Harmonic Inc. (HLIT) Q3 2020 Earnings Report, Transcript and Summary

Welcome to the Q3 2020 Harmonic Earnings Conference Call. My name is Jimmy and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. [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, Jimmy. Hello, everyone and thank you for joining us for today’s Harmonic’s third quarter 2020 financial results conference call. With me today are Patrick Harshman, President and Chief Executive Officer and Sanjay Kalra, Chief Financial Officer. Before we begin, I would like to point out that in addition to our audio portion of the webcast, we have also provided slides to this webcast, which you may see by going to our webcast on our Investor Relations website. Now, turning to Slide 2. During this call, we will provide projections and other forward-looking statements regarding future events or future financial performance of the company. Such statements are only current expectations and actual events or results may differ materially. We refer you to documents Harmonic 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 posted on our website and filed with the SEC on Form 8-K. We will also discuss historical financial and other statistical information regarding our business and operations and some of this information is included in the press release. The remainder of the information will be available on a recorded version of this call or on our website. And now, I will turn the call over to our CEO, Patrick Harshman. Patrick?

Thanks, David and welcome everyone to our third quarter call. Harmonic delivered a solid third quarter, as our Cable Access business continued to gain momentum and our Video business rebounded strongly from the Q2 pandemic slowdown. Corporate revenue was $94.9 million, up 28% sequentially. EPS was $0.03 and book-to-bill was greater than 1, highlighting strong execution and market momentum as we head into the fourth quarter. Our company has really responded to the challenges and opportunities that this year has brought. We are executing well. Our competitive differentiation and customer relationships are stronger than ever and we see healthy demand for both our Cable Access and Video products and services. Taking a closer look now at our Cable Access segment, we had another strong quarter. Revenue was $40.3 million; up 52% sequentially and segment operating income was over 14%, our strongest financial quarter-to-date with the exception of Q3 a year ago when we recognized one-time revenue from our foundational software license deal with Comcast. As of the mid-October, Cable-Tec Expo, we were commercially deployed with 38 cable operators worldwide, up 9 from the second quarter and 100% from Q3 a year ago. As of at the end of the quarter, CableOS was actively serving over 2.1 million cable modems, up 122% from a year ago, of which over 1.4 million were served through our distributed access architecture, all indicative of a transforming market and a strong Harmonic momentum. This momentum was evident through the recent Cable-Tec Expo, the industry’s premier technology conference, where industry consensus was clear. The future of Cable Access is software-based, increasingly leveraging distributed access architectures, underscored by the fact the largest cable operator in the U.S. and the largest cable operator in Europe are both rolling out Harmonic’s CableOS platform. Correspondingly, our new customer pipeline remains strong and we continue to anticipate being able to communicate an additional top 5 North America deployment by the end of the year. Associated with this Cable-Tec event, we made several significant announcements that further extend our market and technology leadership. We highlighted several new customer deployments, spanning the Americas, Europe and Asia. In coordination with Comcast, we announced a powerful and competitively differentiated symmetric gigabit solution that breaks through Cable’s upstream bandwidth bottleneck, a crucial innovation in the context of increased work and school-from-home video conferencing. And we raised the bar for core software, announcing and demonstrating that operators can now leverage our cloud-native platform from multiple simultaneous containerized network applications, including PON, 5G OpenRAN and video caching, delivering on the vision of a cloud-native architecture in a way that is groundbreaking not only for cable but for broadband service providers, more generally. The first of these cloud-native applications we have attacked are XGS and 10G PON for fiber-to-the-home. We are pleased to report that our first fiber-to-the-home field trials are going well and we’ve received our first volume purchase order. This is an important strategic milestone, demonstrating the extensibility of our cloud-native CableOS platform beyond traditional cable applications and specifically, the opportunity for Harmonic to address the large and growing fiber-to-the-home market. We will continue to update you on this important additive growth initiative. So summarizing for Cable Access, we delivered another strong quarter. We provided further evidence that cable operators around the world are moving to CableOS. We announced powerful new technologies that are extending our value proposition and competitive advantages and we’re expanding our addressable market to include fiber-to-the-home and additional access network applications. We are proud of our accomplishments and excited about where this business is headed. Turning now to our Video segment, we saw solid rebound after several months of pandemic-related slowdown. Segment revenue was $54.6 million, up 15% sequentially, as previously delayed projects began to resume, in some cases sooner than we expected. Associated gross margin was 54.6%, indicating a healthy mix of appliance, software license and SaaS revenue. Looking ahead, we continue to anticipate an even stronger fourth quarter with combined second half revenue in line with our previous guidance. Specifically, as Sanjay will discuss momentarily, we anticipate a further step up to $80 million to $85 million revenue and associated solid operating profit in the fourth quarter. We are particularly pleased to see continued growth of streaming solution sales through both public cloud SaaS and on-premises appliance and software solutions. We signed nine new cloud-based streaming customers during the quarter, a mix of both traditional and new media companies. Live streaming of premium content is where our competitive differentiation and brand is strongest and where we see sustainable growth opportunity. Highlighting our expanding position in this live streaming space, through the end of the quarter, we exceeded 48,000 live streaming channels deployed worldwide, up 15% year-over-year. Last quarter, we communicated an incremental business opportunity associated with the FCC mandated reclamation of C-band satellite spectrum for 5G. As you may recall, we estimated this to be a several hundred million dollar global opportunity that will play out over the next couple of years, a substantial additional solution category that will complement our live streaming and traditional broadcast sales. We also announced a partnership with satellite leader, SES and said that we expect associated revenue to commence in the fourth quarter of this year. I’m pleased to tell you that all of this is still on track. We received our first multi-million-dollar order associated with the C-band 5G opportunity during the third quarter and we continue to expect to recognize revenue beginning in the fourth quarter. In summary for our Video business, we saw solid rebound of customer activity and demand in the third quarter and we are carrying strong momentum into the fourth quarter. The traditional broadcast, expanding live streaming and new 5G bandwidth reclamation projects all contributing to what we project will be a strong profitable quarter. Looking further ahead, the resilience we are seeing in the second half of the year, underscored by growing success with our streaming platforms point to the strengths of our Video brand, technology and customer relationships and to our compelling opportunity to drive profitable growth. With that, I’ll turn the call over now to you, Sanjay, for more detailed discussion of our financial results and outlook.

Thanks, Patrick. And thank you all for joining us today. Before I discuss our quarterly results and outlook, I would like to remind everyone that the financial results I’ll be referring to are provided on a non-GAAP basis. As David mentioned earlier, our Q3 press release and earnings presentation includes reconciliations of non-GAAP financial measures to GAAP that are discussed on this call. For the third quarter of 2020, we delivered solid results above our guidance range, driven by both our Cable Access and Video segments. We are pleased with these results, as they demonstrate diminishing COVID-19 headwinds and the resilient business. Before I run through our quarterly financials in more detail, I’ll briefly review some of the highlights. We reported Q3 revenue of $94.9 million, reflecting 28.2% sequential growth. Gross margin for the quarter was 52.2%, up 60 basis points sequentially. Also, notably Cable Access operating margin was 14.6% in the quarter. Further, we reported adjusted EBITDA of $7.2 million and $0.03 EPS. During the quarter, we saw growing business momentum resulting in a book-to-bill ratio of 1.06. As a result, we ended Q3 with sequentially higher backlog and deferred revenue of $216.2 million, positioning us well as we head into our seasonally strongest quarter for this year. Now, I will review *our financials for the quarter in more detail. Turning to Slide 7, Q3 revenue was $94.9 million compared to $74 million in Q2 ‘20, up 28.2% sequentially and $78.2 million in Q3 ‘19, up 21.3% year-over-year, after excluding one-time upfront revenue of $37.5 million from the $175 million CableOS software license agreement that we closed with Comcast last year. In our Cable Access business, we continue to see increased traction with 38 commercial deployments through October 14, the date of Cable-Tec Expo 2020, which is the leading industry conference reflecting growths of 100% from Q3 ‘19. Cable Access segment revenue was $40.3 million compared to $26.5 million in Q2, up 51.7% sequentially and $18.2 million in Q3 ‘19, up 121.5% year-over-year after excluding the one-time initial software license revenue I mentioned earlier. Cable Access revenue performance was driven by addition of new customer deployments and increased penetration of existing customers. In our Video segment, we reported revenue of $54.6 million compared to $47.5 million in Q2, up 15.1% sequentially and $60 million in the year ago period. During the quarter, this segment continued to see steadily increasing activity worldwide, primarily attributable to relaxed COVID-19 restrictions. Additionally, some sales we expected to occur in Q4 actually came to fruition earlier than anticipated. As we enter the fourth quarter, we expect this rebound to continue across all of our markets, as well as additional demand for satellite C-band 5G related activity. We had two greater than 10% revenue customers during the quarter. Comcast contributed 20% and Vodafone contributed 12% of total revenue. As I mentioned earlier, gross margin improved quarter-over-quarter to 52.2% in Q3 ‘20 compared to 51.6% in Q2 ‘20 and 51.2% in Q3 ‘19, excluding the one-time software license revenue. Cable Access gross margin was 48.9% in Q3 compared to 45.7% in Q2 ‘20 and 29.9% in prior year excluding the one-time software license revenue, reflecting improved product mix. Also as previously mentioned, Cable Access operating margin was very healthy at 14.6%, owing to both growing top line and improved gross margin. Video segment, gross margin was 54.6% in Q3 compared to 54.8% in Q2 and 57.7% in the year ago period. Video margins were relatively flat sequentially and the year-over-year decrease is primarily due to product mix. SaaS and service revenue was $31.6 million in Q3 compared to $31.8 million in Q2 ‘20 and $32.6 million in Q3 ‘19. SaaS and service gross margins were 57.7% in Q3, 58.3% in Q2 ‘20 and 60.6% in Q3 ‘19. The slight year-over-year decline is due to a marginally higher portion of SaaS revenue in the mix of SaaS and services as early stage SaaS margins are lower than service margins. Moving down our income statement on Slide 8, we continue to maintain good expense control during the quarter. Q3 ‘20 operating expenses were $45.3 million compared to $43.3 million in Q2 ‘20 and $47.7 million in Q3 ‘19. The sequential increase primarily reflects increased sales expenses as a result of increased revenue in the quarter. The year-over-year decrease is due to reduced travel, entertainment and trade show expenses as well as overall careful expense management. We reported an operating profit for the third quarter of $4.2 million owing to strong Cable Access operating profit of $5.9 million and a modest Video operating loss of $1.7 million. The company’s Q3 operating profit of $4.2 million compares to an operating loss of $5.1 million in Q2 ‘20 and an operating loss of $7.6 million in Q3 ‘19 after excluding software license revenue and profit of $37.5 million as noted earlier. Adjusted EBITDA for the third quarter was $7.2 million, reflecting a strong contribution from Cable Access of $6.9 million and $0.3 million from Video. This compares to an adjusted EBITDA loss of $2.8 million in Q2 ‘20 and adjusted EBITDA loss of $5.5 million in Q3 ‘19 after excluding the software license profit noted earlier. The current quarter’s operating profit translates to a better-than-expected Q3 EPS of $0.03 per share compared to Q2 ‘20 EPS loss of $0.06 and Q3 EPS loss of $0.09 after excluding the one-time impact of software license revenue and profit previously mentioned. We ended the quarter with diluted weighted average share count of 98.4 million compared to 96.7 million in Q2 and 97.6 million in Q3 ‘19. The sequential increase reflects the weighted effect of stock issued to employees under the ESPP plan and the shares that came into the money during the third quarter. The year-over-year increase is due to the issuance of 4.4 million shares issued to employees for restricted stock units and performance-based stock compensation during the year and 0.9 million shares to Comcast for exercise of warrants, offset by reduced dilutive effect of 4.5 million shares not in the money during the current quarter. Q3 bookings were $100.7 million, a 30.7% increase compared to $77 million in Q2 ‘20 and up 13.1% compared to $89 million in Q3 ‘19 excluding one-time bookings of $37.5 million in the year-ago period, resulting in a book-to-bill ratio of 1.06. It was encouraging to see the sequential bookings growth driven mainly in North America and APAC, building confidence in our ability to rebound from the pandemic slowdown in the media and broadcast markets. Bookings grew year-over-year in both of our segments during the third quarter. Turning to Slide 9, we will now discuss our liquidity position and balance sheet. We ended Q3 with a cash of $70.8 million. This compares to $77.7 million at the end of Q2 and $66.7 million at the end of Q3 ‘19. The $6.9 million sequential decrease in cash is comprised of $3.3 million cash used in operations, primarily attributable to higher working capital needs in both our Cable Access and Video business, $5.4 million used for capital purchases, primarily the purchase of fixed assets, approximately $2.9 million of which was related to our new Silicon Valley headquarters, for which the construction was completed during the third quarter and research and development capital equipment for our Cable Access division as we scale the business, and net of $1.3 million cash generated from financing activities, which were primarily the proceeds from purchases under our ESPP. During the fourth quarter, we are committed to payoff the remaining $8.1 million of our 4% convertible debt due in December, 2020. This will immediately reduce the potential dilution by 1.4 million shares from our total diluted share count using an if-converted basis. Also note that this debt is in the money now and its conversion price in $5.75 and hence, this will start benefiting our reported diluted shares in Q4 ‘20 by approximately 0.1 million shares calculated using the treasury method. This debt retirement will also reduce our annual interest expense by approximately $0.3 million going forward. As mentioned on our last call, in April we extended our old San Jose headquarters lease with a month-to-month arrangement due to COVID-19-related delays and completing our new headquarters facility. During Q3, we vacated our previous facility, terminated the old lease and moved into our new headquarters. The new lease will reduce our annual cash outflow by approximately $5 million and annual pre-depreciation OpEx by approximately $2 million, clearly strongly accretive for us beginning in the current quarter. Our days sales outstanding at the end of Q3 was 77 days compared to 91 days in Q2 and 78 days at the end of Q3 ‘19. The sequential decrease in DSO reflects continued collection improvements. Our days inventory on hand was 73 days at the end of Q3 compared to 81 days at the end of Q2, and 68 days at the end of Q3 ‘19. At the end of Q3, our total backlog and deferred revenue was $216.2 million compared to $210.2 million at the end of Q2 ‘20 and $192.5 million at the end of Q3 ‘19, an increase of 12.3% year-over-year. Historically, about 90% of our backlog and deferred revenue gets converted to revenue within a rolling one-year period. Please note deferred revenue represented 23% of our total backlog and deferred revenue at the end of Q3 compared to 21% at the end of Q4 and 28% at the end of Q3 ‘19, reflecting revenue conversion consistent with our expectations. As I mentioned on previous calls, approximately $187 million of CableOS business associated with three Tier 1 CableOS customers under contract is not included in this backlog figure pending purchase orders. Taking these CableOS contrast into account, in total we have future contracted revenues of $403.2 million, which provides a strong foundation for us moving forward. Now, I will turn to our non-GAAP guidance for the full year on Slide 10. While the degree of COVID-19-related uncertainty still exists, our customer activity and pipeline has certainly rebounded since the onset of the pandemic. Based on our analysis and the current environment, we expect this rebound to continue through the remainder of 2020. Specifically for the full year, we now expect revenue in the range of $367.5 million to $377.5 million with Video revenue in the range of $236.5 million to $241.5 million and Cable Access revenue in the range of $131 million to $236 million. This top line guidance is higher than our previous full year expectations. Moreover, Video segment, we have tightened our revenue guidance, raising the low end of the guidance by approximately $7.5 million and reducing the high end by only $4.5 million, thereby increasing our midpoint by $1.5 million. For our Cable Access segment, we have raised the low end of the revenue guidance by $10.5 million and increased the high end by $0.5 million, thereby increasing our midpoint by $5.5 million, gross margin in the range of 51% to 52%, an improvement from our prior guidance of 50% to 51.5%, operating expenses in the range from $184.5 million to $186.5 million, reflecting an increase of $1 million at midpoint from the prior guidance, as we expect higher second-half revenues. Operating income to range from $3 million to $10 million, significantly improved from our prior guidance of operating loss of $7.5 million to an operating income of $11.5 million. EPS to range from a loss of $0.03 to a profit of $0.04, materially improved from our prior guidance of a loss of $0.12 to a profit of $0.05. And effective tax rate of 10%, a weighted average diluted share count of approximately 97 million shares to 98.2 million shares, year-end cash to range from $80 million to $90 million, consistent with prior guidance. Moving to Slide 11, we provide the corresponding updated Q4 2020 guidance. Specifically for Q4, we expect revenue in the range of $120 million to $130 million with Video revenue in the range of $80 million to $85 million and Cable Access revenue in the range of $40 million to $45 million. Gross margin in the range of 50.5% to 54.5%, operating expenses to range from $48 million to $50 million, operating income to range from $12.5 million to $21 million, adjusted EBITDA to range from $15.5 million to $24 million, EPS to range from $0.10 per share to $0.18 per share and effective tax rate of 10%, a weighted average diluted share down of 98.8 million and finally, cash at the end of Q4 is expected to range from $80 million to $90 million. In summary, while we entered Q3 with some uncertainty around the ongoing impact of COVID-19, we are incredibly proud of how our teams executed and focused on positioning our Cable Access and Video streaming businesses for long-term success during such a challenging period. Our Cable Access business continues to grow rapidly, as we expand our customer base and further penetrate our existing customers. Based on the midpoint of full-year guidance I just gave, Cable Access segment revenue is expected to grow by approximately 53% in 2020 compared to 2019 after excluding the one-time Q3 ‘19 software license revenue. At the same time, our Video segment showed solid improvement in Q3. We continue to see increased customer activity and expect the rebound will continue for the balance of this year, driving profitability and cash generation in both of our business segments. Regarding 2021 expectations, we are in the middle of our planning process and we will be able to share more detailed guidance on our next earnings call. At this time, we expect to be profitable in both segments in 2021, while strengthening our market leadership position for both Cable Access and live video streaming. In summary, the Company is continuing to execute on its strategic priorities in both segments, delivering results that have been quite positive. With that, thank you and back to you, Patrick.

Okay. Thanks, Sanjay. We want to conclude by emphasizing that our core growth drivers and execution priorities for 2020 are very much intact. For Cable Access business, we remain incredibly focused on scaling our Tier 1 customer deployments across their extensive footprints with a growing range of products and services, securing new design wins with additional global operators, particularly additional Tier 1s and launching new solutions that expand our addressable market, especially fiber-to-the-home. For our Video segment, our objectives continue to be accelerating the growth of our live streaming deployments, expanding our addressable market to include both non-traditional streaming customers, especially through cloud-based services, and 5G bandwidth reclamation projects and to remain profitable, as we drive these growth initiatives. Finally, echoing Sanjay’s comments, I want to again recognize our employees who continue to push forward with passion and conviction, despite this year’s challenges and I also want to thank our customers and our shareholders who continue to place their confidence in Harmonic. With that, so let’s now open up the call for questions.

Thank you. [Operator Instructions] Our first question comes from John Marchetti with Stifel. Your line is now open.

Thanks very much. I appreciate you taking the question. Patrick, I know you are not necessarily giving ‘21 guidance yet or not giving that outlook, but Sanjay and you both mentioned on the call, once we adjust for the Comcast impact in this quarter last year, the full year is obviously north of 50% growth in that CableOS business and I am curious as we do start to look out into ‘21, and we think about the growth rate, given what you have gotten in backlog, give what you – there is even a chunk of that that’s not even fully in there yet. Is it wrong to assume that we should be looking at that type of similar growth rate as we are looking out into next year or what are some of the puts and takes as you think about ‘21, just for that CableOS business?

Well, thanks for the question, John. We – in terms of puts, we feel very strongly about our competitive position and we feel it from a technological perspective, it’s even more apparent that the market is headed our way, if you will. Really, the open question is, what will the pace of spending and investment be and how quickly can we on-board new customers and scale with those. I think as you know what we have seen. We have seen a variety of results. We have seen some customers come on board and start scaling quickly, others have taken a little bit longer amount of time. So to be clear, John, our question is – the question in our mind is not one of – if we can gain more market share, but it’s simply how quickly and against what kind of market fundamentals we are working against and that’s what we are working through right now from a planning perspective on.

Okay. And then maybe just as a follow-up to that, you mentioned Cable-Tec a couple of times and then we certainly were remotely participating in a lot of the panels and the discussions there. Just curious to get your take on the competitive landscape, obviously, a lot more being shared about others coming into this market, what they are seeing from the trial and deployment activity perspective, but just curious as you are talking to customers, you had some very nice wins here over the last several quarters, curious how you think that competitive landscape shaping up right now?

We came out of the event feeling pretty good. We didn’t know what to expect competitively, as I have emphasized several times, we don’t know what we don’t know here. But other than the marketing messages of our competitors, kind of pivoting strongly to what we have been talking about for a while, we weren’t – we were not back by any specific announcements and the feedback that we continue to get from customers as well as other, let’s say, close industry observers continues to tell us that we are – we have a comfortable technological lead and so we are not – certainly not overconfident by any means, but we didn’t learn anything new competitively at the trade show and we continue to feel as though we are well out in front on the virtualization, cloud-native and distributed access architecture ideas that we really brought to the market in the first place.

Great. And then, Sanjay, if I could maybe just ask one last question. We have seen some nice improvement here on the Cable Access gross margin line. Just curious if we should be reading into that in terms of mix of a fewer no deployments or how to think about the improvement there over the last several quarters?

Well, this quarter, we did experience a decent mix of hardware and software and which actually generated good gross margin, overall. And yes, the mix is improving as the business is scaling and as we are getting in Tier 1s, Tier 2s and Tier 3s all in the mix and a good mix of hardware and software is coming to fruition as we expected and I think overall, we are seeing improvements and going forward, as we have said, our long-term goal is to get 60% plus. I think we are marching on the right path.

Thank you for taking the questions.

Alright. Thank you.

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

Thanks for taking the question. First, I just wanted to see if you could give a little bit more detail on the revenue that you recognized this quarter that you had originally expected in the fourth quarter. Was this part of the satellite opportunity that you had talked about or something different? Could you help us understand what that was that occurred sooner than you expected?

Yes, Simon. It was not any of the 5G satellite revenue. We have yet to – although we received an order, our first order multimillion dollar order in the third quarter, we have not recorded any revenue. As you may recall from Q2, we mentioned we saw several projects, anticipated high-confidence projects slip out. At our call 3 months ago we anticipated – well, frankly, we weren’t sure what to anticipate in the third quarter. We saw that is as a transition and – but we are fairly confident we would get it by the end of the year, so we kind of put it into the fourth quarter in our guidance. And several of those fields, we actually were able to close out in the fourth quarter. So it’s really other – I don’t know, let me call them more garden variety Video things that simply had been delayed in the earlier pandemic lockdowns.

Yes, I would just add...

Sure, go ahead.

I would just add, Simon, we experienced that in all the regions across the board, revenues increasing in this quarter compared to last quarter.

Okay. And when you think about the opportunity you are seeing tied to the satellite folks in 5G spectrum you are expecting some contribution I presume than in the fourth quarter. How are you thinking about the opportunity in 2021? I guess there is some struggling as to how we should think about the timing of the whole opportunity.

Well, the opportunity starts generating revenue in Q4 and then it’s going to take its pace through – in 2021 as well. So I would say Q4 is a portion of it and then followed by revenue in 2021.

I guess what I am really trying to get at with my question is, is it something that burns brightly in 2021 and then goes to zero in 2022 or does it have a long tail?

Let me jump in on that, Sanjay. I think it’s still early days for us, Simon. We are – we have in our sites a couple of very specific opportunities, which I would call the front end of the tail that we believe are going to drive revenue in the fourth quarter and let’s say, in the first half of 2021. That being said, we are pursuing other opportunities that will play out – there will be opportunities later in 2020, ‘21 and even in 2022. In fact, there is a couple of different deadlines in this country that play into that and the international opportunity is also part of what we are looking at. So it’s premature unfortunately still, it’s still relatively nascent thing outside of a couple of more mature opportunities in North America that are very much in our sites, so there is kind of the high confidence stuff, which, yes, will play out, let’s say, over the next few quarters. But there’s broader business, which is included in the several hundred million dollar total opportunity that I mentioned that we expect to carry forward for approximately 2 years. So we do see more runway, although the picture is still hazy, not unexpectedly on some of that slightly further out stuff.

Great. And then just one last one, if we could maybe talk a little bit about the, I will call them, evolutionary opportunities around things like fiber-to-the-home, OpenRAN. Could you help us maybe if you are not ready to size them, at least rank order where we are in terms of seeing those turning to revenue opportunities? Thank you.

Yes, thanks for the question. Definitely fiber-to-the-home PON is first. In fact, we – although we didn’t take revenue, we have our first material purchase order in the third quarter. So that’s where we said we were going to go first. I think it was a year ago that we announced that we were beginning to work on this and so here we are a year later with our first revenue order and some very successful field trials ongoing in a growing pipeline. But as your question suggests, we really – we are really leveraging the cloud-native architecture here. So from another perspective, there is nothing kind of that special about the PON application and we did successfully. And to a lot of very interested customer feedback at the recent Cable events, we showcased a couple of other cloud-native applications. So it is too early for us to kind of give you a – and we don’t get ourselves having a good revenue forecast for that, but we do think what we have built here with CableOS is a very extensive, a very flexible cloud-native core access platform that – DOCSIS application first, PON is coming second and – but I would say it’s opportunity-rich after that and so we are going to – we have business development work to do, but we are working with a number of technology partners around that and I would just say watch this space, we think that there is good opportunity to leverage, to monetize this cloud-native platform we have developed, monetize it over time.

And who do you see as your competitors in that particular opportunity?

Well, that’s a really interesting question. I mean, I don’t know yet. It’s a very much an evolving space. I don’t think there is nobody within cable that we see is talking really the same language. It’s – as far as we understand, even in a more broad wireline access space, we are – we think we have done something very, let’s say, ahead of the pack and we are working on getting a feel for that. And we are working and building alliances with a number of other players in the broader ecosystem and yes, really trying to get our arms around the opportunity. But we are clear there is an opportunity. It’s just a little bit early for us to quantify.

Thank you for taking my questions.

Alright. Thank you.

Thank you. Our next question comes from Rich Valera with Needham & Company. Your line is now open.

Thank you. Question on the number of CableOS customers which jumped pretty significantly, I think, from 29 to 38 this quarter. I was trying to understand where those customers are from a revenue generation perspective. I am presuming maybe you have actually received some revenue from them, but how would we think about these relatively new customers in terms of the revenue potential over, say, the next 12 months? Any way for us to gauge how much this could mean incrementally, as we look out over the next year, year and a half?

Sanjay, I think there is two parts of the question. Maybe I will take the first and then you can step in more on the model, but just in terms of the business, I do want to emphasize that – you talked about the pickup. I think the main message we had is and when we talked about that at the trade show, and by the way the number was kind of past – because of this trade show, the number was past the end of the quarter. We gave the number as of the date of that show, Rich. So, it did also include some October – a couple of October deployments as well, so relatively early days. And what we are really doing is just building up a bigger portfolio of customers. And what we really wanted to convey to the market including our own – our customers is that, we see growing momentum in being selected and having customers begin with rollout. So, I wanted to give that context. Maybe, I will pass it to you, Sanjay, to talk a little bit about how that waterfalls into revenue.

Yes, definitely. Rich, the significant portion of our revenues come from Tier 1s, but at the same time there is a good contribution, decent contribution every quarter from other non-Tier 1 customer, I mean, Tier 2, Tier 3, they are contributing and that’s increasing quarter-over-quarter. I think as we head into ‘21 and as we scale, it’s going to start becoming significant as well. And I think the deployments count, they do contribute, not in the initial periods. But as they expand and as we increase the deployments, we reap the benefits of revenue and margins in the longer. So, we expect going forward, this is going to be getting significant every quarter as you move ahead.

Got it. So, probably more of a 2021 meaningful contribution from those customers, but it sounds like it will be ramping. And just as a percentage of the mix, I mean, you continue to add Tier 1s, you are adding more, call it, Tier 2s and Tier 3s, but obviously they are small. I am just wondering how you are thinking about the mix longer term, Tier 1 versus say Tier 2, Tier 3s? Does that shift one way or the other or do you think it kind of maintained its current levels?

I think over the longer term, there is a slight change where the Tier 2, Tier 3 do become significant as time passes, but overall the material contribution would remain from Tier 1s in the market.

Got it. And just one more, I think you reiterated that you expected to name a top 5 U.S. carrier as a new customer within this year. Just trying to understand, is that currently a customer or still a customer you hope to win – you hope to win that customer by the end of the year and just wanted to clarify that?

Rich, I will take that one. Let’s say, we are in process. It’s premature for us to communicate, but we are fairly confident we will be able to communicate by the next time we speak with you. So, we don’t want to say more for a variety of reasons, including competitive reasons, but we – I think the real point here is that we are making good traction and good progress.

That’s great. Thank you for taking my questions.

Alright, thank you.

Thank you. Our next question comes from Samik Chatterjee with JPMorgan. Your line is now open.

Hi, thanks for taking my question. Patrick, Sanjay, sorry, I jumped on quite late, so this might be that you have to repeat yourself somewhat, but just wanted to get your kind of what you are expecting in relation to video growth sequentially, excluding the 5G reclamation opportunity and do you now – there seems to be kind of decent uptick over the last couple of quarters. Are you expecting that to continue into 2021?

We see a strong fourth quarter, regardless or without the 5G reclamation. Part of this is organic growth of the streaming initiative and part of it admittedly is catch-up on projects that got slowed down or delayed earlier in the year. So, this has been a, well, there is no surprise, somewhat tumultuous year and we are really pleased to see customers getting active again and starting projects again with us in the third quarter and continue into the fourth quarter. So I would say, overall, the trend is encouraging on Video, growing component of that work is around streaming and we think that that piece of our business continues to scale. We think we have significant competitive momentum and differentiating technology as well as I think we all see around this, but increasing streaming of live content, which is where we particularly specialize is doing nothing but growing at higher and higher resolutions, HD, 4K. And then layer it on top of that with a – not a dominating, but incremental impact is the 5G in the fourth quarter. Sanjay said earlier and you may have missed, where it is premature for us to talk about specific 2021 guidance, but we are really happy to see the Video business doing so well in the second half and we are strong believers in the underlying growth opportunity around streaming and the fact that it’s bolstered by this incremental 5G reclamation opportunity. Those things together, we think, put the Video business in a strong position as we head into 2021.

Got it.

I will just add a few things, Samik, as you may have missed.

Yes, go ahead.

For Video business, our book-to-bill ratio was high. We are exiting the quarter with a very strong backlog. Our Q4 seasonally is strong, so we are getting more orders. Our pipeline is up quarter-over-quarter and all the signs of winding is – we are expecting a strong quarter, Q4.

Got it. Sanjay, if I can just follow-up on the Video business, and particularly this 5G reclamation opportunity, actually, what is the gross margin that you are converting this business at? Is it more similar to what you have for the Video segment, because, does that mean that is that you kind of execute on this revenue, we should see kind of more of a mixed benefit on the corporate gross margin line?

It should be very similar to our Video segment margins, high-50s.

Okay, great. Thank you.

Thank you.

Thank you. Our next question comes from Steven Frankel of Colliers. Your line is now open.

Good afternoon. Patrick, on this reclamation opportunity, is there also an opportunity for you to sell not just hardware to these customers, but also sell software and what is the plan to execute on that, if there is one?

Software is a big part of the solution that we are bringing to market, Steve. Frankly, that is the case for everything we do in Video these days. And so that’s part of where the margin profile, excuse me, that Sanjay just mentioned comes from. So it is both, there is a server component. Frankly, it’s off-the-shelf servers. The rest of it is software and we are working intently on the, I would say, the bird in hand and looking ahead to expanding the win rate.

And is there an opportunity to make those customers SaaS customers as opposed to the perpetual package that might go on that server?

My answer is, yes. The initial opportunities that we have in front of us are perpetual license software, but we see a mid-term to longer-term SaaS opportunities with those companies that complements, let’s call it, kind of the vanilla satellite replacement solution. And with other customers, it’s more generally how we go to market these days. We offer both solutions, we have a perpetual license option, but we try to bring a SaaS solution wherever possible and so, this opportunity will not be any different.

Great. And then on CableOS, there’s been a visibility issue in the past. With the momentum you have now in the market and the product maturing a little bit, do you have more visibility into the rollout ramps of these new customer than you might have had a year ago?

Yes, Steve, as we are adding more Tier 1, Tier 2 and Tier 3 customers and we are getting more visibility. In fact, the whole supply chain is involved in getting the visibility of the timing of shipments and the deployment timings. So, our visibility is good and as we gain more customers, we definitely are improving in that process as well. We believe that’s helping our guidance methodology at the same time, our expectations for revenue as we scale the business.

Okay, great. And then Patrick, you have had some great wins, you are talking about another Tier 1 or a top 5 U.S. company between now and year-end. What’s the pipeline behind that look like in terms of field trial? Or is the number of field trial still growing sequentially or is the story in ‘21 more about serving the 40-odd customers you have by the end of this year and penetrating their customer basis?

We are seeing growing interest in the solution and the platform, Steve. So the number of trials and number of customer engagements, I would say, is growing worldwide and the recent Cable-Tec event credited really a good marketing and sales platform for us to further extend that. What we have learned though is if there is a lag time between the trial and the initial deployment and then the volume revenue, as we have touched on a couple of times here, so as I look forward to, let’s say, the first half of 2021, will be – revenue will be dominated by customers that are already kind of scaling as we exit ‘20 and we will see revenue from the newer customers coming in line thereafter. So it’s a virtuous circle and we’re kind of focused on both sides of that. It’s one of the things I really try to highlight in our summary of our execution priorities. We have got to do both. We have got to really work on scaling the existing customers and keep the pipeline strong. And those things do work hand in hand. More word of mouth as successful deployments gets around, the more of the pipeline grows and etcetera., etcetera. So we think we have good momentum. I think there is inherent uncertainty in timing, but as the numbers get bigger, the statistics get better. I think to your previous question, I think we are on a better path as we continue to scale in terms of better path from a reliability of numbers strategically, competitively, the position continues to be as strong as it’s ever been.

Great. And then one last one, you talked about introducing the shelf product a quarter or so ago. What was the feedback on the shelf products from the Cable-Tec?

A positive. We did well with the product in the market in the third quarter and the feedback at the show was also positive on it. We are aware there is other shelves out there. We think ours has some significant advantages, and that show gave us a really good opportunity to showcase the advantages. We think it was well received.

Great, thank you so much.

Alright, thank you.

Thank you. Our next question comes from George Notter with Jefferies. Your line is now open.

Hi, thanks a lot guys. I guess I wanted to ask another question about the C-band transition and obviously, you have talked about the U.S. opportunity. We know there are other C-band reclamation projects going on internationally as well. Canada is an example, right now. And could you talk about what you see outside of the U.S. in terms of C-band opportunity? Is there something that there could be revenue next year for you, like how do you think about it? Thanks a lot.

Yes, it’s definitely a phenomena. We don’t know that will play out in every market. But right now, George, we see opportunity in, let’s say, a handful of international markets and we are kind of relatively early in the qualification and process of trying to secure those opportunities. The head start we have in North America certainly helps us in that regard, but I would characterize the international opportunity is still in a business development to early pipeline phase and how successful we are internationally and how many other companies – countries, excuse me, get into the act, I think, it still remains to be same, but it’s an opportunity we are very focused on and we feel very well positioned competitively from a technology perspective as things do come to fruition overseas.

Thank you.

Alright, thank you.

Thank you. And our next question comes from Tim Savageaux with Northland Capital Markets. Your line is now open.

Hi, good afternoon. Glad I made it on and congrats on the results. I have a couple. I will try to do quickly. You had a pretty decent uptick with Comcast in the quarter. I mean, you also had a kind of what looks to be kind of head-end heavy Cable Access mix driving your gross margins higher, as well as some revenue upside. I wonder if we can relate those two events and if not, maybe what should we relate that, that increase favorable mix to? And I say this in the context to something I took out of that Cable-Tec show which Comcast executive talking about populating the vast majority of their head-end and hub locations with virtualized technology by the end of ‘21. Wonder if you would offer any comments on where they are relative to the vast majority currently and what sort of activity you might be seeing there and whether that activity portends additional activity out in the outside plant in distributed access network? And one quick follow-up from there.

Okay. Thanks, Tim, for the question. I think I can’t speak about Comcast in particular, but if – you just zoom out, on one hand, while we are proud of the fact that we are now serving 2.1 million modems, obviously, it’s a very small percentage of the total footprint of Comcast plus Vodafone plus the other customers we have announced, never mind the ones we haven’t announced. So we still think we are in very early days, very early innings in terms of this transition. Indeed, as you point out, we see the opportunity, I think at one point there was a perception that what we are doing is exclusively for, let’s say, the distributed access, so we see growing understanding that this virtualized cloud-native architectures is equally powerful and impactful operationally in the context of the more centralized setup and so our pipeline of opportunity that we are working is a rich mix of the two and it’s still relatively early days on both fronts. So going forward, I think we have got a lot to do on both sides, you may see certain quarters that have a slightly stronger distributed, outside plant mixed, some that are more centralized but the runway is long on both sides and we expect both opportunity in both the architectures you have alluded to.

Okay. And maybe just to follow-up on that particular point, I mean, you do report Comcast as a 20% customer, so it seems like fair game to think about what drove that increase sequentially. Can you say was that primarily on the Cable Access side or obviously, there is a – it’s big company and probably some Video activity going on there too? Can you characterize the nature of that increase sequentially between your two segments?

Tim, we haven’t broken that out historically to give out total consolidated revenue percentage, so it spans across both segments.

Great. And my actual follow-up was going to be on the Remote PHY shelf side, where CommScope for sure did announce a product and an engagement with Comcast at the show, and maybe among the more significant competitive developments. Would you view that as distinct from what you are doing on the virtualized side both customer specific, and in general? And you referenced sort of bit before and saying you are where you have competitors out there. Is that specifically what you are referencing, and then maybe you can give us a couple of points of differentiation between the solutions?

So I appreciate the question. Tim, I mean, let me zoom out, just paint a mental picture for you, ensure there is two parts of the architecture in this case. There is the virtualized core, which we have done a big deal with Comcast that and then there is these Remote PHY devices, could be potential in a shelf, it could be remote out of the node and I think we have been very clear from the beginning that our software talks to not only our Remote PHY devices, our shelves, our nodes, but also to our competitors and I think as it should. So we are – those are two different dimensions of competition, if you will. So first, the fact that our competitors are coming out with products that talk to a Harmonic virtualized core I think is good news. On that front, that should not be lost here. And so what that means is, then we are competing head to head on the Remote PHY stuff and we saw nothing at the show. We saw nothing that was announced that we think is strongly competitive with us. So, yes, there are competitive Remote PHY nodes and shelves out there. Yes, but it is not a surprise and we came out of the show feeling, well, we kind of saw what the other guys were cooking and we still feel pretty strong about our competitive position. That is it is not to say 100% what the end customer is going to choose to purchase. But we feel that we are very well positioned from a competitive technology point of view on the PHY stuff. And I think will continue to see the reflection of effectively in both centralized and Remote PHY sales in our CableOS numbers.

Thanks. Thanks very much.

Alright. Thank you, Tim.

Thank you. And I am showing no further questions in the queue at this time. I would like to turn the call back to Patrick Harshman for any closing remarks.

Okay. Well, I think we are out of time. We simply wanted to thank you all for joining us today. We are very pleased with the work we have been able to do here in the third quarter. We are excited about the opportunity, the challenges ahead of us in the fourth quarter as we head in 2021 and we look forward to updating you all on our progress soon. In the meantime, take care, and good day. Thanks everyone.

Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude your program and you may now disconnect.