top-line. So, I think it's quite different than the value that we deliver and hence our continued focus on gross profit and operating profit. Very rough numbers, the traditional hardware sales, the appliances themselves can be up to 50% of the revenue that we were doing -- delivering in the past, at virtually no margin. So, I think, the challenge -- and we're going to continue to work on you to try to -- you and everyone else to not think just in terms of Video, because as we turn over the hardware sales to HP, let us say, that is going to be a top-line headwind that I would argue really doesn't, in any way, negatively impact the value we're delivering or creating in the market. We're still delivering the same software. The fact that we delivered 60% record gross margin this quarter, the fact that we still have 14% operating income on the business, while the top-line was down, I think, goes to the fact that, on the timeline, we're kind of -- we're losing empty calories. So, I think, we've still got to go through the rest of that process of flushing out those empty calories, if you will. And at some point, yes, then I think that the top-line will begin to reflect the fundamental growth of the business. But, in the meantime, I -- we believe that focusing on the gross profit and the operating profit of the business segment are actually more meaningful in terms of gauging the progress of this business.

And that makes a lot of sense to me. Is it something where you’d feel comfortable at some point, maybe forecasting the gross profit dollars rather than focusing on gross revenue?

Yes. To be candid, it's something that we're thinking about quite actively. At the risk of sounding like we're kicking the can down the road, we're here announcing the fourth quarter of 2019. So, you've got no deviation from us in terms of the historical way we talked about the business. But, as we go into 2020, we are thinking about alternative ways of describing current results and future expectations. And we will look forward to continuing that dialogue with you.

Our next question comes from Rich Valera from Needham & Company.

I want to try to understand what's baked into your 2020 cable guidance in terms of new wins, or if that's primarily delivering against your existing portfolio wins.

I'll starting and maybe you can chime in qualitatively let's say. It's primarily our existing portfolio of wins. We're quite excited about the competitive market momentum in the new design wins. At the same time one of the lessons of 2019 is that the time between design win, qualification, initial bookings, maybe even initial shipments and recognition of revenue is -- can be lengthy and has risk of variability to it. So, I would acknowledge, I think we would acknowledge that we've taken a somewhat conservative take on how quickly we'll be able to convert new design wins into revenue during the year. So, I'm highlighting that because we're quite confident and aggressive about continuing to sign up new customers and new design wins and say we're somewhat more conservative about how quickly that water falls into revenue. But, make no mistake, whether water falls into revenue in 2020 or not, we think 2020 is going to be a watershed year of additional design wins, positioning us extremely well for multiyear growth delivery.

And then, on Comcast, Sanjay, you talked about how much you got in the third quarter from the ELA. Can you say what you got for all of 2020 from the Comcast ELA -- I’m sorry, 2019 for the Comcast ELA?

Well, for the -- we did announce that for full year Comcast represents approximately 23% of our total revenues, that’s among both the segments. But, in terms of the ELA, we did get 37.5% in Q3. And then, we said $4 million to $7 million we’ll get every quarter. So, for two quarters, at the midpoint if you take $6 million, we got close to $50 million this year, from ELA.

Got it. And one more if I could. You, back at the -- I think the SCTE show, you announced a new PON capability within the CableOS platform. Can you -- has there been any traction with that, have you gotten any sort of initial design wins or sort of take-offs with that at this point?

The progress is good. No design wins yet, but we're working, we're active with a couple of lead, I call them strategic customers. The first -- we don't expect revenue contribution in the first half of this year, we expected to be, again based our experience around public sharing and surround the initial virtualized CMTS, we expect the first half to be characterized by lab and field trial work, which we expect to transition into revenue beginning in the second half. But, the response the response has been has been quite positive. And to be clear, we’re at least in the early innings here. We're focusing on cable operators who are also doing fiber-to-the home. And so, the story -- the advantage is a unified access platform that is simultaneously supporting, provisioning the whole thing, both access and fiber services. And that is definitely a message that has resonated and strongly since the announcement.

Thank you. Our next question comes from Steven Frankel from Dougherty. Please go ahead.

Patrick, given the slow start to the year in Cable Access, could you give us some insight into what kind of visibility do you have into these Tier 1s and their deployment plans in 2020?

It's a great question and it's mixed. The more mature the engagement, the better the visibility is getting. So, for our early customers where we've already recognized revenue, domestic and beginning in the fourth quarter more significantly a lead international customer, we've got pretty decent visibility, and that really is, to the earlier question, that really is the backbone of the 2020 forecast. As the engagement -- the engagements that are little bit newer, the visibility isn't quite there. What we've seen, as you know, Steve, is that there is a number of the things that go into making these deployments work. It's not just a simple switch of a CMTS. It's a broader ecosystem. And so, as mentioned earlier, we're arguably a little bit conservative in our estimate of how quickly all these other things will come together. So, the visibility is less precise for the new customers. And then beyond those we're engaged with, our plan does call for additional design win certainly during the year. And there, I would say, we're the most conservative in terms of how quickly those design wins will turn into revenue. So, there is certainly upside there, but we're not baking it in and we will be cautious about you baking it in, until we get going a little bit faster. One last thing I would say though is that, as a whole thing becomes more mature, we expect these sales and deployment and revenue cycles to decrease. It's just a little bit premature for us to kind of call the knee in the curve at that point yet. But that's something that we will be tracking on and reporting back to you as we go through this year.

I’d just like to add, as a reminder that as the build our ramp in 2020, there may be some variability along the way within in quarters, due to the customer mix and product mix in the quarter. We did see that in 2019 as well. But, I just want to give a reminder, it could happen in 2020 as well.

Okay. So, -- and again to go back through these two large Tier 1s that were won in Q4, you have a little to no revenue in 2020 forecast at this point relative to those customers?

I'd say, we have modest revenue principally in the second half of the year.

And then, to go back to your comment in video about, it used to be 50% pass-through hardware. Kind of where did that exit Q4 in terms of pass-through hardware as a percentage of revenue in Video?

You can see it in the gross margin of 60%, which is a blended number. So, in fact, still over 50% of our Video sales are associated with some kind of pass-through hardware. I like that phrase. But that percentage is declining and with that, we're seeing the gross margin move up.

And how quickly do you expect that to trend toward kind of let's call it sub-25% range?

The truth is, I don't know. We're definitely seeing some acceleration there. But frankly, if you asked me, a year ago, I would have tough it would be further along, Steve. So, we're watching it and that's part of our challenge in answering some of the questions that we get asked about -- about revenue. Particularly, some of the more traditional players in the broadcast space still like to get a box or an appliance. And so, some of them haven't tipped as fast as we anticipated. On the other hand, service provider cloud is increasingly I think converging their view of how they'll deploy this technology with their broader cloud or data center strategies.

Maybe let's go at it a different way. If we look out a couple of years and if hardware becomes a much smaller piece, what kind of gross margin does the SaaS software business get as it shifts to SaaS? Is that a 70% plus gross margin business?

Yeah. I think that'll be fair, that's reasonable and that's definitely the long-term path we’re marching towards.

Okay. And then, just to be clear on the year-end cash position. That's a function of $17 million in improvements. And what do you say $45 million of bond repurchases, that's where the cash is going for the year?

Correct. Yes.

But away from that, the business is now in a mode where you generate -- you are starting to generate consistent cash flow, right, from the business.

Yes. I mean, we generated $26 million, $27 million cash this year. And we expect to generate cash next year as well. And definitely, the two things you pointed out are the main reasons for fluctuations in cash in 2020.

And Patrick, pivoting back to CableOS. What kind of level of interactions do you have today with the -- let's call them the Comcast syndication partners, those operators that typically follow Comcast lead. Are they having discussion along CableOS as well at this point or is still early days?

Well, I prefer not to mention any specific customer. I mean, we do know that there is a group of customers, as you say, Canadian operators and COTS principally who have a so called, the syndication relationship around Video with Comcast. Now, we consider those important North American cable operators. So, like all important cable operators, we're absolutely engaged in conversations with them. Whether they might work directly with us or whether they might engage with Comcast and so called syndication deal around. I don't want to speculate. I think, it's an opportunity to be able to work with those and other operators in more than one way. Anytime choices created for delivering the technology, I tend to think it's a good thing. So, we historically have relationships with all of those operators. We have historically delivered product, edgeQams and Video to all those companies. So, we get good relationships. And of course, they've got a very special relationship with Comcast. So, one way or another absolutely, our aspiration is to see a Comcast -- excuse me, to see CableOS become part of the story there. And that's -- won't be a surprise to anyone that's part of our -- that’s on our hit list for going forward.

Thank you. Our last question comes from Tim Savageaux from Northland Capital Markets. Please go ahead.

Good afternoon. I want to focus back on the Cable Access business and comment you made earlier about the -- I guess about the gross margin in the quarter. Well, couple of things. First, given the upside on the top line, Sanjay, before you talked about normalized kind of growth relative to your market forecasts and normalizing for the Comcast software piece. Is it reasonable or some of the dynamics you saw in the quarter some -- should we add some element of pull into that? I guess, you had this dynamic previously. Maybe that was on the Video side. But, is there an element of unanticipated strength and demand in Cable Access in the quarter? And how I guess -- how I link that if it’s maybe taking away from 20 to some degree? And that was hardware oriented, right? You seem to have had a very strong quarter, just kind of parsing out the gross margin results on the remote side, node side, maybe even like two-thirds of revenue in the quarter. And I wonder if that’s -- if we can look at that as kind of multiple quarters of demand heading forward, and there is some sort of dynamic about some of this Q4 strength, maybe taking away from what you might have expected in ‘20?

Yes, Tim. So, in Q4, we had catch-up of revenue for one of our Tier 1 international customers, which started ramping in Q4. Actually, that's variable of RevRec. We had been delivering on this customer since May of 2019. But the RevRec came in, which was dependent on acceptance, came in Q4, as we received that acceptance in Q4. So, it did have a piece of catch-up, which you see and hence the number was higher than expectations for Q4. Now that said, in terms of the node shipments, the node shipments we did last year, and they will also happen in 2020. They are baked into our guidance, but there will be variability among the quarters on how the node shipment would go. In fact, there's a seasonality aspect to the nodes in the time of their deployment. They become more active in the second, third quarters than the first quarter. So, that's the piece which is variable, but definitely no shipments, and hardware shipments are baked in for entire year.

Okay. Let me try and com in that again. I mean I also maybe looking at your Comcast concentration in the quarter as well. I mean, assuming that that went down, the software element went down to that run rate level you described and even also assuming some video in there as well. That's a pretty significant quarter of hardware shipments to Comcast. And I don't know whether the catch up from the International Tier 1 you described is also hardware or software in nature, and maybe we can review, that's a good opportunity to talk about the cadence with which you -- it seems like you saw some hardware shipments initially with Comcast and then obviously the big license and catch-up on the software side. As you look at your other four Tier 1s, the two frame agreements and the ones you've just announced, what kind of dynamics do you expect there between kind of hardware and software as we head through the year? And, once we look at kind of our run rate, node business is what we saw in Q4, indicative of typical quarterly demand at Comcast, so we’d be looking at $15 million to $20 million a quarter in node revenue there, or is that kind of -- how would you characterize that at least?

I don't think there's anything more we can say specifically about Comcast, Tim. But, I think you do bring up a good point that we should further clarify. A couple of points. First, not only -- beyond Comcast, the other international operator, who started to contribute strongly in the fourth quarter revenue, and the two new ones, all of those Tier 1s, although not exclusively, the primary initial architecture selected is DAA. So, in fact, there will be strong hardware elements. And as you alluded to and you recalled from a year ago, these DAA deployments are experience now as characterized by hardware shipments upfront, because in fact, there is a lot of logistics, provisioning, installment et cetera, where's the corresponding software can be delivered more just in time. And so, yes, we're actually very much in that mode now. And with these Tier 1s focusing on DAA, you can expect the initial wave to be hardware followed by software to like that hardware up. And then, our anticipation is another re-up on the hardware. And that goes a little bit to what Sanjay was mentioning previously about perhaps some amount of cyclicality quarter-to-quarter. Now, I think over time and where you're getting to is we bring more customers into the fold. And as these deployments all become more mature, I think we're going to get to a more statistically average hardware and software per quarter. But, we're still not there yet. So, we're still kind of in early days. And that's why it doesn't fuss us too much to see a particular quarter kind of up or down on revenue, heavier on hardware, heavier on software. I think, we're really just in that startup phase where the flywheel isn't quite moving as fast. But, I think with this increasing number of DAA, design wins that we're now getting under our belt, I think we can anticipate during 2020 or perhaps by the end of 2020 to be to a more -- a place where we are seeing more repeatable statistics quarter-to-quarter. But, you’re right in highlighting that we're not there yet. But, I think it's all part of the startup phase with Tier 1s around DAA.

Got it. And…

Does that help, does it address what you're trying to get at.

It does. I appreciate that. And I guess last question on the strong order bookings and increase in backlog. I think, the $200 million kind of outside of that, has that number changed? I think that's the number you've been talking about pretty consistently in terms of this kind of -- I don't know if that's meant to represent the value of the frame agreement that you're talking about. And so, should we look at it as that number as kind of stays there, and the backlog increases really, mostly a result of the Tier 1s you've announced?

So, Tim, the number has reduced since Q3. However, it’s still over $200 million.

Okay, great. Thank you.

Thanks, Tim. And thank you all for joining the call today. We appreciate your continuing interest and participation. And we look forward to continue and execute on these compelling opportunities in front of us and to talking with you all again soon. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.