Harmonic Inc. (HLIT) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q4 2020 Harmonic Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker for today, David Hanover, Investor Relations. Sir, you may begin.

Thank you, Towanda. Hello, everyone, and thank you for joining us today for Harmonic's Fourth 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'd like to point out that in addition to our audio portion of the webcast, we've 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 operation, and some of this information is included in this press release. 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, David, and welcome, everyone, to our fourth quarter call. Harmonic delivered a strong fourth quarter with record new bookings, sequential quarterly and year-over-year revenue growth and earnings and cash generation that exceeded expectations. Both our Cable Access and Video segments contributed meaningfully to these results. For Cable Access, financial success is being driven by scaling existing customers and by continued new customer wins. For Video business, demand for both innovative new broadcast and streaming solutions resulted in our strongest revenue quarter in two years. Big picture. Looking back on 2020, Harmonic responded incredibly well to unexpected challenges and opportunities, demonstrating the transformative value of our newer solutions, the depth of our customer relationships and the extraordinary capabilities of our global team. Despite continuing pandemic challenges, our businesses exiting the year with strong market momentum, record backlog and deferred revenue, and a solid plan for growth and value creation. Taking a closer look at our Cable Access segment, we had another strong quarter. We were commercially deployed with 44 cable operators worldwide, up 91% from the fourth quarter of 2019. And this deployment scaled to serve over 2.6 million cable modems, up 149% year-over-year. Segment revenue was $45.5 million bringing full year revenue growth to approximately 56% once normalized for the onetime Comcast software license revenue recognized in the third quarter of 2019. Segment operating margin was over 20%, demonstrating the operating leverage possible even at this still early stage of market transformation. And while we're pleased with this financial progress, we're even more encouraged by the fact that global leaders in broadband delivery have been expanding their reliance on Harmonic's CableOS through the pandemic, a time when expectations for broadband services are at an all-time high. Our cloud-native solution has been performing extremely well with increasing scale and traffic load, demonstrating the efficiency and effectiveness for both truly virtualized core network and software and a next-generation distributed access architectures. Our leading customers have been seeing the business benefits, their conviction, evidenced by strong bookings and backlog. Looking ahead, we're focused on two complementary growth vectors. Supporting these existing customers and accelerating CableOS deployment across their entire footprints and winning and beginning to scale with new customers. Regarding customers who have already begun deploying CableOS, we're still at the first inning. CableOS has so far been rolled out to only approximately 5% of the over 50 million cable modems served by our early customers. For these existing customers, we continue to innovate to make it easier to expand CableOS into all of the various use cases. For example, in the fourth quarter, our new shelf products began to be successfully deployed at volume, opening the door to expanded centralized architecture deployment of CableOS in 2021. Similarly, now in the first quarter, we're beginning to ship our new node platform that incorporates the powerful symmetric gigabit solution announced in coordination with Comcast last quarter, making the business case for our industry-leading distributed access solution even more compelling. We're also continuing to aggressively advance our core software with our latest containerized cloud-native capabilities providing augmented co-deployment agility, and real-time telemetry capabilities that are translating directly to significant operational advantages for our customers. Turning to winning new customers, the biggest news coming out of 2020 is our first multimillion-dollar purchase order and initial shipments to a new Tier 1 North American cable operator. This is another important milestone confirming our continuing mind share and market share momentum with global Tier 1s, of whom five are now rolling out CableOS. In total, we added six new CableOS customers between mid-October and the end of the year. This positive market momentum is also evident through a growing pipeline of new customer engagements that span additional Tier 1s and smaller operators across both our cable DOCSIS and/or fiber-to-the-home solutions. While the pandemic continues to create some headwind for hardware lab evaluations and trials, we're creatively powering through this and anticipate a continuing flow of new customer wins throughout 2021. Summarizing for Cable Access, Harmonic delivered another strong quarter financially and strategically. Our early customers are successfully scaling, leveraging our latest CableOS innovations to optimally address an increasing range of broadband service challenges and opportunities, and we're steadily adding new customers, both large and small. The future of Cable Access, and we think the broadband, wireline and wireless access more generally is cloud-native core software powering a flexible distributed access network. Harmonic's leadership in this transformational industry direction continues to shine brightly. Turning now to our Video segment. Following a solid third quarter, we delivered an even stronger fourth quarter driven by healthy global demand for both broadcast and streaming solutions. Segment revenue was $86 million, up 57% sequentially and segment operating profit was 15.7%, bringing the business to a full year operating profit. Bookings were also strong, greater than revenue, contributing to our record backlog and deferred revenue entering 2021. Behind these headlines are several notable business highlights and encouraging market trends. First, demand for high-quality live streaming solutions continues to grow. During the quarter, we signed one of our largest streaming SaaS agreements to date, a multimillion-dollar deal with a blue-chip domestic media company to power their free ad-supported and subscription live sports, news and entertainment streaming service. This is a big win for us and part of the record backlog and deferred revenue story. In total, we added net 17 new SaaS customers, over half of which are new to the Company, demonstrating growing success in expanding our reach to address new streaming players worldwide. Through the end of the quarter, we were powering over 50,000 live streaming channels globally, up 15% year-over-year. The second video headline is the extent to which 5G bandwidth reclamation has been a catalyst for both near-term business and new opportunity creation. Our initial wave of work with SES on this initiative kicked into high gear during the quarter, contributing materially to our strong fourth quarter revenue result. The execution of our team and our business partners on this program has been nothing short of stellar. As many of you know, the 5G-driven bandwidth auctions in the U.S. have been extremely successful, further focusing industry attention and expanding the potential opportunity for further government-sponsored bandwidth transitions. The broader context here is that traditional broadcast infrastructure remains the foundation for hundreds of billions of dollars of television advertising and subscription revenues today, revenue streams that are essential to global media companies as they invest in new streaming. So when it comes to existing media companies, Harmonic's video strategy is to meet our customers where they are, supporting their essential broadcast infrastructure, while also partnering with them to transform to more efficient and targeted advertising friendly cloud and SaaS platforms, a compelling multiyear growth opportunity. And it's important to remember that SES and many of the media companies involved in 5G reclamation have historically been important Harmonic video customers. In this broader industry context, 5G bandwidth reclamation is best understood as a new catalyst for our media customers to commence necessary and advantageous technology transformations, a trend Harmonic is well positioned to capitalize on. So in summary here, our strong fourth quarter underlines the resilience of our video business and the opportunities ahead, scanning both new streaming and traditional media. The announcement last week of two new Emmy wins for our video innovations further highlights our technology excellence and the vital role we play for hundreds of media companies around the globe. We're entering 2021 with real market momentum, strong backlog and deferred revenue, new opportunities taking shape and a plan for growth. We're excited to see where we can take our Video business next. I'll now turn the call over to you, Sanjay, for a 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'd like to remind everyone that the financial results I'll be referring to are provided on a non-GAAP basis. As David mentioned earlier, our Q4 press release and earnings presentation includes reconciliations of non-GAAP financial measures to GAAP that are discussed on this call. For the fourth quarter of 2020, we delivered solid results above our guidance ranges. Our strong performance during the quarter underscores the competitive advantages and complementary strengths of both our cable access and video segments. These results demonstrate the strength of our businesses performing well even under the uncertainties caused by the pandemic. As we enter the new year, we are incredibly proud of everything that our teams accomplished in 2020. We have positioned our businesses for continued long-term success and are excited to build upon this momentum in 2021. Before I run through our quarterly and annual financials in more detail, I'll briefly review some of the highlights. We reported solid Q4 revenue of $131.5 million, up 7.7% year-over-year, and gross margin for the quarter was 55.3%, up 300 basis points year-over-year. Also, notably, the operating margin for the quarter was 17.8%, with Cable Access operating margin coming in at 21.8% and Video operating margin at 15.7%. Further, we reported adjusted EBITDA of $26.4 million and $0.20 EPS. During the fourth quarter, we saw strong business momentum, resulting in a record book-to-bill ratio of 1.57. As a result, we ended Q4 with a record backlog and deferred revenue of $290.5 million, positioning us well for the year ahead. For the full year 2020, total revenue was $378.8 million, down $24.1 million compared to 2019 and up above the high end of our guidance range coming into the fourth quarter. Annual revenue in our Cable segment grew 56% on an adjusted basis after excluding the one-time upfront revenue benefit of $37.5 million, from over 175 million CableOS software license agreement with Comcast. Our annual Video segment revenue declined 12.8% as media investment slowed in response to the pandemic. Let's review our financials for the fourth quarter in more detail. Turning to Slide 7. Q4 revenue was $131.5 million compared to $94.9 million in Q3 '20, up 38.6% sequentially and $122.2 million in Q4 '19, up 7.7% year-over-year. In our Cable Access business, we continue to see increased traction. We ended Q4 '20 with 44 commercial deployments compared to 38 as announced during the Cable-Tec Expo show in October, and 23 deployments in December 2019, reflecting a sequential growth of 15.8% and year-over-year growth of 91.3%. Cable Access segment revenue was $45.5 million compared to $40.3 million in Q3, up 13% sequentially and $43 million in Q4 '19, up 5.8% year-over-year. Cable Access revenue performance was driven by the increased penetration of our existing customers and addition of new customer deployments. In our Video segment, we reported Q4 revenue of $86 million compared to $54.6 million in Q3, up 57.5% sequentially and $79.2 million in the year-ago period, up 8.7%. This segment saw steadily increasing activity worldwide during the fourth quarter, as several of our media customers were to catch up on pandemic-delayed projects. In addition, we also began to see initial satellite C-band 5G-related revenue during the quarter. We had 2% greater than 10% revenue customers during this quarter. Comcast contributed 22% of total revenue and SES contributed 19%. As mentioned earlier, gross margin improved quarter-over-quarter to 55.3% in Q4 '20 compared to 52.2% in Q3 '20, up 310 basis points and 52.3% in Q4 '19, up 300 basis points. Cable Access gross margin was 53.7% in Q4 compared to 48.9% in Q3 '20, up 480 basis points and 38.3% in the prior year, up 1,540 basis points, reflecting improved product mix. Also, as previously mentioned, Cable Access operating margin was very healthy at 21.8%, owing to both a growing top line and improved gross margins and strong expense management. Video segment gross margin was 56.2% in Q4 compared to 54.6% in Q3 and 60% in the year-ago period. The sequential and year-over-year fluctuation was primarily due to product mix. Moving down our income statement on Slide 8, we continue to maintain strong expense control during the quarter. Q4 '20 operating expenses were $49.3 million compared to $45.3 million in Q3 '20 and $49.2 million in Q4 '19. The sequential increase primarily reflects increased sales expenses as a result of increased revenues in the quarter. Year-over-year operating expenses were essentially flat even with increasing revenues year-over-year, due to reduced travel, entertainment and trade show expenses as well as overall aggressive expense management. We reported an operating profit for the fourth quarter of $23.4 million comprised of Cable Access operating profit of $9.9 million and Video operating profit of $13.5 million. This operating profit of $23.4 million compares to an operating profit of $4.2 million in Q3 '20 and operating profit of $14.8 million in Q4 '19. Adjusted EBITDA for the fourth quarter was $26.4 million, reflecting contributions from Cable Access of $11 million and $15.4 million from Video. This compares to an adjusted EBITDA of $7.2 million in Q3 '20 and adjusted EBITDA of $17.6 million in Q4 '19. Q4 '20's operating profit translates to better-than-expected Q4 EPS of $0.20 per share compared to Q3 '20 EPS of $0.03 and Q4 '19 EPS of $0.12. We ended the quarter with diluted weighted average share count of 100.3 million compared to 98.4 million in Q3 and 97.5 million in Q4 '19. The sequential increase primarily reflects convertible debt dilution and shares that came into the money during the fourth quarter as a result of increased average stock price. The year-over-year increase is due to the issuance of 3.6 million shares to employees for restricted stock units and performance-based compensation during the year offset by the dilutive effect of 0.8 million shares not in the money during Q4 '20, as a result of reduced average stock price compared to Q4 '19. Q4 bookings were a record $206.4 million, a 105.1% increase compared to $100.7 million in Q3 '20, and up 47.4% compared to $140.1 million in Q4 '19, resulting in a record book-to-bill ratio of 1.57. It was encouraging to see another quarter of sequential bookings growth, demonstrating strong demand for our solutions. Bookings grew sequentially and year-over-year in both segments during the fourth quarter. Turning to Slide 9. We'll now discuss our liquidity position and balance sheet. We ended Q4 with cash of $98.6 million. This compares to $70.8 million at the end of Q3 and $93.1 million at the end of Q4 '19. The $27.8 million sequential increase in cash is comprised of $41.6 million cash generated from operations, primarily attributable to higher profitability and strong working capital management in both our Cable Access and Video businesses. Net of $6 million cash used in per share of fixed assets and $8 million cash paid towards retirement of convertible debt during the quarter. Fixed asset expenses included approximately $2.7 million of our new Silicon Valley headquarters, which was completed during the third quarter, and research and development and testing equipment for our Cable Access business. During the fourth quarter, as mentioned on our last earnings call, we retired all of the remaining 4% convertible debt due in December 2020. This retirement reduces the potential dilution by 1.4 million shares from our total diluted share count using an if-converted basis. And going forward, we will also reduce our annual interest expense by approximately $0.3 million. Our days sales outstanding at the end of Q4 was 45 days compared to 77 days in Q3 and 65 days at the end of Q4 '19. The sequential decrease in DSO reflects collections from SES within the quarter and continued overall collection improvements. Our days inventory on hand was 54 days at the end of Q4 compared to 73 days at the end of Q3 and 45 at the end of Q4 '19. At the end of Q4, our total backlog and deferred revenue was $290.5 million compared to $216.2 million at the end of Q3 '20 and $210.2 million at the end of Q4 '19, an increase of 38.2% year-over-year. The increase in backlog and deferred revenue primarily reflects increasing commitments from our large cable customers and continued growth of our still modest SaaS business, both key strategic initiatives. We are pleased to have kept the business profitable while significantly expanding a high-quality backlog. Please note, historically, about 80% to 90% of our backlog and deferred revenue gets converted to revenue within a rolling one-year period. Please also note, deferred revenue represented 22% of our total backlog in deferred revenue at the end of Q4 compared to 21% at the end of Q4 '19, reflecting the fact that revenue conversion of backlog and deferred revenue is happening at levels consistent with our expectations. As mentioned on previous calls, not included in our backlog, is additional contractually agreed CableOS business with three of our existing Tier 1 cable customers. At the end of Q4 '20, this amount was approximately $158 million, down from $187 million last quarter as approximately $29 million went through the purchase order process and therefore, moved into bookings. Taking these CableOS contracts into account. In total, we have future contracted revenues of $448.5 million, which provides a very solid foundation for us for 2021. I'll now turn to our non-GAAP guidance for the full year on Slide 10. While COVID-19 related uncertainty still exists, our customer activity and pipeline have rebounded since the onset of the pandemic. Based on our analysis and current environment, we expect this rebound to continue into 2021, although I want to highlight that full year visibility is even less than normal. That said, for the full year 2021 we currently expect revenue in the range of $430 million to $465 million with video revenue in the range of $260 million to $275 million and Cable Access revenue in the range of $170 million to $190 million. At midpoint of our guidance, this reflects approximately 10% growth for Videos and 32% growth for Cable over 2020. For our Video segment, we are targeting solid contributions from both our evolving broadcast investments, including 5G reclamation projects and a growing pipeline of streaming SaaS opportunities. For our Cable Access segment, we anticipate growth driven from our existing customer base as this scale and the addition of new customers and initial modest fiber-to-the-home bond revenue. Gross margin in the range of 51.5% to 54.5%, at midpoint of our guidance, this reflects an improvement of 50 basis points over 2020. Operating expenses to range from $206 million to $230 million at midpoint of our guidance, this reflects an increase in spending of 13%, primarily due to increased sales and marketing expenses as we work to expand our customer base and increased research and development, primarily for our Cable Access segment. Operating income to range from $15.5 million to $40.5 million, adjusted EBITDA to range from $27.5 million to $53 million; EPS to range from $0.09 to $0.31, an effective tax rate of 10%, a weighted average diluted share count of approximately $103.7 million, year-end cash to range from $110 million to $130 million. Moving to Slide 11, we provide Q1 '21 guidance. For Q1, we expect revenue in the range of $97 million to $107 million with Video revenue in the range of $61 million to $66 million, and Cable Access revenue in the range of $36 million to $41 million. At midpoint of our guidance, this reflects a 17% growth for Video and 60% growth for Cable over Q1 2020. Gross margin in the range of 51.5% to 53%, at midpoint of our guidance, this reflects an improvement of 360 basis points over Q1 2020. Operating expense was to range from $49 million to $51 million. At midpoint of our guidance, this reflects an increase of 4% over Q1 2020. Operating income to range from $1 million to $6 million compared to an operating loss of $9.5 million in Q1 2020. Adjusted EBITDA to range from $4 million to $9 million, EPS to range from $0 to $0.04, an effective tax rate of 10%, a weighted average diluted share count of approximately $102.5 million. And finally, cash at the end of Q1 is expected to range from $85 million to $95 million. In closing, again, we are proud and grateful for our team's performance during the fourth quarter. We continue to execute and position our cable access and video streaming businesses for long-term success during a period of unprecedented challenges. With that, thank you, everyone, and now I'll turn it back to Patrick for final remarks before we open up the call for questions.

Okay. Thank you, Sanjay. We want to conclude by summarizing our strategic priorities for the year. For Cable Access business, our objectives are accelerated expansion of existing Tier 1 deployments, entering new global operators, particularly additional Tier 1s, and expanding our addressed market through CableOS's new fiber-to-the-home capabilities. For our Video segment, our objectives are accelerating the growth of our streaming and SaaS customer base, capitalizing on the coming transformation of traditional media and broadcast infrastructure globally and delivering both top and bottom line growth. Putting it all together, we aim to create value to deliver industry-leading solutions and to enable superior subscriber experiences worldwide. And finally, I want to recognize and thank everyone who hung with us through a crazy year, our exceptional employees, our customers and our stockholders. Your support has been essential. Let's now open up the call for questions.

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

A couple of things I wanted to ask about. The first one is just getting a better understanding of what's driving the increased operating expenses in the 2021 forecast. I guess when I look back at 2018, 2019, you held spending pretty stable below $200 million for the year, and then we understand why 2020 would have been down. So what kind of assumptions are you making in terms of the sort of recovery of travel expenses and a normalization as opposed to investment in new initiatives, expanding the sales force, things like that. Just if you could help us bridge the OpEx forecast? And then I've got a follow-up.

Sure, Simon. This is Sanjay. Sorry, I was on mute. As I mentioned in my prepared remarks, we are planning to increase our sales and marketing expenses as well as we are working on expanding our customer base. And together with that, we are increasing our R&D expense, primarily for Cable Access segment, and both of these initiatives are a significant factor of why the OpEx is increasing. And at the same time, we are seeing some benefit of saving in travel as well, as you mentioned. Our travel expenses are lower in -- we experienced lower in '20 compared to last year, but that's kind of a benefit. But overall, I think it's mainly driven by increase of our sales and marketing expenses and R&D.

And then one of the topics, I haven't really heard you guys talk much about is the RDOF government funding program. I imagine that, that could present some incremental opportunities. Just if you could maybe elaborate on how you would think about that as an opportunity for incremental revenue for Harmonic?

Hi, Simon, Patrick here, I'll take that. We do see it as an incremental opportunity. In fact, what we talk a lot about Tier 1s with CableOs. As you've seen from various press releases, et cetera, we've had a fair amount of success with the other end of the market, the smaller cable operators, the so-called Tier 2 and Tier 3. You may recall that we signed a pretty significant agreement with the National Cable Television Cooperative, the NCTC, a year or so ago to actually cooperate and bringing CableOS to that part of the market. And indeed, that's where a lot of the RDOF stuff is going to happen. And so both our existing relationships around our existing CableOS platform as well as are now coming for way into fiber-to-the-home, we think will be advantageous. That being said, we're not prepared to wrap a number around that. It's still an emerging opportunity. So, I'd say watch this space, and we'll continue to communicate with you as it takes more shape. But it's definitely something that is on our radar screen and does present an opportunity.

And maybe just to level set folks, even if you were to win opportunity, I presume that wouldn't really contribute until 2022. Is that a reasonable assumption?

We don't have a significant RDOF of revenue built into the guidance that we've just provided. I wouldn't preclude the opportunity of upside there. But yes, by and large, our thinking is that, that is -- I think wins can be happening this year, but our assumption is most of the revenue would start to flow the following year.

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

Question on the video business. Looks like you had really strong rev rec from your sort of wave one win for re-banding. It looks like you're expecting that to be down in the first quarter. Wondering how you're thinking about that for the balance of the year? I'm assuming you expect that to be up in 2Q? And do you expect any of that engagement to flow into the second half as well? And then kind of as a follow-up to that, how are you doing on pursuing kind of Wave 2 opportunities for re-banding? And do you think there's the chance you could land something on the Wave 2 side in the first half of the year or this year, how you -- just how you're thinking about Wave 2 and how that pipeline looks?

Okay. Rich, I'll take a swing at it and Sanjay, please –feel free to fill in any blanks. The first piece of business that we've won, we do expect additional revenue to be recognized in both Q1 and Q2. We expect the totality of what was originally run last year to be recognized by the end of the second quarter. There is a significant and, in fact, growing pipeline of additional opportunities that we are actively pursuing. Our objective is to be awarded additional projects during this year. It remains possible, if not likely that we'll see additional revenue this year. Certainly, we are targeting additional revenue in 2022. So this is an opportunity that specifically focused on 5G continues to look attractive to us. That being said, if I can expand slightly, Rich, we're seeing some pretty interesting, I'd say, knock-on effects from this whole thing. The combination of the success of the auction and the innovation we're bringing around solutions to not only compress things in satellite, but actually to bring some of that content onto fiber terrestrial IP networks. That's intriguing for operators that maybe even don't have a media pressure because of the whole bandwidth reclamation thing. So this whole industry dynamic is getting a lot of attention and is indeed serving as a catalyst for a number of media companies to really rethink their media -- their distribution strategies. It's opening the door to a lot of conversations and into a wave of activity around traditional broadcast infrastructure that frankly has been kind of slow-moving over the last couple of years. So we're increasingly seeing this as less of a stand-alone distinct opportunity that's kind of one or two or three or four bullets, but more a catalyst for the overall industry to really rethink some fundamental architecture paradigms and opportunities going forward. It's tied intimately to the whole idea of moving to the cloud as well. So I think that somewhat long-winded answer, but there -- but I also -- I wanted to highlight that it's an evolving space, and it's is causing us to be incrementally more encouraged about spending around broadcast infrastructure in general.

Got it. So one final follow-up, if I could. And maybe this is diluted a bit by your statement there, and I appreciate the color on how that sort of -- that opportunity is sort of diversifying. But can you talk about what sort of baked into your initial Video guidance for '21 with respect to additional re-banding wins? You should have had wins baked in already? Or just wondering how we should think about that back half?

Rich, we can't really specify what percentage we are baking in the guidance for any particular kind of an opportunity. That said, I just want to highlight that if you look at our total backlog and deferred revenue, it's a record this year. And it's comprising of not only Cable but it's Video, Cable, like all categories of revenue in all various streams, it's up year-over-year and quarter-over-quarter. And as I also mentioned, 80% to 90% does convert in one year. So we are feeling pretty good about the year how this whole deferred revenue is going to shape up and convert to revenue. And I think, yes, the question mainly was for SES, which we discussed. It tapers off later for H1. But I think we have a strong backlog which should get us to the year what we guided for.

Our next question comes from the line of Samik Chatterjee with JP Morgan. Your line is open.

Patrick, Sanjay, I just want to start off with a broader question about the strength in 2021. You, obviously, have strong backlog as well as contracted revenue. You're guiding to strong revenue growth. But I think Sanjay, in your prepared remarks, you just mentioned you feel like visibility into the full year is less than usual. I just wanted to see what's driving that comment? What's driving kind of the impression that either is it like customers are not willing to spend? Or are you more hesitant about their piece of spending? Just wanted to check on that.

Yes. Samik, I would say that there is still limited visibility regarding the macroeconomic outlook for later part of this year. And it kind of also depends on what's the -- and what's the relevant impact of that on customers deployment plans and could there be shifts. So I think that was the main point of highlighting that the visibility for full year is less than normal. But otherwise, I think our backlog and deferred revenue stands and supports all what we want to accomplish next year.

Okay. Okay, got it. And just a quick follow-up, Sanjay, I think this is also for you. When I look at gross margins, you're guiding to 54.5% at the high end for 2021. I know 2019 is probably not the best compared just given the software revenue you had, but 2018, you had done 54% gross margin at a lower revenue base. And I'm just wondering why isn't there more upside on the gross margin at the high end of the guide? Why isn't there more kind of leverage on that, just given the higher revenue guide versus 2018?

So let me highlight one thing. Definitely, our gross margins are improving in both, but there is also a segment mix shift happening. Starting from '18, if you come to 2021, along the years, we have marched the path that our Cable revenue as a percentage of total revenue is increasing and both segments have different margin profiles. So from that perspective, we are getting to a margin of 54.5% overall combined for the Company. If you look at '18, it was primarily driven by Video, which is higher margin in Cable. So I think the segment mix should also be considered for the year-over-year gross margins.

Okay. Good. Sanjay, just quickly, are there any supply chain constraints that are limiting factors on gross margin at all in 2021, anything on that aspect?

No. They are not. We have planned appropriately for that. So we don't expect any supply chain issues to impact our performance execution for next year.

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

Patrick, I would like to get a feel for where are we in the traditional Video business in this transition to SaaS. So have we seen the bottom in the perpetual business and maybe some -- just some commentary on how you see that mix playing out in '21?

Well, I think it's a good question. Its many ways is the right question, Steve. And the truth is, we don't have perfect visibility. I mean, just to take a step back, I think you know, but for the broader audience here. We've been -- on one hand, we've seen, as I mentioned a moment ago, kind of a stagnation of investment in traditional broadcast infrastructure really as many companies have tried to figure out where to go, and we've seen growth of around streaming, and in particular, the SaaS component of streaming, which makes sense, which parallels what's happening. That being said, we come off of a very strong position in traditional broadcast infrastructure. And so we were disproportionately hit, I'd say, by stagnant spending on broadcast infrastructure. In many ways, although it has come a lot of challenges, the positive aspect of the pandemic is it's been a real wake-up call for a lot of media companies, even around their traditional infrastructure about the value of getting to cloud, about the urgency of evolving some of that infrastructure to get off a satellite, to become more personalized, get ready for targeted advertising, et cetera. So, we see a real growing tailwind behind a broadcast infrastructure, flattening, let's say, the decline curve on that substantially. And while at the same time, we see growing momentum behind what we're doing in streaming and particularly the SaaS component of streaming. So putting it all together, we feel comfortable coming out this year with the growth forecast that we have put forward. But keep in mind, a lot of what we're talking about is simply about timing. I think if you take a step back, there are billions of dollars of advertising and subscription revenue, riding on this infrastructure. It's not going anywhere. It's going to be around, and Harmonic has an amazing position as really a foundational supplier enabler of that infrastructure. So admittedly, we've had a little bit of a difficulty kind of calling the timing. But the need for a rejuvenated investment cycle in its infrastructure has always been apparent to us, and we're seeing encouraging signs that we're really on the cusp of that, and we try to capture that as best we can in the guidance we've given you for this year.

Great. And then flipping over to the Cable Access business, very impressive back half operating margins. Should we think of those as kind of the new normal? Or were there particular things that happened in the back half that kind of makes the back half margin above what you would consider the run rate in that business?

So Steve, definitely, Q4, there was a decent mix of hardware and software, giving us very good margins to start with. But at the same time, the strong margins were also accompanied with good cost controls and combining to produce a very good operating result for the segment. Long term, we do expect gross margins to improve further. But I think the expenses said differently were light this quarter. And we're doing a more aggressive spending next year, as I mentioned, for research and development, for Cable, at the same time, increasing the go-to-market for sales expenses. So definitely, we expect the gross margins to continue improving. But operating margin, I just want to be cautious that expenses are light this time, but we are going on a little bit more spend.

And that increase in spend, is that mostly fixed or there's a material variable component there as well?

Well, I think there are two pieces. There is a piece for research and development, which I would classify as fixed. But at the same time, for sales expenses it's mainly variable.

Okay. That's helpful. And then on the fiber-to-the-home stuff. Was there material revenue recognized in the quarter for that new product? Or is that something we'll start to see in Q1?

I think there's more coming for next year.

You mean this year, I think.

Yes.

So no, Steve, there was not material revenue. We're very pleased. Last quarter, we talked about our first win. We saw that project being deployed. We have several other, let's say, advanced trials that are going quite well. So, we're excited about the progress there, but indeed we have yet to recognize material revenue.

Okay. And then last question. You keep redefining what CableOS is broadening its mission. Is there anything new on the competitive front with your competitors getting to market with something that maybe looks like what CableOS was or what it might be at the moment and not where it's going next year or next quarter?

We're not aware of any meaningful change in the competitive front. I mean, I think, as you know now for a couple of quarters, our competitors have largely changed their tune and everybody is talking about virtualization as well. That being said, we continue to perceive that we are well ahead. To the point you just made, though, it would be the wrong mental picture. I think we're kind of in a stationary position, waiting for people to catch up. I mean, really tying into your question about expenses, we continue to have the pedal firmly on the ground in terms of really pushing forward. And so, I would say [indiscernible] redefining what it is, but we're expanding what it is. And having a core cloud-native foundation enables tremendous flexibility and optionality as we go forward. Our fiber-to-the-home solution that you just asked about a moment ago, for example, it's not a completely separate product. It's a variation of the same networking core software. Particularly when it comes to the cloud-native capabilities and the real-time NON telemetry that some of our customers are talking publicly about. We're not aware of anyone who's playing the same game, frankly. And our intention is to continue to invest and depress our advantage and stay well out ahead.

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

I wanted to go back to a comment earlier. I think, Sanjay, you were talking about reduced visibility, and I heard your comments certainly about the macro being part of that. But I mean, to be fair, we're beyond the presidential election, vaccines ready distributed. I think the environment is probably more certain feeling than it was, say, three or six months ago. Obviously, you guys have a lot of orders in the order book here for this year. I'm still confused by the comment about lower visibility. Is there something that you're formulaic about your business that's driving that reduction in visibility or am I missing something? Thanks.

Yes. I think there is some confusion, George. Let me try this time. I think the comment was relative to any other ordinary year. The comment wasn't relative to three months ago or six months ago. We're saying at any other non-pandemic year sitting here. It's always a little bit of a look in the crystal ball to say what's going to happen in the second half of the calendar year. And our comment was simply as we look at 2021, we think that, that picture is a little bit hazier than it would be in another year, 2018, let us say or non-pandemic year. That's all. So certainly, the visibility relative to what it was six months ago has improved. And I think there are a number of reasons to be modestly encouraged about the overall situation. And I think that encouragement is manifest in the guidance that we've provided.

Got it. Okay. That's great clarification. And then I also wanted to ask about another comment. You mentioned earlier, I think you said that 5% of 50 million cable modems in your CableOS customer base are being run on CableOS. And I know that situation persisted for a while, but can you just talk about the catalysts or the levers that can get you into a higher mix of that network going forward?

Yes. I think it's a key question, and it's one of the reasons why we call out scaling within our existing customers is this kind of growth job number one. Frankly, it's not something that we can do on our own. This is -- as you know, this is -- in many cases, reengineering networks, et cetera. It's profound work, and there is a certain pace in which our customers can move. Now we think they climbed a tremendous learning curve over the last 12 to 18 months, and we're seeing the pace of deployment increase. I think our strong order book speaks to that. At the same time, we're all learning things. And one of the things I mentioned in my prepared remarks is enhancements we're making to the systems to further improve the operationalization of the overall solution. So our customer is gaining more experience, more confidence, more training of their own staffs, subtle improvements and enhancements to the technology. All of that is contributing to a continuously increasing deployment pace. And I think that, that dynamic will continue. And I think our customers' public statements support this, but I think we will see a continually increasing pace of deployments of CableOS within our largest customers' footprints as we go forward.

Thank you. Our next question comes from the line of Tim Long with Barclays. Your line is open.

Two if I could. First, can you talk a little bit about the new Tier 1 win, maybe anything that was different about that? And how we should think about timing? And maybe kind of what that means as you get another one as far as converting some of the pipeline that's out there? And then second, could you talk about SaaS business and kind of customer count, and what we need to see happen to see that revenue line start accelerating?

Okay. Thanks, Tim, for both questions. On the new Tier One, top five North America cable customer, frankly, every one of them is different of the big guys. This was a -- you may recall, we've been talking about it for a couple of quarters. We've been working on it for some time, and it's just great to have a multimillion-dollar order in to have that shipped. And I'd say it's more than just a foot in the door. It's a great start, and it's one that we're going to continue to push behind. As with all of our engagements, I mean, it's somewhat success-based. So, we're very focused now on making this first wave of deployment successful and we think doing that will open the door to further deployment. I guess the other thing I'd say more broadly about Tier 1 is that, the experience of all of our large customers is at scale, is getting just to be better known throughout the industry. So I think there's a virtuous circle here, greater deployment scale, greater word of mouth, CTO chatter, better and better results, better and better operating metrics coming back from the customers who have deployed us. All of that is -- it's not lost on the leading CTOs in the industry. So, we think that there is a virtuous circle of confidence and recommendation that's happening. And it creates a tailwind, which is not to say that every Tier 1 isn't going to have their own rigorous evaluation and approval process. I mean, let's face it. Broadband right now is the goose that's laying the golden egg. So everyone is going to be extremely cautious about introducing the new technology. However, the virtues, the advantages of the -- of our new technology are more apparent and more clear than ever before. So our confidence is greater than it's ever been about our ability to continue to pick up such wins. Now on the Video front, the SaaS business, we did see an acceleration particularly in the second half of the year. I think that part of this is just natural there, again, we're also building a brand beyond our traditional, let's say, broadcast heritage. At the same time, we also saw the pandemic really being a catalyst for more focused, more realization for the advantages of having a SaaS service in a public cloud and particularly cloud-based service at a time when many operators were struggling to properly care and feed for their on-premises deployments. As I mentioned in the prepared remarks, we picked up 17 new customers including a couple of very significant, what I call, blue-chip kind of household name wins. That's pretty exciting. And look, we're just going to kind of continue to push forward there. I think we've got good momentum. There's an inherent lag, as you know, between picking up a SaaS win and recognizing and reporting the revenue. Bookings and SaaS as part of the record bookings -- excuse me, backlog and deferred revenue that we have right now. But having that revenue flow through, it's recognized ratably with usage over time. In some cases, these are multiyear contracts in place of all at once capital purchase order. So there is an inherent headwind there. But frankly, we think that maybe blocked. One of the criticisms of our business has been a little bit the up and down of it and having strong backlog and deferred revenue, a growing portion of that being associated with SaaS and then having that play out in a way that gives more stability and reliability to our revenue. We think it's a positive dynamic over time. And it's one that we're encouraged by the momentum we're seeing, and then we're going to continue to lean into.

I'm showing no further questions in the queue. I'll now turn the call back over to management for closing remarks.

All right. Well, thanks, everybody, again, for joining us here today. And more generally, for supporting us through what certainly was a rollercoaster of the year. We're excited about the momentum that we have, the opportunities in front of us, and we look forward to reporting back to you soon. Thanks very much. Have a good day.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.