Welcome to the Q2 2022 Harmonic Earnings Conference Call. My name is Kevin, and I'll be your operator for today. 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 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 second quarter 2022 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 the audio portion of the webcast, we've also provided slides to this webcast, which you may view 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 described 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 have 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 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?

Thanks, David, and welcome, everyone, to our second quarter call. In the second quarter of 2022, Harmonic again delivered exceptional business results. Revenue was up 39% year-over-year, reaching a record $157.4 million. EPS was $0.16, and adjusted EBITDA margin was 15.5%, with balanced contribution from our two business segments. Cable Access segment continues to generate strong sustainable growth with revenue up 62% year-over-year. Video segment revenue grew 20%, with the underlying highlight again being SaaS revenue, which was up 69% year-over-year. These results demonstrate growing demand for multi-gigabit broadband and live streaming video and that our associated products and services are highly differentiated and build value for our customers. They also demonstrate the resilience of our business model as Harmonic continues to execute despite current supply chain challenges and the macroeconomic environment. Turning first to our Cable Access segment, we produced strong top and bottom line growth during the second quarter. Segment revenue was $81.2 million, up 62% year-over-year. By quarter end, 79 broadband service providers were deploying our CableOS and cable modems served grew to 8.5 million, up 159% year-over-year, still less than 15% of our existing customers status footprint. Adjusted segment EBITDA margin was 14.3%, demonstrating good earnings leverage despite product cost headwinds. These results reflect both a healthy market and our strong momentum in this market. The current cable customers are global market leaders and they are leaned into advancing their broadband networks to new multi-gigabit offerings, better analytics and more flexible operations; all areas where Harmonic solution continues to be way out in front. During the quarter, we announced and demonstrated groundbreaking new capabilities in support of the cable industry's 10G vision. We announced a new solution, enabling customers to leverage legacy Cisco node platforms to deploy our DAA and several of our engagements with respective…

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 Q2 press release and earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP that are discussed on this call. Both of these are available on our website. For the second quarter of 2022, we delivered strong financial results that were ahead of our guidance. These results demonstrate the strength and resiliency of our businesses, which continue to perform well in today's macro environment due largely to the strong demand we continue to see for our distinctive solutions. Before I review our quarterly financials in detail, I'll briefly review the key highlights here on Slide 7. We reported a record second quarter revenue of $157.4 million, along with solid gross margins of 52.8%, adjusted EBITDA margins of 15.5% and EPS of $0.16. Our balance sheet continues to be healthy with a cash balance of $121.8 million at the quarter end. We continue to maintain near-record backlog and deferred revenue, which was $477.8 million at the quarter end, positioning us well for the second half of the year. Taking into consideration our second quarter performance and the positive market trends Patrick mentioned earlier, we have raised our full year revenue, adjusted EBITDA and EPS guidance once again. Now let's review our second quarter financials in more detail. Turning to Slide 8. As I just mentioned, total company Q2 revenue was $157.4 million, up 6.8% on a sequential basis from Q1 and up 38.8% year-over-year. Looking first at our Cable Access business segment. Revenue for the quarter was $81.2 million, consistent with our strong performance in Q1 and up…

Thanks, Sanjay. We'd like to conclude by summarizing our strategic and execution priorities as we enter the second half of the year. For Cable Access business, it continues to be all about working with our existing customers to enable ramping deployment success, winning and launching volume deployments with the Tier 1 operators we've not yet secured and leveraging our fiber solution to expand our addressed market and create additive revenue growth and value. For our Video business, we continue to focus on growing our streaming SaaS brand and customer base, further extending our streaming SaaS capabilities, particularly for live sports and leveraging the traditional broadcast appliance business to profitably enable these transformations. In each of these areas, our execution and results in the first half of the year were excellent. We're looking forward to the rest of 2022, and we appreciate your continued support. And with that, as Sanjay just said, we'll now open up the call for questions.

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

I wanted to get your thoughts on what's going on in terms of the cable TV industry, the marketplace and potential implications for Harmonic in -- this was a quarter where the largest cable operators reported declining subscriber metrics and it wasn't just lots of linear video subscribers, but now broadband subscribers. And I'm just wanting your sense of what was your take on the most recent reports as an industry observer. And then what do you see as the implications of these new trends or this inflection on Harmonic in the longer term?

We're not in the details of our customers' number, but a high level, we're not too surprised. I think we've been talking about for a while, increasingly competitive playing field around broadband services for our customers. And in fact, this heightened level of competition or coming competition from technologies like fiber, I think is part of the reason, the big part of the reason why we've seen some of our customers really lean into investing in developing, deploying next-generation multi-gigabit services. So I think we're really seeing play out with most in the industry expected. I think we can debate about what timing was anticipated, but at the top level, not a concern. And frankly, we look at it as constructive. There is a consumer thirst for even greater broadband speeds and access capabilities. We think that service providers in general will be fighting over the consumer and investing to build the highest quality network, the networks that can deliver the highest quality of service. And our strategic objective is to provide -- to really be a key partner in terms of providing enabling technology. The work we've done to date is really, I think, in anticipation of this next phase of heightened competitiveness between service providers.

And then as a follow-up, I wanted to see if your international business is feeling any effects of foreign exchange rates given the strong U.S. dollar. I guess two parts to my question. I've assumed -- I don't know if this is correct, I assumed you write your contracts in dollar terms, not in local currency. And therefore, your products would be more expensive for customers who may be budgeting in a local currency. Could you discuss what, if any, impact you've seen from the shift in exchange rates?

Simon, definitely this quarter the U.S. dollar was very strong. And overall it benefited, as I pointed out in my OpEx. But to your specific question on customer contracts, majority of our customer contracts are in U.S. dollar. There are some which are not in U.S. dollars, but they are like kind of -- we have an inherent hedge in terms of FX as our expenses are also in euro. So we don't expect a significant change or a significant shift in the way we expect this to impact us in case the exchange rate goes more stronger for you going forward.

And then just one last one, in terms of what you're seeing on supply chain constraints, just your latest view on sort of the trajectory and time line for normalization?

Simon, definitely, supply chain is something we've been very cautious about right from the beginning of the year. But our experience to date since the last two quarters has shown us that things have not significantly changed. We are still battling with the same challenges. We still see decommits. We still see cost premiums. We still see surprises on prices. We planned our year in a way that addresses those risks. And as you would have noted, our gross margins are very consistent what we guided earlier. So yes, the challenges are continuing. And we don't think that they will be completely behind us. Certain costs go up and they never go down. But overall, as macroeconomic factors improve, we do expect some improvement in certain areas. But overall, our experience in the last two quarters has shown us that things are kind of similar what we expected.

Next question comes from Ryan Koontz with Needham.

If you could comment, Patrick, on the composition of backlog here kind of given the softness Q-over-Q, is this a new seasonality? Can you comment on any kind of mix changes there? Is some of this kind of bookings weakness coming more from the video side? How should investors think about that? And I have a follow-up, please.

Well, Ryan, year-to-date, our book-to-bill is about 1.1, which is consistent, if not strong relative to historic trends. Now we did see a couple of quarters that were -- had extraordinarily strong book-to-bill. But as we called out, in part this was some customers really trying to get ahead, contemplating the supply chain issues that we just spoke about and really trying to order further ahead. So we saw that effect. We never anticipated it to be that long lived. And what we're seeing now is that some of those orders, in many cases, they extend out 12 months or in place, we see more of a turn, I would say, to traditional book-to-bill ratios, which again is still greater than 1. So I think that there's no -- we don't see any particular change. Certainly, no broad trend in terms of softness from a backlog and book-to-bill point of view, if we look at the last several quarters in aggregate, we're about where we expected to be.

And on the -- some great news there on your fiber-to-the-home trials and the strong bookings in the quarter. Can you comment on that? It sounds like it was a Tier 1 trial that you're -- that you have now?

We've got a great solution to be frank. And it particularly resonates with cable operators of all sizes, so Tier 1s down to small ones. There's a really powerful kind of hybrid unified solution for both fiber and cable, which offers, I think, tremendous operational cost and customer responsiveness advantages. And we're seeing good traction with that really across the board. So we've got advanced trials going on with several Tier 1s as well as with smaller customers. And we've seen good order input from early Tier 1s and as well as smaller customers. So the bookings result, which was a record for us, so this quarter really represents fairly broad strength. And that mirrors the pipeline that we're seeing, both domestically and internationally.

Our next question comes from Tim Savageaux with Northland Capital.

And congrats on the good results. I wanted to follow up on the PON side, and you mentioned the $10 million plus in orders. I wonder if you might be able to quantify that a little bit more, which is to say, how should we think about that relative to the pipeline that you're looking at. To the extent that you -- well, and I guess I'll ask specifically, were any of those orders translated into revenue and including with your top customer. And as you look at the size of that opportunity both there and elsewhere, how does that pipeline compare to the $10 million that you mentioned from an order standpoint?

The pipeline is substantially larger, I guess, in short. And ultimately, the opportunity is much larger. Look, relative to the scale of the cable or the [indiscernible] side of the business, this is still the smaller piece of what's happening. But the slope is starting to become interesting and we're spending more and more time on it. So pipeline is bigger than what was ordered this quarter. That being said, Tim, we're still relatively early days. I might expect some up and down in the coming quarters in terms of the amount booked. But I think that the results that we've seen in terms of early orders and the pipeline we have tell us that over the next several quarters, certainly over the next year, this is going to become an important additional growth vector for us. And again, we'll talk more about it in the Investor Analyst Day we're talking about in September. I think that what we previously shared in terms of multiyear ambitions around fiber-to-the-home, we feel increasingly confident about both because of the market opportunity and the resonance solution it seems to be having.

Right. I was just going to follow up right on that, which is I think you said last year at the Analyst Day, you felt like this could be a $100 million business or pretty close in '24. So those are the type of targets that we're talking about. Final question on this topic for me, in terms of what we've seen kind of yet another increase in Cable Access revenue guide for this year, is fiber contribute to that in any meaningful way?

Very modestly, I think is the best way to think about it. I think we're still really -- and creating that business. We want to create a good backlog. Certainly, there'll be modest revenue, but it's not a material contributor to our guidance.

And I wanted to follow up on the gross margin side. You did have a pretty significant increase in appliance gross margins in the quarter. And I think you mentioned the video drivers there. But it does seem that Cable Access saw a stronger mix of router or head end based activity also contributing to that margin strength, although you did call out component costs, so maybe it's that. But am I right about that, I guess, on the one hand and what does that portend for your business going forward to the extent that you might be seeing a little higher appliance versus node mix and cable access?

So Tim, you're definitely right on the video side that the software mix is better and hence the margins were kind of record this quarter. In terms of cable, there is no real change in the mix versus the way we expected. The margins came right at the midpoint of what we were expecting. They came at 43%. Our expectation was 42% to 44%. And it's a confluence of mix, supply chain impacts and whatnot. But overall, it's not the mix changing of any hardware as you mentioned.

Our next question comes from Greg Notter with Jefferies.

Hi, that's George Notter. And this is actually Kyle on for George Notter. Thanks for the question. This is also around gross margin a little bit more specifically on Cable Access, but it sounded like overall gross margin upside was driven by mix, it's probably largely in video, but you also mentioned certain period costs in Q1 that didn't repeat. So would you give us a sense for how the gross margin you're getting on optical nodes is coming in? And whether that's improving, driven by the better costs or better pricing? Are they still generally in line with what they've been over the past few quarters and your expectation, or are they improving based on supply chain?

Yes. So I'll answer the first part of the question, which is why the margins improved in Q2 versus Q1 for cable. The margins improved basically because of -- we had onetime premium costs for certain components, which we paid last year, and they were amortized in Q4 and Q1. And in Q2, we didn't see them. And this is exactly what we said in the last call. We expect those premium charges to be behind us in Q2 and they were behind. And that's the biggest reason why margins are up in Q2 versus Q1. Now on the second part of the question regarding the nodes margins, they are in line with what we were expecting. There's a trajectory plan for the year. They are going in accordance with that trajectory. We do not specifically call out margins of certain product lines. But overall, they are within our expectations, and nothing significantly changed beyond that.

What's your general sense for the trajectory of supply chain? You did better this quarter, reduced backlog somewhat. Will supply continue to get better from here? Or could there be some ups and downs? I think in other words, are we past the peak in backlog in your mind given you have a good inventory position and book-to-bill was a bit below 1 in this quarter specifically?

So Kyle, the increase of our guidance for cable, the first two quarters we did not really have a very good view of what the supply chain could entail in terms of supply, what -- how much we can get from our manufacturers. But the experience of the past seven months tell us that, yes, we can generate the product which we have to ship. Demand was definitely there, could we supply and the answer is yes. And that's one of the reasons we are raising the guidance on the supply. So yes, while there are risks, but we feel confident what we've achieved so far, we can continue for the next two quarters.

[Operator Instructions]. And I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.

Okay. Well, thank you very much for joining us today. I hope it comes across, we're very encouraged by our results for the first half of the year. We have a tremendous opportunity in front of us. We're executing against that opportunity. We're looking forward to the second half of this year. We're looking forward to going after our longer-range plan and to speaking with all of you in September. Until then, thank you very much, and have a good day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.