Harmonic Inc (HLIT) 2017 Q4 法說會逐字稿

Welcome to the Q4 2017 Harmonic Earnings Conference Call.

My name is Candice, and I'll be your operator for today's call.

(Operator Instructions) Please note that this conference call is being recorded.

I'll now turn the call over to Blair King, Harmonic's Director of Investor Relations.

Blair King, you may begin.

Thank you, Candice.

Hello, everyone, and thank you for joining us today for Harmonic's fourth quarter 2017 earnings conference call.

With me in our headquarters in San Jose, California are Patrick Harshman, our CEO; and Sanjay Kalra, our CFO.

Before we begin, I'd like to point out that in addition to the audio portion of this call, we have also provided slides for this webcast, which you can see by going to the Investor Relations page on harmonicinc.com.

Now turning to Slide 2. During this call, we will provide projections and other forward-looking statements regarding future events or the future financial performance of the company.

Such statements are only current expectations, and actual events or results may differ materially.

We refer you to the documents Harmonic files 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 could 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 items 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 operations.

And some of this information is included in the press release, but the remainder of the information will be available in a recorded version of this call or on our website.

And I'll now turn the call over to our CEO, Patrick Harshman.

Patrick?

Okay.

Thanks, Blair, and thank you all for joining the call today.

Let's turn to our Slide 3 and get started.

The fourth quarter revenue was $101 million, just above the high end of our guidance and up 10% sequentially, capping a pretty strong second half of the year after a tough first half.

Gross margins were 50%, non-GAAP EPS was 0 and we generated approximately $9 million in cash from operations.

Behind these financial headlines were several positive business developments as the strategic investments we've been making in transforming our business are really starting to come together.

New product and service bookings totaled $123 million, up 28% sequentially, making this our strongest bookings quarter in several years.

This translates to a 1.2 book-to-bill ratio, positioning the business with record backlog and deferred revenue of about $224 million, further reflecting our continuing transformation to a more software services and SaaS-centric model.

The strong order input was driven principally by our Video segment where we saw some catch-up of deals originally anticipated to close earlier in the year but also continuing growth of new over-the-top CapEx and Software-as-a-Service wins.

As a result, we drove not only increased Video segment backlog but also greater than 6.5% segment operating margin for the second quarter in a row.

It's good to see a stable and profitable Video business with an increasingly strong software services and SaaS backlog.

Turning to our cable business.

Several important milestones were also achieved during the fourth quarter, including new design wins that bring the number of CableOS commercial deployments and advanced field trials to over 12.

There's a lot happening with our CableOS initiative.

So let's turn the page here and take a closer look.

So turning to Slide 4. CableOS activity around the globe has really started to gain momentum.

As I hope you all have seen by now, we recently announced our win in deployment projects with Com Hem, a well-respected and much-watched cable operator serving the Swedish market.

Sweden is a hotbed of broadband consumption.

Competition there among broadband service suppliers, including fiber to the home providers, is fierce.

And Com Hem is fighting back by deploying CableOS across its roughly 1.8 million connected household network.

This is a big deal for Harmonic and the industry because it's the world's first deployment of a virtualized cable access network, that is deployment of a super high performance, fully software-based and virtualized CMTS core running on efficient and dense off-the-shelf Intel-based servers.

Now there's been some misperception among the investment community that CableOS is targeted exclusively at new so-called distributed access architecture, or DAA, applications.

While it's certainly true that CableOS really shines in DAA scenarios, as we'll discuss in a couple of minutes, it's also true that CableOS is now the most powerful centralized DOCSIS 3.1 CCAP solution in the market today.

Indeed, Com Hem is deploying our CableOS solution in a traditional centralized architecture, with CableOS software running on servers located just where the replaced legacy hardware-based CMTSs used to be.

The success of this hardware-to-software swap-out upgrade at scale is clearly a very important and validating case study milestone for the industry.

So with Com Hem formally announced and doing well, where do we go from here?

Well, our top strategic focus continues to be on the world's largest and most influential cable operators.

And I'm pleased to let you know during the fourth quarter we secured an initial CableOS purchase order from a third top 10 global operator.

With now 3 very active top 10 operator engagements and encouraging new progress with a couple of additional Tier 1s, we've established a solid foundation for both 2018 revenue growth and our ultimate goal of long-term market leadership.

But it's not only about the big guys.

We're also starting to make inroads with smaller and midsized operators like Com Hem, and these newer go-to-market efforts yielded 2 additional new customer wins in the fourth quarter.

Putting it all together, we currently have over 12 CableOS revenue-generating deployments and advanced field trials underway worldwide.

Now this is certainly significant progress.

I do want to acknowledge that CableOS and our customers' move to virtualization have been on the launchpad longer than originally anticipated.

In retrospect, there's good reason for this in a way that I've never seen before in my 20-plus years in the industry.

Our cable customers are driving collaborative innovation with Harmonic to further unleash the potential of an all-software virtualized access network.

As some of you may have heard on our partner Arista's recent earnings call, the marriage of CableOS virtualization with next-generation cloud-based routing is really opening the door to reinvention of the cable access network, including emerging architectures such as fiber deep, digital fiber, virtual segmentation, cloud-native integration and facility consolidation, all of which are active areas of work between Harmonic and key customers.

A good example of this collaborative innovation is the work we're doing with several customers to bring fiber deep distributed access architectures to life.

During the fourth quarter, we successfully completed customer site interoperability testing between our CableOS core and remote PHY hardware devices of key competitors.

Also during the quarter, our own new remote PHY nodes were qualified by key customers.

Shipments of these nodes commenced and the complete Harmonic end-to-end DAA system was successfully deployed for the first time in a live network.

As other example of collaborative innovation and the opportunities CableOS is unlocking, I want to highlight Com Hem's recent announcement of truly revolutionary new service currently being field trialed in Stockholm, and this is above and beyond the scale deployment mentioned just a moment ago.

And this trial is around the symmetrical 1.2 gigabit per second service, exceeding the broadband speeds available from commercial fiber to the home solutions.

As Com Hem noted in its own press release on this, this trial has generated quite a bit of excitement and discussion among the global cable operator community.

If you've not seen it, I encourage you to check out Com Hem's press release issued on February 6.

Turning to the financial view of our Cable Edge business segment.

Revenue increased to $13.5 million, and operating loss narrowed to about $4 million as CableOS revenue starts to build while we continue to invest heavily in both extending functionality in response to the new customer architectures I've just touched on and in ramping up our CableOS market introduction and service and support capacity.

Looking ahead, we're seeing the CableOS story pivot from one of investments and field trials to design wins and commercial deployments.

As a result, we have the first wave of customer wins and planned deployment pipeline necessary to support both our 2018 revenue target of $100 million and our longer-range growth and value-creation objectives.

And regarding real value creation, let's wrap up this CableOS discussion with a couple of observations about market dynamics and why we continue to believe there's an incredible opportunity for an innovative new player in the CCAP space.

Recently published market research suggests that the combined CCAP and DAA market will grow to approximately $1.8 billion by 2020, just 2 years from now, with over 60% of this forecast spending going into virtualized CMTS and DAA elements, brand-new and fast-growing product categories where we at Harmonic believe we have a strong innovation, product maturity and market penetration lead.

And further, worldwide, there's a lot of DOCSIS 3.1 upgrade activity being planned and an increasing number of customers questioning the wisdom of upgrading their old hardware to new hardware versus making the move to software.

And while we do not expect Harmonic's CableOS to suddenly capture 100% of this DOCSIS 3.1 upgrade market, we do believe that there are a growing number of operators who are looking to embrace software as part of their broader corporate strategies to move to cloud-native architectures wherever possible.

So look, we still have a lot of work to do to hit our CableOS targets, but I'll tell you, we're entering 2018 with real momentum and confidence based on an expanding foundation of signature customer wins and increasingly favorable market trends.

So let's now turn to Slide 5 and talk about our video business.

The first key message here is that the Video segment financial performance has sustained the improvement we saw in the third quarter.

Revenue in the fourth quarter was approximately $88 million, up 4% sequentially which, in turn, enabled 6.6% segment operating income, our second consecutive quarter of sequential revenue growth and greater than 6.5% operating income.

Video sales were strong across our product lines and regions and, as noted earlier, positive book to bill means we're entering 2018 with healthy video backlog and deferred revenue.

The second key message here is that the over-the-top streaming component of our video business is performing well, with new bookings exceeding $45 million in 2017.

Second half over-the-top bookings were up over 35% from the first half of last year, enabling us to enter this year with strong growth momentum and an expanded base of over-the-top customers.

A still modest but strategically important subset of this over-the-top activity came in the form of new Software-as-a-Service engagements.

Total over-the-top SaaS bookings during the year were approximately $22 million, and corresponding annual recurring revenue grew to just over $9 million, up from $7 million last quarter and approximately $2 million a year ago.

Although this SaaS transition creates an earnings timing headwind, this is the right strategic direction, and we're encouraged to see our video cloud technology and Software-as-a-Service capabilities gaining increasing traction with customers, spanning Tier 1 pay-TV providers to new Internet-first market entrants.

Our recently announced SaaS deal with the Global Technology Group for an innovative new over-the-top service in Myanmar is a great example of the expanded pay-as-you-go market opportunity we're beginning to tap into.

Which brings me to the third key, video business message.

The video market we address is opportunity-rich but still very much in transition as our customers evolve from traditional broadcast and pay-TV models to new over-the-top models.

Specifically, the migration from traditional pay-TV to, what we call, over-the-top 2.0 that is premium quality live over-the-top services targeted both to large family room screen and mobile devices is really poised to trigger a global wave of investment in new unified video platforms that enable delivery of premium live over-the-top services and targeted advertisements with broadcast-like quality and reliability.

Additive to these next-generation over-the-top services will be a new 4K Ultra HD tier.

We are pleased to be finally seeing a still early but clear, pickup in customer demand.

And finally, I want to emphasize that the ongoing wave of media and telecom M&A is inextricably linked to enabling and exploiting this next generation of streaming video services and associated personal advertising.

While customer M&A processes can and have resulted in an investment timing uncertainty, the endgame is unquestionably greater investment in next-generation over-the-top streaming platforms, underscoring the opportunity for Harmonic to leverage our strong technology platform and global brand to play a key enabling role in this global reinvention of the pay video business model.

So in summary, as with the cable side of our business, the strategic transformation and software transition investments we've been making on the video side of the house are clearly bearing fruit.

We've delivered another profitable video segment quarter, we're heading into 2018 with strong backlog and competitive momentum and we see over-the-top and Software-as-a-Service growth strategy succeeding as the market continues to pivot from traditional pay-TV to over-the-top 2.0.

So with that, I'll now turn the call over to you, Sanjay, for a more detailed discussion of our fourth quarter results, our financial guidance for the first quarter and our outlook for the full year.

Thank you, Patrick, and thank you all for joining our call this afternoon.

As you just heard from Patrick, we had a good quarter, revenue was at the high end of our guidance range.

Gross margin dollar expenses and earnings came in around the middle of our guidance range, and we drove good cash generation and a book-to-bill ratio greater than 1.2 means we are entering 2018 with a solid financial foundation.

So let's get started and turn to Slide 6 to review our Q4 results.

Please recall the numbers that I'll be referring to are on a non-GAAP basis.

Revenue was $101.1 million, exceeding the upper end of our guidance range.

This compares to $91.6 million in Q3 '17 and $113.8 million in Q4 '16.

Video revenue was $87.6 million, also above the high end of our guidance, compared to $84.2 million in Q3 and $104.8 million in the same quarter last year.

Looking at that Cable Edge segment.

Revenue was $13.5 million compared to $7.4 million in Q3 and $9 million in the year-ago period.

This was a solid finish to 2017 for both our segments.

Gross margin as a percentage of revenue was 50.1% in Q4, down from 53.4% in Q3 and 56.1% in Q4 '16.

Video segment gross margin was a reason for the temporary decline, 53.2% in Q4 versus 57.4% in Q3 and 57.7% in Q4 '16.

This lower Q4 video segment margin was the result of product mix as we closed out a couple of older projects that had a high mix of legacy hardware-based appliances.

With these deals behind us, we expect Video segment gross margins to rebound back to recent levels.

Cable Edge gross margin was 29.9% in Q4, 9.2% in Q3 and 37% in Q4 '16.

The modest year-over-year decline is a combination of declining legacy product volumes and new product introduction costs, particularly related to CMTS deployment services and our new distributed cable access initiative.

Operating expenses for Q4 were $49.1 million, at the midpoint of our guidance range.

Operating expenses were $47.7 million in Q3 and $54.2 million in Q4 '16.

The sequential increase was primarily due to increase in sales commission expenses in the quarter, in line with the sequential increase in revenue.

The 9% year-over-year reduction reflects a continuation of careful cost controls throughout the company.

Q4 operating income of $1.6 million was driven by our Video segment, which contributed $5.8 million of operating income and 6.6% of operating margin in the quarter, offset by our continuing heavy investment in our CableOS program.

Q4's operating income of $1.6 million compares to $1.3 million in Q3 and $9.6 million in Q4 '16.

Q4 EPS of $0.00 compared to a loss of $0.01 in Q3 and a profit of $0.08 in Q4 '16.

We ended with a weighted average basic share count of 82 million compared to 81.4 million in Q3 and 80.1 million in Q4 '16.

Perhaps the most encouraging metric, Q4 bookings were $122.9 million in Q4 compared to $96 million in Q3 and $116.9 million in Q4 '16, our strongest booking quarter since the first quarter of 2014 when our legacy Cable Edge business was much stronger.

That said, market's transition to OTT and virtualized systems is still early.

So while we expect some variability to continue near term, the good news is that our strategy is materializing.

These fourth quarter results, following on improvements seen in Q3, demonstrate a tight focus on execution and strengthening business.

Comparing the first and second halves of 2017, we see bookings up 26%, revenues up 16%, gross margin dollars up 20% and OpEx down 13%.

While we still have a lot of work ahead of us, I'm encouraged by our progress and excited about the opportunities in front of us.

Moving to Slide 7. I would like to pause here and provide some context regarding our modest, but growing, SaaS business and how it impacted our Q4 and annual results.

Total contract value, or TCV, associated with our new OTT SaaS deals signed in the fourth quarter was $4.6 million or 3.7% of our total bookings, pretty much in line with our expectation of 4%.

This new business brought our full year 2017 SaaS TCV to $21.9 million or 5.6% of total company bookings, marginally above our full year expectation of 5%.

OTT SaaS annual recurring revenue, or ARR, grew to end the year at just over $9 million.

As a reminder, 2017 was the first full year of Harmonic OTT SaaS business.

Year-over-year, our ARR grew above 300% from $2 million to $9.1 million at the end of fourth quarter.

To put this in perspective, our traditional linear broadcast video business, the general rule of thumb we provided on last quarter's call, which I will recap here again, is that on an annualized basis, each $1 million shift from a traditional CapEx purchase to a SaaS contract will reduce current year revenue by $600,000 and non-GAAP operating margin by $400,000, with the difference moving into our backlog or delayed for recognition in future periods.

Applying this general rule of thumb, for the full year of 2017, the SaaS activities resulted in approximately $15 million of delayed revenue and approximately $10 million of delayed operating income.

Now of course, our SaaS offering is enabling us to expand our addressable market and in mid- to long term, enhance the profitability of our business.

That said, this is a gradual transition, and we expect TCV of new SaaS bookings to remain in the mid-single digits as a percentage of total company bookings throughout 2018.

One other change I want to highlight is enhanced transparency regarding the financial profiles and results of our 2 operating segments.

Historically, we employed an aggregate allocation methodology based on total revenues to actually [reflect] the service revenues and sales expenses between our Video and Cable Edge segments.

Beginning in Q4, we have changed to a more precise attribution methodology as activities of selling and supporting our CableOS solution have become increasingly distinct from those of our video solutions.

We can now track and attribute these activities more precisely.

The impact of making this change in the fourth quarter compared to our historical approach was a reduction in operating income of $2.4 million from our Video segment and the corresponding increase to the operating income of our Cable Edge segment, of course, without an impact to total combined company results.

Looking ahead, where our Cable Edge revenues and expenses are both expected to grow faster than those of our Video segment, this updated internal allocation methodology ensures enhanced clarity regarding operating metrics of both our Video and Cable Edge business segments.

Now turning to the balance sheet on Slide 8. We ended Q4 with cash of $57 million, above the high end of our guidance.

This compared to $50 million at the end of Q3 and $62.6 million at the end of Q4 '16, applying continued strong focus on managing our working capital.

In Q4, we generated $9 million in cash from operating activities.

Note that the $15 million working capital facility established with Silicon Valley Bank in Q3 was not used during Q4, and we currently still do not intend to access this facility.

Our days sales outstanding at the end of Q4 was 62 days compared to 70 days at the end of Q3 and 69 days at the end of Q4 last year.

The sequential and year-over-year declines continue to underscore the efforts we are making to drive working capital improvements throughout the organization.

Our data inventory on hand were 46 days at the end of Q4 compared to 67 days at the end of Q3 and 74 days at the end of Q4 '16.

The decrease was due to good execution on operations and supply chain management and an associated inventory reduction.

At the end of Q4, backlog and deferred revenue was $224.4 million, setting a new record high for the third consecutive quarter.

This compares to $200.9 million in Q3 and $188.4 million in Q4 '16.

This trend reflects the ongoing evolution of our business to a more software and services-centric model.

Specifically, the latest sequential increase was driven by strong demand for our OTT and broadcast video products and related services, including SaaS.

The year-over-year increase is due to record service and professional service bookings and the receipt of material new orders for our new CableOS solution.

Considering the new CableOS design wins Patrick just mentioned, we expect this business to continue to ramp throughout 2018.

Our objective continues to be exceeding $100 million revenue in our Cable Edge segment and full year growth for the combined company.

Turning to Slide 9. I'd like to bring to your attention 2 items, meaning there's a brief overview on the impact of recent tax reform.

Our GAAP tax benefit for the fourth quarter and full year 2017 were a modest $200,000 and $1.8 million, respectively.

Our GAAP tax benefit for both periods include a discrete benefit of $2.6 million as a result of new tax legislation, which allows for recognition of cash tax refunds of our revenue taxes paid in prior years.

Considering our taxable loss position, the full valuation allowance against our U.S. deferred tax assets and negative accumulated foreign earnings, we do not expect to see a one-time impact on our tax expense for remeasurement of deferred tax assets or transition tax on unremitted earnings resulting from the new tax legislation.

We will finalize the impact of new tax law within the allowed 1 year measurement period.

Our non-GAAP tax rate for the year was unchanged at 15%.

The second important item taking place beginning January 1, 2018, is the adoption of a new revenue recognition accounting standard known as ASC 606.

It is important to note that the guidance we will provide momentarily will utilize ASC 605 that is the revenue recognition standard for 2017 and prior years.

We are in the process of finalizing the accounting impact due to ASC 606 and will present revenue for Q1 under both ASC 606 and ASC 605 when we report results for the first quarter of 2018.

We will adopt ASC 606 using modified retrospective method.

The adoption of ASC 606 could have an effect on the timing of both revenue recognition and the recognition of cost to obtain contracts, including commissions.

Now let's turn to Q1 non-GAAP items on Slide 10.

Considering recent business and market dynamics, for Q1 2018, we expect revenue in the range of $83 million to $93 million, with Video revenue in the range of $70 million to $76 million and Cable Edge revenue in the range of $13 million to $17 million; gross margin in the range of 52% to 53%, with both Video and Cable Edge gross margin showing sequential improvement; operating expenses to range from $49 million to $51 million; operating profit to range from a loss of $8 million to a profit of $0.5 million; EPS to range from a loss of $0.10 to a loss of $0.01; effective tax rate of 16%; and a weighted average basic share count of approximately 84.3 million shares; finally, cash at the end of Q1 is expected to range between $45 million to $55 million.

Turning to our full year outlook on Slide 11.

We expect revenues in the range of $380 million to $430 million, with Video revenue in the range of $290 million to $320 million and Cable Edge revenue in the range of $90 million to $110 million; gross margins in the range of 51% to 53%, largely dependent on the mix of hardware and software in our Cable Edge segment; operating expenses to range from $196 million to $204 million; operating profit to range from a loss of $11 million to a profit of $32.5 million; EPS to range from a loss of $0.18 to a profit of $0.25; and effective tax rate of 15%; and a weighted average share count to range from 86 million basic shares to 86.6 million diluted shares; we expect cash to range from $45 million to $55 million.

With that, I'll conclude by saying we are encouraged by our 2017 second half results and now remain focused on maintaining our operation execution momentum throughout 2018.

I will now turn the call back over to Patrick.

Okay.

Thank you, Sanjay.

Turning now to our Slide 10 (sic) [Slide 12].

We want to close by reiterating our strategic priorities.

For our Cable Edge business, objective number one is to continue to successfully scale our first wave of CableOS deployments, encompassing both centralized as well as newer distributed architectures.

Leveraging this growing CableOS market momentum, our second objective is to secure new design wins with additional operators, both Tier 1 and, increasingly, small and midsize operators.

And objective number three is to deliver on our $100 million 2018 revenue target, further positioning this business for both industry leadership and compelling profitable growth.

Turning to the video side of the house.

First objective is to further accelerate the success and growth of our over-the-top platform across regions in media and service provider verticals.

Objective number two is to continue to extend our SaaS offerings, thereby expanding our addressable market and further enhancing our customer value proposition.

And objective number three is to deliver consistent segment profitability just as we did in the second half of 2017.

As Sanjay just highlighted, our focus on these priorities enabled solid execution in the second half of '17.

And together with our healthy backlog and project pipeline, we remain confident and committed to driving renewed growth, profitability and shareholder value as we head into 2018.

So with that, I would like to now open up the call for your questions.

(Operator Instructions) And our first question comes from Steven Frankel of Dougherty.

Patrick, I wonder if you might begin by updating us on the dollar value in CableOS backlog.

And then as a follow-up to that, what does it take to get the deployment started?

It doesn't seem like there are any material deployments in the Q1 guide.

So how should we expect the year to scale up if you're going to hit this $100 million bogey?

The backlog coming in to 2018 is roughly unchanged, approximately $20 million from where it was a quarter ago.

We booked our business, and we burned some of the old backlog in the fourth quarter, which was manifested in the uptick that you saw in segment revenue.

We definitely expect a lot of the things that we're working on, and there are an increasing number of things, as I've highlighted, Steve, to really start to flip to revenue and increasingly as we go through the course of the year.

There's not a huge amount of that, that happens in the first quarter, but the amount of work that's underway that we think begins to get burned in the second, third and -- quarters is actually increasingly -- yes, there's increasing confidence.

There's a lot to cross -- the depth and the breadth, I guess, of the work has given us increased confidence in our full year target.

And how are you feeling about your competitive lead today?

Given that it's taking you a while to get to deployment, how big of a lead do you think you have?

And how do you maintain it?

We're not aware of any other solution out there that offers a virtualized or a software-based solution, on one hand.

And on the other hand, the newer products that we've seen released to the market, the newer hardware released products, are behind us in terms of just raw performance, power consumption, density, efficiency, the like.

I want to reemphasize that, let's say, the delay relative to our earlier expectations is less about product not being ready and it's more about customers really getting their minds and their arms around what can be done once you start thinking about an all virtualized access network.

Indeed, the Com Hem deployment that we've been able to now announce is quite advanced and quite mature and I think speaks to the readiness and capability at scale of the technology.

I think what we are seeing though is that we've got a lot of global customers who are increasingly convinced that virtualization of software is the way to go, but figuring out how they want to roll that out, bringing their ideas to the solution to bear is -- has been the name of the game.

If you don't mind me digressing for just a moment, I saw in today's news that 5 of the leading global wireless operators in the 5G area have banded together and with a unified credo of going all virtualized in their networks.

And core to the proposition of -- or the target is innovation and agility on that platform, which I think is absolutely necessary to -- for the ultimate success and growth of 5G.

And I think there's a strong analogy actually to what we're seeing in the cable arena.

So admittedly, we first walked into this 1.5 years ago thinking, okay, we're just bringing a better CMTS to bear.

And I think what this has turned out to be is not just about a better mousetrap, but it's -- in fact, it's about a whole different way of deploying access architecture.

And that is -- it actually makes us feel more strongly about our competitive lead.

The work we're doing with our competitors -- excuse me, with our customers makes us feel better about our competitive positioning.

And while I regret the additional time it's taken to get to market, I think that actually, in retrospect, it makes sense given the magnitude of change that's being contemplated and planned by an increasing number of customers.

Okay, this is Sanjay.

I'd like just -- I just like to add in terms of the backlog question, if you look at the order backlog has increased year-over-year by $36 million.

Approximately, 30% of that is cable, and I would say approximately 70% of that is video, and know this is a split of the increase and not of the total backlog itself.

So they're actually -- both of the businesses are progressing since last year.

Compared to Q3, the backlog increased by 24%, but all of that is video.

But that doesn't mean there is no new CableOS bookings during Q4.

Rather, the burn rate for cable backlog to revenue is much faster in Q4, and more backlog was converted to revenue than new orders coming in.

At the same time, this 30% of cable and 70% of video, it totally aligns with how we see the business.

Like, if you see the video and cable business, we were 90% on video and 10% on cable last year.

In fact, in '18, the way we see in our guidance for Q1 or for the whole year, we are close to 75%, 25% of video and cable.

And this increase in backlog in the same proportion underpins our confidence that the trend we see in the business and the revenue forecasting is aligned with the backlog and (inaudible).

And what does it take to get operating margins in the Video business to double digits?

You've kind of stabilized them here in the mid-single digits, how much more revenue do you need to get it to a double digits?

Well, so our -- getting to the margins is a mix of gross -- operating margins is a mix of gross margins as well as OpEx.

If you see, this quarter, at $101 million revenue and at the current OpEx level, it's 6.5%.

I believe as OpEx is the bare minimum which we have met, it's just a matter of gross margin dollars.

If it's close to $110 million, $120 million on video, that will be the benchmark to get to 10%.

But at the same time, it's also a mix of how the SaaS transitions and how the other transitions we've seen in the market last year, how do they play in this whole equation.

And then my last question, and I'll jump back in the queue, I would have thought there would be expectations to generate a material amount of cash in 2018.

That's not implied in your guidance.

Are you being conservative?

Or is it the shift to more hardware with the CableOS remote PHY deployment that's going to hinder your cash generation in 2018?

Yes.

Steve, so I mean we've seen during the whole you, we have made significant improvements in the DSOs.

And as you've seen we ended up at 62.

We believe this momentum -- if this momentum continues, and that's what we are driving towards, we believe we should end up similar to where we ended this year.

But during this year, because of the ramp in CableOS, there would be some investments in the working capital towards inventory or the RPHY nodes, as you mentioned, and that would move depending upon how the bookings and how the revenue turns around in quarter-over-quarter.

So we are keeping some room, some reserve for the working capital which will be deployed for the RPHY nodes, and that may set up a small portion of cash.

Hence, you see the high end is $55 million, even though we ended $57 million this year.

If that working capital, DSO improvements continue, together with the RPHY nodes working capital needs are met, I will not be surprised if we come at slightly above, at the high end.

But all that needs to play out in the quarters.

And our next question comes from Simon Leopold of Raymond James.

This is Victor Chiu in for Simon Leopold.

I wanted to circle back on the CableOS for a second.

So just to be clear, are your expectations for 2018 cable sales contingent on some specific deployments of CableOS opportunities that you're targeting?

And just how material are you expecting it to be in 2018 relative to your $100 million target?

As we highlighted, Victor, we've got to over 12 active commercial deployments and, let's say, mature field trials, and we've got a growing pipeline of seeing that growing.

So I think the good news is the number isn't dependent on -- in any one particular customer, but it certainly assumes that several of these will begin to turn into a greater volume over the course of the year.

And based on our activities with the customers, the feedback from them, our insights into their plans, we see the work we're doing is providing adequate foundation for this forecast.

Okay.

Okay, that's helpful.

And the Com Hem announcement that you made is certainly encouraging.

But I guess, I wanted to see if there's any -- have you -- are there any other operators outside of Com Hem that you're discussing virtual CCAP deployments, I guess?

And can you speak about any other specific opportunities that are similar that you might be targeting?

By the way, thanks for giving me the opportunity to clarify.

Everything we're doing is virtual CCAP.

So when I say we've got 12 commercial deployments or mature field trials, I mean we have 12 virtual CCAP deployments and/or mature field trials.

So that's the name of the game for us, Victor, spanning both centralized deployments, which Com Hem and several others are, as well as some of them which begin to get into distributed stuff.

So that's the value proposition we're bringing to the market.

We're coming to market with a virtualized solution that is working.

It's working demonstrably in the field at scale.

We are in deployments.

We're replacing brand, CMTSs, and a kind of apples-to-apples way in terms of functionality by bringing extra capacity and extra efficiency and with a fully software core platform.

So if that's not clear, I'm -- please continue to ask because I want to make sure that, that is really clear.

Are these global deployments or in the U.S. or...

We're working globally.

The biggest concentration in our -- of activity is in North America and in Europe right now.

But we're -- one of the benefits of having been in the market for years and having strong relationships with cable operators around the globe means that we've got a real leg up in terms of dialogues and engagements with customers around the world.

So we're active in Latin America.

We're active in Asia.

But the biggest concentration of activity today is in North America and in Europe.

Okay, great.

That's very helpful.

And one last thing, I guess.

Outside of the 12, I guess, what are -- just in general, what are the different aspects of network integration interoperability that you think needs to be addressed in order for more carriers to start considering deploying new solutions?

I think we've shown now that there are -- that there's no fundamental issues and there's no real risk.

And I think, particularly the Tier 1 operators, frankly, they're dealing increasingly with cloud-native technology in other aspects of their business for their applications, et cetera.

So this is not some kind of black magic kind of stuff.

Increasingly, I think CTOs are saying we're doing it everywhere else, why aren't we doing it in our access area?

And so it's -- there is no fundamental problem to be solved, et cetera.

I think -- look, the high-speed data platform is extremely profitable, it's extremely strategic for our customers.

So it's absolutely understandable that before they or as they undertake moving to next-generation technology, there's a careful vetting process, there's a careful integration process, et cetera.

Each operator is a little bit different.

We're in the midst of that in different forms or fashions with different operators.

But we're not seeing anything -- there's no fundamental physics or problems being solved.

It's pretty much straightforward integration work that's going on across these different engagements.

And our next question comes from Jeff Bernstein of Cowen.

First off, just want to say, Sanjay, a gold star on the capital management front, we like to see that.

I was hoping you guys could give us a little bit more detail about the competitive environment on the video side.

The traditional competitors, Ericsson and Cisco, seems like their businesses are for sale, or Ericsson, I guess, already took a hope note for theirs.

Are Amazon Elemental and Disney BAM the competitors now that you see in the market?

Or just give us as much detail as you can about that.

Well, it's an excellent question, and it's one that I regret is a little difficult to answer just because it's so fragmented.

We consider AWS an important strategic partner.

Indeed, most of the public cloud deployments that we've done to date are running on AWS.

So we've got some activity on Google as well.

But indeed, we compete with another part of that business.

And we tend to see a BAMTech as more of a partner than a competitor.

So particularly in the OTT area, Jeff, it's just kind of fragmented, and I think it's indicative of the big transition from traditional broadcast and pay-TV to new streaming models.

That being said, on the legacy side of the business, there's no doubt about it, the competitive situation has become, I'd say, more benign.

It's a growth challenge space, the legacy part of the video business.

And indeed, we've seen some of the traditional large competitors whither somewhat.

And I think part of our healthy results in the second half of the year are indicative of us picking up market share there.

That being said, I hope we made it clear, we're not hanging our hats on that part of the business, we're leaning in heavily.

The shoulder is into the wheel on the -- on expanding what we're doing at over-the-top, and not just in our traditional encoding for encoding but really expanding the footprint of what we're doing.

And that's part of the SaaS whole discussion.

We're being managed service capability to bear.

We're bringing other system elements to bear.

We're bringing the ability to offer a turnkey service to bear.

And that is an evolving competitive environment where some -- one day we're competing with a player like Amazon and another where we're partnering.

And I hope that's not too much of a wishy-washy answer, but that's a little bit of the reality of a fast-moving and evolving space but one that I think presents a lot of opportunities for us to be expanding our footprint.

So it sounds like it's still sorting out a little bit as the technology is changing.

And are -- do you see resistance from customers to commit to competitors like a Disney or Amazon as the vendor?

Or is that just seen as a separate area and, therefore, they're just as competitive as you are?

So I mean, I think that's the real -- you've hit on a really interesting question.

I mean, it's evolving more so because of the evolving way the customers are thinking about their business.

They're going from buying CapEx to considering moving to a service model.

And then you got to think, well, who's my service partner?

And so we're seeing an evolution of thought where, indeed, some large media companies are saying hold on, do I want to put my service on a potential competitor's platform?

I think that it's all very real time.

So at a higher level than we're operating, frankly, you've got big media companies thinking about, is Amazon, is it a partner or is it a competitor?

Same thing with Disney, et cetera.

So that said, that is also a pretty fluid situation.

I think in that context, one of Harmonic's positioning strategies is to position ourselves as clearly a best-in-class, neutral technology platform.

And we think in that regard, for those media companies who are wary of putting their chips on the table of a company that actually competes with them for ad dollars or on the content sphere, we actually think what we're doing is pretty attractive.

And we think that there's some real mileage there.

Without -- yes, without disclosing specific names, we've certainly had large customers turn to us saying, hey, we started out.

We made the move to service.

We went with one of the other managed service players.

But management, the word came down that we prefer not to do business with someone who's competing with us in another arena.

So again, sorry if that's a circuitous kind of answer.

Again, it's a fluid situation but one that we see as opportunity-rich for the way we're -- given the way we're positioned in the market.

So Jeff, I'd just like to add -- I would just like to add that despite of all this volatility in the environment we saw based in video business, like not only a SaaS transition headwind but the continuing customer M&A, if you look at our backlog and bookings this year, which has been a record bookings quarter, I mean, this is all primarily driven by video.

So very strong backlog, which is -- which positions a very strong year ahead of us on video.

Great.

And then just on Cable Edge, you guys have sort of bracketed the $100 million number for the year on guidance.

But going back quite a while now, it was really a single North American customer, not Com Hem, that was going to be the driver of that, and you've expanded the pipeline pretty significantly.

But that number hasn't gone up.

So what's the problem with the North American guy and their deployment?

Look, I -- you know I can't talk about any one customer with any specificity.

That being said, I guess it's the elephant in the room, so I appreciate the question.

There is this theory out there that I've heard that Harmonic is being used as a stalking horse or something like that, et cetera.

And I want to tell you categorically, I and my team, we've been around, and we've been around this industry for a while.

That is not the case.

We are convinced that the engagements that we're investing time and energy in are going to yield significant return.

That's for sure.

That being said, as I have highlighted earlier, this move to a full cloud-native virtualized solution, it's become bigger than us.

It's about cloud-based routing.

It's about whole new paradigms for the management.

It's about the way you co-locate things with the rest of your cloud-based infrastructure.

And so I think what we've learned, unfortunately, over the last 12 months is that, as particularly our Tier 1 customers kind of gear up to make this change, there's a lot of moving parts that go beyond what we're doing, which we don't have control over and, therefore, we don't have exact control over the timing.

So I know it -- probably on the outside looking in, it's frustrating as heck and it's a black box and what's was going on.

But from our view, the activity and the complexity is indicative of seriousness and scale.

And that gives us continuing conviction in the long-term opportunity, in our long-term opportunity, for leadership here.

However, it has also taught us that be careful about the timing.

And I think what you're hearing from us and our guidance today is not a backing off at all of the strength of the position with any one customer or any group of customers but rather a recognition that the -- because of the complexity here -- and I'm not talking about years, but quarter-to-quarter, we recognize that there are certain timing elements that are out of our control.

I see every opportunity for us to blow away the guidance we've given you.

On the other hand, I can see us just making it.

Hopefully, we've not erred in calling it the way we are.

It's still early in the year.

And yes, we've given your our best stab at 2018.

I -- if you'll allow me to go a little further though, and I know there's all this discussion about 2018 and $100 million, and I think that is a necessary next step.

But we're in this game for a lot more than $100 million revenue.

I want to go back to the fact that the latest research says that this is estimated to be a $1.8 billion market.

And 60% of that spend, 60% of $1.8 billion, is with brand-new product categories where we think that we're way out in front.

So if you really want to know how we're thinking about this business, and we don't want to get too far out over our skis in terms of looking beyond '18, but I have to tell you, what I and the management team and our Board of Directors are playing for is getting a major piece of this $1.8 billion spend by 2020.

So we're going to execute.

We're going to, hopefully, meet or beat what we're talking about in 2018.

But the real thing here is making sure we're in a position to fully capitalize on the bigger pie here.

And I assure you that our belief and our confidence in the customer engagements that we're involved in is really undiminished.

That's great.

If you can get a Casa multiple on those revenues, I'd be really with that, too.

Well, I -- they've done extremely well.

We're impressed with them.

I think Jerry and the team are great.

I -- but keep in mind that -- if I recall correctly, they're a 10-plus year old company, right?

And I'm not saying it's going to take us 10 years.

I think we're 4 to 5 years into this.

But on the other hand, it says that if you're 4 to 5 and you're not actually throwing off that kind of cash, it doesn't mean the game is over by any means.

Thank goodness for them that they didn't throw in the towel or slow down at 5 years.

So I'm not predicting another 5 years by any means.

I think that we're making great progress, and we're in great shape for where the market is going.

But I agree with you, Casa is a very instructive case study here.

And that concludes our question-and-answer session for today.

I'd like to turn the conference back over to Patrick Harshman for any closing remarks.

All right.

Well, thanks very much.

Let's just wrap this up by highlighting that we're executing on our strategic transformation and plan to capitalize on this new wave of global customer investment in virtualized cable access networks as we've been discussing here, both centralized and distributed, and also the new premium quality over-the-top services that are going to flow over this new higher bandwidth and more agile access networks.

Our fourth quarter and second half results and recent announcements I think clearly demonstrate that we're making real strategic and financial progress.

Looking ahead, we're going to remain focused on both profitable growth and cash flow, as Sanjay has highlighted, while also delivering differentiated new technologies and services to the market that really will build long-term value, as we've just discussed.

We appreciate your support, and thank you all for joining the call today.

Thanks very much.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.

Everyone, have a great day.