Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 Harmonic Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. David Hanover. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's first quarter 2021 financial results conference call. With me 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 for 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 first quarter call. Harmonic delivered another solid quarter with seasonally strong new bookings and solid year-over-year revenue, earnings and cash growth. And both our Cable Access and Video segments again contributed meaningfully, and both carried substantial backlog and deferred revenue into the remainder of the year. For Cable Access, the story is continued scaling by existing customers and new customer wins, driving 79% year-over-year segments revenue growth. For our Video business, demand for both our broadcast and streaming solutions remained healthy, enabling us to deliver 29% year-over-year segment revenue growth. Big picture, Harmonic continues to respond well to both current challenges and opportunities, leveraging and continuing to invest in differentiated technologies, deep customer relationships and an extraordinary global team. All of this translates into strong market momentum in an increasing growth outlook for the remainder of the year. So focusing first on our Cable Access segment, we delivered another strong quarter. We were commercially deployed with 53 cable operators worldwide, up 96% from the first quarter of 2020. And these deployments scaled to serve over 3 million cable modems, up 127% year-over-year. Segment revenue was $41.3 million, up 72% from a year ago. And although margin sagged somewhat as we had a heavier mix of DAA hardware in the quarter and our hardware was impacted by higher costs, we nonetheless again delivered positive segment operating margin. Looking ahead, we're well positioned to continue this pace of revenue growth. We see broad market momentum for next-generation multi-gigabit broadband solutions spanning fiber cable and wireless, and the emergence of cloud-native software working in concert with an open distributed access architecture as the winning formula. Within Cable, Harmonics cloud-native and DAA solutions continue to be way out in front of the rest of the market. It's…

Thanks, Patrick, and thank you all for joining us today. Before I discuss our quarterly results and outlook, I like to remind everyone that the financial results, I will be referring to are provided on a non-GAAP basis. As David mentioned earlier our Q1 press release an earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP that are discussed on this call. For the first quarter of 2021, we delivered solid results generally above our guidance ranges. We reported Q1 revenue of 111.6 million, up 42.3% year-over-year and gross margin of 50.4% or 150 basis point improvement year-over-year. Operating margin was 4.5% comprised of 3.1% for cable access and 5.4% for video and we generated adjusted EBITDA of $9.1 million and EPS of $0.04. We also had seasonally strong bookings during the quarter with a book-to-bill ratio of 0.9. As a result, we ended Q1 with a solid backlog in deferred revenue of 274.3 million positioning as well for the remainder of the year. Now I will review our first quarter financials in more detail. Turning to Slide seven, total company Q1 revenue was 111.6 million or 42.3% increase compared to 78.4 million in Q1 '20. As Patrick mentioned, we continue to see increased traction in our cable access business. And in Q1 with 53 commercial deployments, which is sequential growth of 20% compared to 44 at December 31, and up 96% year-over-year. Cable access revenue was 41.3 million up 72.1% compared to 24 million in Q1 2020. In our video segment, we reported Q1 revenue of 70.3 million up to 29.2% compared to 54.4 million in the prior year period. We continue to see recovering video activity worldwide during the quarter, including continuous satellite C-band 5G related revenue. We had two customers representing greater than 10% of…

Okay, thanks, Sanjay. We want to conclude by reviewing our strategic priorities for the year. For our cable access business, our objectives are accelerated expansion of existing tier one deployments, entering new global operators, particularly additional tier ones, and expanding our domestic market for CableOS new converged to DOCSIS, the fiber to the premises capabilities. We are pushing forward aggressively despite near term cost challenges. For video segment, our objectives are accelerating the growth of our streaming and SaaS customer base and usage, 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, we're pleased to announce that later in May, we will be hosting two special industrial events, a deep dive into our cable access business and associated multi-year outlook and a similar deep dive in multi-year outlook for our video business, while featuring additional members of our executive management team. We expect today's to be finalized shortly and hope that you all join us. With that, I would now like to open up the call for questions.

[Operator Instructions] And your first question comes from Samik Chatterjee from JPMorgan.

Hi, this is Joe Cardoso on for Samik Chatterjee. My first question is on your guidance, kind of more of a clarification. You always obviously spent a large portion on the prepared remarks mentioning the supply constraints and implications on the higher costs. I'm just curious if you guys are seeing any implications on the supply constraints on your top line? And basically, are you being impacted by your ability to supply customers? And whether you're baking any of that into your full-year guide?

Yes, in terms of top line and the supply chain, we have factored in any risk we consider in our guidance range. So our guidance range completely entails the risk we consider at this point for this supply chain.

I guess if I could just follow-up there. Are you seeing any implications on your ability to supply customers currently, or is that not -- you have not seen that yet today?

We've not dealt with to date. If I can step in, we've not dealt with that to date. I think the current situation creates a ceiling. It’s not to say we're not working to remove that, but it does create a little bit of a ceiling on the upside. What we're talking about today is, is going beyond our guidance of last -- that we gave last quarter. So we're fortunate that we don't see any reduced expectations. But if your question is, is sky the limit? Right now, the sky is not the limit. And there is a scenario where demand may outstrip supply. But right now, the supply that we see, we think we can manage and actually manage to deliver a little bit of upside, albeit, as we've said, a couple of times, at higher than originally anticipated costs, simply entailed with getting that done. It's a dynamic situation. As Sanjay said, we're confident – we’re quite confident that we've got the resources to deliver within the range that we've talked about. Is upside on that possible? It is possible. I think it's probably more likely that the demand is there, then that we'll be able to satisfy the demand. But both of those things are a little bit dynamic and we'll continue to keep you updated as we move through the year.

No, I really appreciate the color. And then I guess, just for my second question, and this is more broader. It looks like there's a bunch of initiatives from governments globally in the pipeline, including RDOF and the infrastructure plan in the U.S. There's the UK’s project gigabit and the European Commission's broadband project. Just curious to hear, your overall thoughts on these government projects in terms of when do you expect them to materialize? And how is Harmonic position to benefit from these investments globally? Thank you.

Yes. Well, I very much appreciate the question. As your questions implied, it's -- the world is a big place. And there's a lot of different initiatives with different timing happening all over the place. But I think we can agree the headline is, is that broadband and access to broadband is, it's, it's a priority issue from every country from the United States to the UK to Bhutan, right? And so being a participant and being a key supplier of broadband-enabled technology is a great place to be. We think we have an extremely strong position within cable. And as you know, we're working to expand that position to also address fiber. Our first protocol, if you will, is those cable operators who are expanding in a fiber or have hybrid cable and fiber infrastructures and we think that that opportunity substantially expands our addressed market. And as we've discussed before, we - once we've kind of got that in play?, well, we think we can expand beyond that. So we think it's a very attractive environment. We think we're well positioned. We're not targeting the totality of the market today. But we're targeting a growing subset of the broadband market where we can not only participate, but we're really, really can differentiate ourselves. So we think that the future is pretty, pretty exciting. And it's one of the reasons why we're leaning in now. And we're continuing to lean in into investing in and both the current and our upcoming technologies to strengthen our position, not just for 2021, but for the next several years. And I guess just one last thing. As I mentioned a moment ago, we do plan an investor event to really go into this topic from both the market and the technology perspective in more detail later on in the month. And I think that your question really hits on one of the reasons we want to have a slightly more in-depth conversation to talk about what we're doing and the market opportunity that we see.

Thank you. Appreciate the question and congrats on the results.

Thank you.

Thank you.

And your next question comes from Tim Long from Barclays.

Thank you. Two questions, if I could. First on the C-band side. It sounds like it's starting to broaden out a little bit more from a customer base. So could you kind of just give us an overview, Patrick, on kind of level of activity there and maybe update us as this moves along, any changes to the competitive environment? And then, on the cable side, it sounds like they are a really big pipeline outside of the backlog. So maybe if you could kind of give us a sense as to why you're seeing that growth. Is it a lot of new deployment? Is it the traffic growth what’s driving that or competitive wins and maybe a little bit on the slope of the curve to turn that stuff into revenues? Thank you.

Okay. Thanks for the question. On the C-band stuff, indeed, we're seeing more opportunities. In particular, we see a couple of substantial new opportunities that really come into focus and where we see that is beginning to materialize in the second-half of the year and we also see it as high probability for 2022. So I would say that there was that next wave of opportunity is domestic. And so beyond that, we still see and we're engaged in a number of conversations around related international opportunities, but I would call those still is not quite in focus. And therefore not yet factored into in any way into the guidance that we've given. But from a broader trend, I think that it continues to be promising from our perspective, not only because the government is looking to recover bandwidth, but because the market is waking up to the fact that actually, there's a lot of benefits to moving video traffic over terrestrial fiber network, personalization, customization, targeted ads, et cetera. So it's a dynamic in a positive way, it's a dynamic evolving opportunity that is leading to broader conversations with a number of customers, both domestically and internationally. There's not really been any change. The last part of that question, Tim, is not really any change to the competitive environment. We're certainly not the only one. We've seen some deals go to what the competitors, but we think we're pretty uniquely positioned and we're really leaned into a couple of very significant additional opportunities. On the cable front, look at since a little bit all the above in your comments, I think that as we touched on, the last question broadband is a must do whether it's from a consumer perspective, or from a government perspective, it's only becoming more…

And your next question comes from Simon Leopold from Raymond James.

I wanted to ask maybe if you could help folks, understand the metric you've been offering on the past several calls regarding the cable modem served, I guess, this quarter, you're up to 3 million. And you talked about 6% or better than 6%, which would imply that the customers have a total of about 50 million. Could you help us understand how you measure that metric and what stands between basically serving 3 million and 50 million is there? What needs to happen for that number to grow is really what I'm looking forward.

Okay, indeed, you've got it in round numbers. You've got it about right. The people who are actively deploying CableOS today They serve about over 50 million cable modem subscribers. They are -- I don't know, right technology assignment now, they're kind of rebuilding the house, if you will, or repainting the house, so room by room. And it isn't the flip of the switch kind of thing. There is at a minimum in centralized architecture, so there is rewiring and we architecting of the main head end. And the DAA is used, actually there is deployment of DAA notes out in the neighborhoods, which means a truck needs to roll, someone needs to go up in a bucket truck or go down to the ground and replace an old node with an existing node. And very often that involves pulling fiber deeper into a neighborhood. So that's the part of the process that is time consuming, it's not so much our technology itself. But it's making the architectural, the wiring, the infrastructure, the rest of the infrastructure changes, both in the central office where you know if you are running our software -- core software on commercial off the shelf servers, you're moving to that server infrastructure, that data center kind of infrastructure, off of old legacy chassis. And very often you're replacing -- deploying fiber deeper on the network. So that's a time-consuming process that also takes capital money as well. And it's that process Simon that for any given operator limits the speed and even the most well-heeled operators with a lot of budget. They're not throwing infinite amount of money at this simultaneously. And frankly, in many markets, work crews are somewhat tough to come by etc. So there is a process of rolling out. That's why we've always said that, even with those customers who we expect to roll out our solution to 100% of their plan. And most of our key customers, we do expect that to be the case, or what we expected to be a several year process, three to four-year process. And so we're on that curve. As experience becomes better, we expect the pace to quicken, we expect our largest customers to be picking up the pace. And that's the biggest part of the growth. We're projecting this coming year to be clear. But even at a quicker pace, we still expect a several year process for our larger operators to roll out the technology across the entirety of the footprint.

Thanks. And then as a follow up, I wanted to see if maybe we could unpack the gross margin pressure on the cable access segment. And certainly I appreciate you don't have some crystal ball that tells you when the supply chains open up necessarily. But what I'd like to try to understand is, what's the impact of supply chain versus product mix, for example, nodes dilute your gross margin versus your software? We understand that. So I guess what I'm trying to understand here is what would you expect the gross margin in that business unit should be in a sort of more normalized non supply constrained market? And do you have a view on when we should get back to those levels?

So Simon, I appreciate the question. I think, as I pointed out in my prepared remarks, there are both pieces to the gross margin. The gross margin decline we are seeing now marginally, is substantially due to the supply chain related costs. At the same time, we are also seeing increased growth in the DAA hardware. So both pieces are there, it's hard to quantify what is the piece of each, but substantially it's the supply chain costs. That said, once the supply chain challenges are behind us, we should return back definitely in better margins and where we are expecting for this year. And I think not going in outer years. I think when we talk about the multi-year in our IR event which Patrick mentioned, I think we can cover the expectation at that time. At this point, we are not going into the '22 margins. But directionally we should see improvement from where we are this year.

Is there I guess the level that should we look at fiscal '20 as kind of a normalized value or is that misleading for any reason?

If I could step in, I mean our target is to do better than 2020. So I don't think it's a normalized value. I mean, maybe if I could from the CEO perspective, look, there's a software component, there's a hardware component, the software component is going to be very high margin, right? It's 90 plus percent. Then we've got hardware. And we've always said, we said previously that the hardware has been let's say, mid 30s, on average. But that is, we expect that to be going up with volume, as well as designer enhancements, etc. And in long-term, that's still our expectation. I think, yes, we've gone the other way, short-term on the hardware. But that is not a fundamental reset, we're paying a lot more to unpack that a little bit, as you asked, we're paying a lot more for key components. We're also paying higher assembly and transport costs. So we're kind of getting hit from a number of perspectives. We see none of those hits, though to be off the fundamental impairments to go forward indefinitely. We don't have a crystal ball on this supply chain thing. I mean, right now, I think we expected to kind of carryover somewhat into 2022. But we would expect, again, this is a very clear expectation, but we expect some recovery later in 2022. But we certainly hope it's sooner, we don't have a good crystal ball. But what this guidance assumes is that it will be with us to 2021. And again, I want to emphasize the fact that we could probably have higher margins if we were willing to take a lower deal with lower volumes. But, we see a land grab opportunity, we've got real momentum with our solutions. So we are leaning in every opportunity, we have to deploy DAA hardware out there, which means we're scouring the planet right now for the materials we need. And we're paying top dollar in many cases for that. I think that's the right thing to do strategically. I think capturing real estate is absolutely the right thing in terms of our multi-year growth opportunity, our market leadership opportunity. Yes, it's costing us the gross margin short-term. But I think that I think the right way to look at it is, is that we're picking up a significant market share. And that's going to be a durable strategic benefit to the business for many years after this near-term cost headwind is behind us.

Great, that's helpful. Thank you. That's what I was looking for. Appreciate it.

You have a question from George Notter from Jefferies.

I guess I wanted to come back to the C-band discussion from earlier. I think you said you're seeing a broadening out of opportunities, I guess the clarification here. Are you seeing then some of the 2023 opportunities coming forward? Then I guess there's a of course a deadline December 5, I think 2023. So when you talk about a broadening of opportunities, are those the deals that you're seeing now kind of coming forward? Or? Are there some other pieces of business that are coming forward?

No, we're referring to something a little bit different, George. Just taking a backup, I know, you know, this, but others listening may not? I mean, still around the world, a huge amount of video is moving around over satellite networks. And I think, in many ways, the philosophy, our philosophy has been out there, if it ain't broke, don't fix it. Even though intellectually, the question has been out there, wait a minute, why not be using, fiber base to transport. And I think what we're seeing is, through the success in what's happening to-date with the C-band project that is causing some of the -- let's call it, ain't broke, don't fix it, folks, to stop and pause. So even in the absence of the government conversion plan or pressure, the success of this initiative is opening the door to a different kind of discussion saying wait a minute, even if the government isn't bearing down on us and requiring us to abandon satellite, maybe moving more of that traffic to fiber is going to save money on one hand. And on the other hand, maybe it's going to allow a more innovative service deliver offer. So it's the latter that we're referring to not a pull in of government driven programs, but rather, a growing industry dialogue around whether to leverage this technology more broadly. Does that make sense?

That's very helpful. I guess I also wanted to ask about maybe one in RDOF. So, obviously the list of awardees is out there for phase one. Are there specific operators or customers that you see on that list that are Harmonic customers that create new revenue opportunity for you. Are there specific guides you can identify?

Yes, is the short answer. I don't want to suggest that, we've got a seat right in the front and center of the auditorium. But the short answer is yes. There are people who are existing customers and there are people who are in our sales pipeline. Now, to be clear, as we've stated, we're focusing on today we're focusing on a subset. Those are the subset of those folks who own some cable infrastructure as well. So who would be kind of hybrid cable and fiber to the premises operators? But for anyone who is in that category, they're absolutely which is a subset of the RDOF awardees. They're absolutely part of our go-to-market focus.

And you have a question from Steven Frankel from Colliers. Mr. Frankel, check to see if your line is muted.

There we go. Patrick, thank you for the opportunity to what extent is this acceleration in R&D reflecting kind of new projects that you think you need to get to market faster versus kind of just accelerating the pace around existing things you have already targeted?

I wish it was one or the other, it's a mix of both. We do have -- look to be frank, I think we've said it before every tier one has their own unique stuff. And part of the success formula is kind of adapting before them. And we've got, we announced a significant tier one last quarter, we've added another one this quarter. And we've got several more tier ones in our pipeline. And we're planning for success with the ones we've recently signed and with the ones that are coming. So there's part of it. But the second part of this is, it's not for looking, what we're learning in existing deployments, what we're seeing the fiber of the home opportunity, we've talked about a couple of times and the overall momentum and we're envisioning where the puck is headed and we see the puck really moving down the ice if I can stick with that analogy. And so we think now is the time to -- is to really lean in. I mean, let's face it, if we spend on R&D in that regard now, it shows up as benefit, later in '22 or in 2023. And we've got real growth aspirations for those years. And so we think now is the time.

Well, and then one follow-up. I think I heard you say before that DAA is increasing in mix and it's coming from the tier ones. So is it fair to say that those tier one customers that were kind of dipping their toe and doing fits and starts over the last 18 months, are now far enough into it, that they can kind of put their foot on the accelerator in terms of deployments?

Yes, the pace of employment is definitely increasing. I think that's one thing. I think the other thing is, is that a couple of those operators initially started off with several different DAA sources. And we think we're getting a little bit higher market share because of the strength of our particular solution. And again, even at short-term, higher cost, we think the right thing to do is to lead into that, let's call it incremental market share opportunity. We view putting a DAA node out there is gaining valuable real estate. And not just a short-term, or not just a short-term revenue opportunity but a real presence in the network opportunity but that is where we're leaning into.

And you have a question from Tim Savageaux from Northland Capital.

I'm trying to be quick here. Got a couple questions. First, the overall topic of deployment accelerating in cable and trying to bridge the gap between 3 million cable modems and 50. I think you commented at a recent industry event that you thought that number would be nine or so by the end of this year, which is a pretty market acceleration. In that context, interesting to see that the guidance increased I mean, understanding there may not be a linear relationship between that type of acceleration and cable modem served in Harmonic's revenue. Should we -- sounds like, we should be thinking more about the high end of the range where you mentioned 50% growth or even that's conservative in light of those targets. And then I have a follow up on a completely separate one.

Well, thanks for the question, Tim. I think you're referring to comments that I made at a recent industry event, which is really targeted at the cable operator community. And they are -- I was not talking specifically about Harmonic but the industry at large. And as I think while think we're ahead of the class on DAA, there are a couple of others who are doing DAA solutions, including DAA solutions that are not tied to virtualized CMTS, etc. So the estimate that I provided there was not a Harmonic number, but it was an overall industry number, domestic as well as international and certainly, therefore included a competitor DAA solutions that are out there. So yes, there's a couple of different variables floating around. And further, I will also concede that discussing, growth forecasts with the industry is somewhat different than offering financial guidance. So you've got a couple of different things going on. I think the good news is, we are seeing the industry get more and more comfortable with DAA as a technology. And I think, important thing that came out of that live reading conferences is increased industry conviction, the DAA is not only viable, but it's actually increasingly is the way to go. But yes, one can therefore not draw a straight line between those industry projections and our revenue for a couple of reasons, as you highlighted as well as what I've just said, in terms of overall industry numbers versus Harmonic's.

Okay. Did say you thought you were gaining share, but I'll just leave that one there. Second one is, I think there was a brief reference made maybe in the incentive comp, discussion about part of the driver of that being the new kind of cooperation agreement or the board changes that you've seen. And, I wonder if you might comment a little more expansively on that we also, I'm going to guess that the more detailed segment guidance and Investor Days might be a function of that as well. And I guess at a high level, should we be thinking about these segments increasingly, separately, for Harmonic video and cable access, both tactically and strategically. And if that were the case, it might make for a shorter press release, at least, or possibly a shorter call. But your choice for how to approach it, whether we should be thinking more about strategic activity at Harmonic as a result of that agreement and what has been the impact to-date, besides what you've mentioned on the call?

So, let me start with the first one, let me clarify this change, of incentive comp from stock to cash has nothing to do with the cooperation agreement. This is purely internal decision. As the Board looked at our plan for the year, we are generating very good cash and the operating profit level we are reaching, we took a decision to convert a piece of over stock comp to cash comp and it helps marginally reduce the valuation of the company as well. So let me clarify, it has nothing to do with that agreement. Secondly, in terms of the two segments being distinct, we have always reported the two segments, right from the revenue to the operating profit in actual reported results. But while giving the guidance, we have not given the guidance in that transparency, starting this quarter, we felt the need to do it based on the continuous regular questions during the industry interactions we've had. So we thought it's more transparent and it provides more visibility of what each segment is doing. And again, this has also nothing to do with any other agreement. So this is more on transparency.

And Tim just maybe a follow on from my perspective, where we truly as a cooperation agreement, we value relationship with Scopia, they've been in the stock for several years, and that's all very good and so that's full statement full stop. Separately, I think along the lines of Sanjay just said, we've been quite clear over the past several years, about how we think about the different pieces of our business and how we're trying to create value in the company. And there really is no strategic change. And it wouldn't be a mistake to conclude anything strategically from anything that we've discussed today. Both of our businesses, we think, have exciting futures and opportunities you can see that we're investing in both. And we've been quite transparent, we've received the question numerous times over the past several years, what's the level of synergy between the two, we've been quite transparent to say, there's modest synergy. It's not overwhelming. The way the company, the management team, as well as our Board will work to create value whatever way we can, that maybe what the two business units saying together and maybe what the part, there's no change in that answer nor in our thinking that has over the past several years. We will continue to move forward, looking to create as much value as we can and overall enterprise, which really means creating as much value as we can in the two business segments. And I'm very pleased coming into this call that we see actually good strategic progress on both sides of the business. I think there's a lot of reason to be encouraged on both sides and to see a good future so on both sides of the business.

And there are no further questions at this time. I'm going to turn the call back over to management for closing remarks.

All right. Well, thank you very much all for joining us. We've got a lot of challenges, but a lot of opportunities ahead of us. We look forward to staying in touch with all of you and in particular, as mentioned, keep an eye out for our planned investor dates in a month or so time. Until then, take care and we look forward to speaking with you all again soon. Bye-bye.

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