Welcome to the Q4 2021 Harmonic Earnings Conference Call. My name is Valerie, and I'll be your operator for today's 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. I will now turn the call over to David Hanover, Investor Relations. David, you may begin.

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's fourth quarter 2021 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 in addition to the 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 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 in operation, 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'll turn the call over to our CEO, Patrick Harshman. Patrick?

Well, thanks, David, and welcome, everyone, to our fourth quarter call. Harmonic capped a strong 2021 with another quarter of excellent financial and strategic results. Revenue was a record $155.8 million, up 18.5% year-over-year. EPS was $0.16. Cash generation was strong. And book-to-bill was 1.7%, resulting in record backlog and deferred revenue of over $440 million. Full year revenue grew over 33% as both our Cable Access and Video segments continue to invest in the future and secure new strategic wins, while also delivering positive operating income. Fourth quarter Cable Access segment revenue grew 53% as the number of customers deploying CableOS grew 66% year-over-year. Our Video segment delivered strong year-over-year streaming revenue growth of 56.5% and adjusted EBITDA margin of 19.8%. These 2021 results and our 2022 outlook demonstrate that execution of the multiyear strategic and financial plans we shared with you in our June investor days remain firmly on track, despite continuing pandemic and supply chain headwinds. We're entering 2022 with truly industry-leading technology, strong market momentum, new customers actively deploying our latest solutions, record backlog and deferred revenue and solid cash position, a great foundation for extending our solutions, market impact and growth. So looking now more closely to our Cable Access segment, it was another very good quarter and a very strong year. By quarter end, 73 broadband service providers were deploying our CableOS, up 66% year-over-year. Broadband modem served grew to 4.8 million, up 82% year-over-year. Segment revenue was $69.7 million, up 53% from a year ago and adjusted EBITDA margin was 9.6%, despite ongoing supply chain headwinds, which impacted both top line and gross margins. In December, we announced Rogers' selection of Harmonic and CableOS to power the company's next-generation multi-gigabit broadband services. Rogers is a true market leader and this high-profile win further…

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. Both of these are available on our website. For the fourth quarter of 2021, we delivered solid results, near or above the top of our guidance ranges. These results demonstrate the strength of our businesses, which continues to perform well, even with the challenges caused by the pandemic and supply chain landscape. As we enter the new year, we are incredibly proud of everything our teams accomplished in 2021. We have positioned our business for continued long-term success, and are excited to build upon this foundation in 2022. Before I run through our quarterly and annual financials in more detail, I'll briefly review some of the highlights on Slide 7. We reported record revenue of $155.8 million, along with solid gross margin and EPS. We also saw strong sustained business momentum with a record book-to-bill ratio which contributed to record backlog and deferred revenue, positioning us well for 2022. For the full year 2021, total revenue was $507.1 million, up 33.9% compared to 2020. Annual revenue in our Cable Access segment was $218.6 million, up 60.4% year-over-year; and Video was $288.5 million, up 19% year-over-year. Now let's review our fourth quarter sequentially and 53.2% year-over-year, reflecting both the continued ramp-up of existing customers and new customer wins. In our Video segment, we reported Q4 revenue of $86.1 million, up 25.3% sequentially, and approximately flat year-over-year. This solid performance reflects continuing broadcast demand, robust revenue from 5G bandwidth reclamation…

Okay. Thanks very much, Sanjay, a lot there. What we'd like to conclude by summarizing our strategic priorities as we enter 2022. For our Cable Access business, our objectives remain, enabling volume deployments with our growing list of Tier 1 customers, winning and scaling with new global operators and expanding our address market through our unique converged software core for DOCSIS and fiber-to-the-home applications. Our Video segment objectives continue to be accelerating the growth of our streaming SaaS customer base extending the capabilities of our streaming sales to support the requirements of our growing list of top-tier customers and the most valuable content, especially for online sports and capitalizing on a traditional broadcast business to profitably enable these transformations. 2021 was a year of strong, strategic and financial execution. In 2022, we aim to continue to leverage and extend our industry-leading solutions and create even greater value for our customers and for our shareholders. And with that, I want to thank you all for your support and open up the call for questions.

[Operator Instructions]. Our first question comes from Simon Leopold of Raymond James.

You're right, Patrick, there's a lot to digest here. So looking first at the gross margin trends in the Cable Access segment, you've given us a forecast for the first quarter and the full year. And I think this implies a lot of improvement as we get through the year. So I'm trying to get a better sense of where do you think we exit 2022 in terms of gross margin in Cable segment? And what gets us to that higher level that's implied by the full year guidance in -- I'm assuming you've got input costs probably not going down. To what degree are you able to raise prices? Or how much of this is about mix shifting more towards software from hardware? So if you could maybe paint a picture of the drivers and trajectory for Cable Access gross margin? And then I've got a follow-up.

Thanks, Simon. So there are a couple of things here. I think, first of all, I'll start with -- yes, Q1, as you said, we guided a range in high 30s. But for full year, it's close to 43.6% at high end, entering the 41% to 43%. So overall, for the full year, the margins are expected to be where we ended last year or with a slight improvement if we get closer to high end. That said, starting -- in Q1 itself, the margins are a little lower. And yes, they are expected to improve in the outer quarters compared to Q1. Q1 is mainly the mix and the supply chain carryover coming from last year because of it, the margins are more on the lower end, I would say. But as we progress during the year, we expect that to get back in the regular normal shape. That said, overall, for the full year, as I pointed out, Simon, the margins have been impacted by supply chain. Without supply chain impact, in my prepared remarks, I mentioned we could be 47% instead of 42.6% we showed. So that's the situation for supply chain impact. That said, in 2022, there are a couple of things happening. Even though you see the margins are in the similar range of last year, but our supply chain impacts are higher in 2022 versus 2021. Instead of 4%, it may go up to 6%, the supply chain impact. That said, the supply chain impacts are offset by price increases, which we are working with our customers. At the same time, with the economies of scale, which we are seeing because of the growth. So overall, the margin is the same, but there's a lot going on with these offsets.

And then just as a follow-up here. You've been giving us the metrics in terms of cable modems served and it's kind of had a steady cadence I don't think you gave us the number of passing. So I'm trying to get a better sense of what is the penetration rate for cable modems? And my sense is that it's not growing that quickly at this point. And I'm just wondering how to think about maybe longer-term trending of the number of modems that should be served given the potential that you can serve.

The number of passings is approximately -- it's the neighborhood of $60 million, Simon, you're right, as we reported now serving 4.8 million. So we still are below 10% of the passing. I think that there's been a modest pickup -- and from our perspective, that's good news. On one hand, we continue to add new customers, and there's a lot, including a couple of new Tier 1s who are -- have not really gotten going in earnest. So while we're I think we're starting to hit a pretty good cadence with some of our larger customers. We continue to expand that past market. That being said, I do think that I would expect sometime during this year as to maybe probably trust more than 10% of the past things addressed. But I certainly wouldn't expect it to be 20% this year. It's one of the reasons why we're so confident in this business and our multiyear trajectory we see the demand just from the customers we've already won being strong and driving very healthy growth for the next several years. And then layer on top of that, the additional business we expect to win. We think we're going to have a very strong runway in this business for the foreseeable future.

Our next question comes from Steve Frankel of Colliers.

And then kind of to go back on the supply chain situation, maybe give us a little color on how it got incrementally worse from the last time we talked. And your confidence that you can get your hands on the parts you need to meet the demand -- tremendous demand that's in front of you? Is this really going to be a cost issue and the equation around how much of that you can pass through? Or are there material risk to just getting your hands on material and being able to deliver nodes?

Well, there are risks, Steve, but we think we've taken a fairly balanced approach in the forecast that we've given today. As Sanjay mentioned, actually, there's -- and I think as I mentioned as well in my prepared remarks, the outlook we've given you today is supply limited. We see more demand than we can supply and more demand than is reflected in the guidance we've given today. So we definitely have taken a haircut on that and the haircut we've taken is informed by our experience over the past year. So we're relatively confident. I'd say we're quite confident that we can deliver what we've outlined here today based on our work to date. There is an upside opportunity, but it's premature to assume any of that. In fact, we're not -- we wouldn't advise you to as well. That being said, what we can supply is going to be a high cost for the full year. And Sanjay was just saying a moment ago, when you compare year-over-year, in 2021, we were not struggling with certain price increases and certain challenges for the whole year. A number of things really kicked in, in the second half of the year. Now we're entering the beginning of '22 with those things in full force. And while that is somewhat mitigated by some pricing adjustments, et cetera, from a full year perspective, it's a bigger challenge. So I don't want to suggest that the situation has materially deteriorated from the second half of last year, it has not. But we are in a situation where we're contending with it from day one. We think we've done a good job. We think we'll continue to do a good job, but the issues are with us. And we don't at this point, anticipate them subsiding before the end of the year. I'll pause there. That was also a mouthful, but tell me, does that address the questions you're asking?

Yes. I think that addressed my question. And then you made 2 other comments during your prepared remarks. One was it sounded like you might be able to quantify what that supply chain impact was to revenue? Being Q4 you said there were some things that you probably couldn't deliver. And then my second question maybe is a little more color on those comments around, well, beef up travel to go after some potential customer wins? Maybe some color on what that means?

Well, okay. Look, Q4, I would say, very modest impact in terms of unfulfilled demand in Q4. So our comment really on being demand constrained, I mean that's all relative to the guidance we had and the plan we put in place for the second half of the year, Steve. The comment really is as we look at 2022, we see a very strong demand environment. And frankly, we don't think we can keep up with all of that demand. We're working closely with our customers to basically do what they need. But we see demand being realized, orders being booked in 2022 where the delivery is -- at this point, we assume it's going to spill over into 2023. From a long-term perspective, we don't think we're losing that business. It's not going away. But it means that 2022 probably is not going to be quite as strong as it otherwise would be. That being said, it's a strong year-over-year from a growth perspective, as you can see from the guidance we've given. And so we're not at all, let's say, embarrassed about what we're able to do. We're doing a heck of a job. Let's say it kind of gets out for the business that we see even stronger demand by virtue of the good success we're having with existing customers and the growing the growing number of customers we're bringing into the fold. And maybe on that, bringing customers into the fold, maybe current short-term pandemic issues notwithstanding, our preliminary view right now is that over the course of this year, the pandemic situation will recede somewhat and that there will be growing opportunities as well as the desire on the part of our customers for us to meet with them in person. We are getting those requests already from customers. And indeed, we think more in-person meetings may help us actually accelerate some of the market share gains that we've been able to ramp up over the last 18 months. So it means our travel and entertainment budget is going to not get back to where it was pre-pandemic. But right now, our guidance anticipates a significant step-up relative to 2020 and 2021. But really, that's all in the service of continuing, if not accelerating market share gains on both sides of the business, both the Cable Access as well as the Video.

And would you characterize the CableOS pipeline is something that still has a material number of Tier 1s that you haven't conquered yet? Or were you after the next?

Yes. No, there's still -- look, our ambition and our belief is we are going to be #1. I think eventually, we're going to be, one way or another, in every Tier 1, Steve. It may not happen in '22, but it's going to happen by the way. And we are engaged in one way or another with virtually every Tier 1 out there. So in terms of the pipeline of 2022, I won't say that it's every Tier 1, but our 2022 pipeline is strong overall, and it certainly includes remaining Tier 1s as well as a growing list of, let's call them, Tier 2 and Tier 3 operators, both cable as well as a growing number of fiber-to-the-home. And so that's something that's unchanged with this business. The sales pipeline continues to be strong. And that's one of the reasons why you see us continuing to invest in the go to market.

Our next question comes from Tim Savageaux of Northland Capital Markets.

Congrats on the -- both the strong quarter and obviously, the bookings and backlog results. And my question is kind of in that direction. Maybe following on your comments about customer acquisition, but I wonder if you could kind of give us your latest view of the competitive environment? I mean, you've had a couple of your big competitors in Analyst Days late last year, kind of maybe throw in the towel, but certainly offer outlooks for growth in cable networking that are flat after seeing declines this year versus your substantial growth. I guess, what did you take out of that? And how do you look at this competitive environment going forward as you kind of see the -- this market leadership position? And follow up from there.

Well, look, we compete against some very good companies that have kind of long histories and a very strong installed base. And we give them a lot of respect, and take them seriously as competitors. That being said, as you know, Tim, for some time, we have continued to believe that we are way out in front on the next generation of technology. And well, some of the public comments that you mentioned were surprised to some of the market. For us, there are more confirmation of what we think we're seeing day in and day out in the marketplace. So we think we're ahead, and we think that our technology leadership position is not something that can be easily and I think that the experience over the last year or 2 has demonstrated that doing a completely new cloud-native virtualized access platform is a monumental task that's not a quick R&D program. So we think we're way out in front. And that's why, frankly, hopefully not with Vivado, but in all sincerity, we believe that we can, and we'll ultimately be #1 in this space. That won't happen overnight. There's a lot of installed competitor product out there, et cetera. But from a competitive perspective, we think our position, frankly, has never been stronger.

And to follow up, I guess, maybe you could extend those comments to the PON side of the house as well or maybe you were including them. And going back to the bookings performance in the quarter, I think you mentioned a couple of drivers, both an acceleration in customer deployment activity and maybe some preordering and given the supply chain issues. I wonder if you can kind of parse among those 2 factors. And to what extent did you have you really seen a meaningful step-up in deployment plans, both among your top customers or more broadly?

Okay. Well, let's start with the PON piece of that first. I think it's premature for us to compare our fiber-to-the-home solution with the, let's say, the telecom specialists, who are, let's say, selling the AT&T and Verizon every day. Well, we do think we are increasingly strong and it is in a hybrid converged solution for DOCSIS and PON. It's unique. And it really is a competitive multiplier within cable accounts, which are increasingly themselves going after rural opportunities, business services and the like. I think we all heard a lot of that on recent conference calls. So when it comes to fiber applications for cable operators, that in and itself is a significant TAM expansion, and we think we really have something that's truly unique. That being said, going beyond that, we think that our fiber solution is pretty slick. And as I mentioned in the prepared remarks, we've started to see some interesting wins with operators that have no cable infrastructure at all. Now I think it's premature to declare victory there, but it's a pretty encouraging trend. It's something we're leaning into more, and we'll continue to reports on as we go forward. Now in terms of the backlog and the fourth quarter bookings, both on in particular, Sanjay talked about, indeed, we saw 2 things. Number one, we've just got a bigger group of customers, and they're all at various places on kind of accelerating deployment ports. So I wouldn't say it's a market stepped up by anybody, but all of our customers, existing and new are not kind of out of flat deployment curve, but in fact, they're on a parabolic or accelerating deployment curve. So that's part of just what is feeding the overall growth of the business. Now in addition to that, we are in a very difficult supply environment. And our customers are seeing that, not only from us, but from their other suppliers across product categories. And so a number of customers really are working to get out ahead of that. And so we saw from several customers, orders that really look beyond Q1 look into Q2 and in some cases, even into Q3. So it's a mix of those 2 things that drove the kind of extraordinary order input that we saw in the fourth quarter.

Our next question comes from Ryan Koontz of Needham.

And most of my questions have been answered, but any more color you can share on the supply chain costs here that are impacting Q1 in terms of the types of chips? Are there any logistics costs? And -- any more color would be helpful. That's the only question I had.

Well, it's all of the above to tell you the truth, Ryan. I think that the components is the big thing, but -- component costs -- but you're right, component availability kind of comes quickly after that. And light availability kind of drives continuing higher production costs, having to run certain lines late in the quarter around the clock, for example, and airfreight as opposed to lower cost of transport. So it's a little -- it's all of the above that we're dealing with, but it's a component cost and component availability that is really the core of the problem.

Our next question comes from George Notter of Jefferies.

I guess I wanted to ask about pricing increases. I think Patrick, earlier on the call, you mentioned that you guys are starting to mobilize on pricing increases. Could you just talk about how that works with customers, both on the video appliance side? And then also, I guess, on the hardware piece of the Cable Access business, the nodes business, how do you go into large customers like Comcast and negotiate higher pricing? And how much higher do you think you can get in terms of where pricing levels can go

Well, thanks for the question, George. I just heard the ears of all my competitors perk up. Seriously, I can't and I shouldn't be too explicit about that. What I will say is, particularly the larger customers, I mean every one of them is unique in every regard. And so every discussion is unique. Every existing commercial agreement is unique. I think the good news is on both sides of our business, I think we've increasingly established ourselves as not just a supplier, but a partner. And these are discussions not just about selling, but about working together to help our customers deliver on their plans. When you think about our cable customers, the objective isn't just to get a lower price. They're out there delivering a competitive broadband service that's going to compete with AT&T fiber or what have you. So we're having a collaborative discussion about what can be done to get the job done on time and most efficiently. And that conversation takes different forms with -- just with different operators. What I would say is that we're being -- we're seeing a fair amount of success in that regard. But -- in some cases, agreements haven't kicked in yet or only kicking in now in Q1 or kicked in late in Q4. So I think, as Sanjay alluded to, we expect more benefits from that over the course of 2022. That's part of the answer to improving gross margins above and beyond what we're forecasting for Q1. And -- but I also have to say it is a moving target. We don't think we're done seeing surprises. Our customers don't think we're going -- we're seeing surprises. So it's an ongoing cooperative conversation that I think is, in general, is very much in a partnering mode.

Got it. Okay. And then I guess the other one I had was really on CableOS. And I guess I'm trying to drill down a bit in terms of what growth rates and revenue contributions look like there? I ask because you've had a lot of success on cable modem adds, you've gone from, I think, $3.9 million to $4.8 million sequentially, and that's the biggest jump we've seen in, I think, forever in this CableOS business. And then at the same time, the SaaS and service segment isn't growing that much on a year-on-year basis or on a sequential basis. So I guess I'm kind of wondering, are there moving parts in here that I'm missing in terms of what's going on with the Cable Access business and then that SaaS and service revenue line. I guess I'm inferring perhaps that maybe more of the business is coming from Comcast where you have more kind of all-you-can-eat type of pricing structure rather than other customers. Is that the right read? Or am I on the wrong path here?

Not quite, I guess. I mean I appreciate the question. We appreciate the question, and we agree that it's not completely transparent. In fact, our SaaS and service revenue today is actually dominated by the Video side of our business. As you may know, we have billions of dollars of video appliances out there in the market. And so a heavy part of that video broadcast business is actually legacy support agreements associated with all that deployed product. And part of what you're seeing in terms of the weakness of the services and SaaS piece of things is a decline associated with the decline of our broadcast appliance business being offset by the video SaaS growth. Because CableOS is still relatively new, in fact, as a percentage of revenue, support revenue on CableOS is still relatively more modest. So I guess that's 1 top-level comment as you look at those different categories, we're not breaking out, correct me if I'm wrong, Sanjay, software and services, by cable versus video. But just because you asked the question or for clarity, George, it's SaaS and support as of today. That being said, as we have discussed, George, within Cable, in general, software grows with -- software licenses kind of should grow proportionate to hardware revenue in all accounts except for Comcast, where we have a unique software license agreement. And we continue to see that happening. If you look at our strong cable growth, the software, Sanjay, I think, mentioned in his comments, the software component is absolutely growing at the trajectory we envisioned. That being said, the hardware is growing probably even faster, greater market share; and in some cases, greater segmentation of those networks. So I think we should think about, Sanjay, going forward, maybe there is an additional way to provide a little bit more clarity to get after what George is looking for. So I think we'll take that on, George. But in the short term, please know that the software piece of our cable business continues to look very much in good shape, very much aligned with our projections. And fortunately, not impacted by the supply chain and cost challenges that are pulling down the hardware piece of that business.

I'll just add to that, that the SaaS growth, which primarily is for SaaS streaming, we have seen a very significant growth in the most recent quarters, 133% up from Q4 year-over-year. And if you look at for the full year, the streaming SaaS is up 60%. So I agree, Patrick, as you said, SaaS and service nearly for the Video, but for Cable is the support, which is more linked to the hardware growth. So maybe we have to see going forward how we dissect between the 2 to clarify George's question. But overall, we are on target for SaaS and support for Video as well as our software growth relative to our long-term targets.

I'm showing no further questions at this time. I will turn the call back over to Patrick Harshman for any closing remarks.

Okay. Well, good. We're just about the top of the hour. We appreciate your time today. And more generally, we appreciate all your support of your business. We had a fantastic 2021. Thanks again for your support throughout the year. We're looking forward to an equally exciting 2022. We're excited about the opportunities, and we have the momentum that we have, and we look forward to keeping you all updated as we progress through the year. Thank you very much, everyone. Good day.

Thank you all.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.