Harmonic Inc (HLIT) 2018 Q1 法說會逐字稿

Welcome to the Q1 2018 Harmonic Earnings Conference Call. My name is Candace, and I'll be your operator for today's call. (Operator Instructions) And please note that this conference is being recorded. I will now turn the call over to Nicole Noutsios, Investor Relations. Nicole, you may begin.

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's First Quarter 2018 Earnings Conference Call. With me today are Patrick Harshman, our CEO; and Sanjay Kalra, our CFO. Before we begin, I would like to point out that in addition to the audio portion of webcast, we've also provided slides to this webcast, which you'll see by going to our webcast on our IR 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 the documents Harmonic filed with the SEC, including our most recent 10-Q and 10-K reports and the forward-looking statements section of today's preliminary results press release. These documents identify important risk factors which can cause actual results to differ materially from those contained in our projections or forward-looking statements. And please note that unless otherwise indicated, the financial metrics we provide to you on this call are determined on a non-GAAP basis. These items together record for any GAAP numbers, and the reconciliation of 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. The remainder of the information will be available in 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, Nicole, and welcome, everyone, to the call today. We're pleased to be reporting a positive quarter with solid year-over-year financial improvement that was enabled by growing success of our key strategic initiatives. In fact, the first quarter was a pivotal quarter as we achieved meaningful strategic milestones in both our CableOS and Video software transformations. The resulting financial headlines are that year-over-year bookings were up 25%, revenue was up 8%, gross profit was up 15% and operating income improved by approximately $12 million. The key driver of this financial performance was our CableOS initiative, which is continuing to gain momentum in the marketplace. To underline this momentum, I'm very pleased to announce today that we have secured a new and greater than $50 million multiyear supply agreement with a Tier 1 international cable operator. This win involved a very competitive formal RFP process, substantiating both our technology leadership and our ability to compete effectively in the marketplace. Although we currently anticipate the financial impact in 2018 to be modest as this engagement ramps up, this is a major strategic win and an important step for our CableOS program. And [I believe] we now have over 15 CableOS commercial deployments and advanced trials underway with over 200,000 consumer devices served, up nearly 100% from last quarter.

And behind the scenes, we continue to raise the bar in both virtualization and Remote PHY technology, including filing several additional patents during the quarter. In our last earnings call, we discussed that, in addition to centralized architecture commercial deployments, early distributed architecture field trials are maturing. For this quarter, I'm pleased to announce that we have deployed our first scale commercial distributed architecture network, now live and serving end consumers, and we secured our first greater than $1 million purchase order for a Remote PHY system. Thanks to new orders and deployments like these, our Cable Access segment revenue was up 70% year-over-year. And segment gross profit was up over 95% year-over-year.

In a side note here, reflecting the expanding access solution space our CableOS is addressing, we've renamed this business segment Cable Access from the prior name Cable Edge.

Considering both our first quarter financial results and our second quarter visibility, which Sanjay will cover as part of the guidance discussion momentarily, we continue to believe we're on track to reach our $100 million 2018 segment revenue target. But look, let me be clear. Our objective is not just getting to $100 million revenue. And frankly, we view this target as just a stepping stone toward our ultimate market leadership objective. The combination of our clear technology leadership of CableOS, our growing number of Tier 1 wins, deployments and project pipeline, the increasing pace of market demand for virtualized and distributed access solutions and our rapidly developing expertise in deploying these advanced technologies all position Harmonic uniquely to be the market leader in the next generation of scalable cable access. I can tell you that Harmonic team is pumped up and charging forward. It's a critically important and exciting time for CableOS.

Switching gears now. We're also quite encouraged by the continuing success we're seeing transforming our video business. As a reminder, our objective has been to transition our historically broadcast video-centric appliance business to a more profitable and predictable over-the-top centric software and SaaS business model. And during the first quarter, we saw good evidence of this transformation is on track. Where year-over-year revenue was modestly lower, gross profit increased as gross margin jumped to 57.5%. And resulting Video segment operating profit was up over $7.5 million, making Q1 our third consecutive quarter of positive Video segment operating income.

As you know, Harmonic has been the market leader in broadcast video technology. What is new is our growing leadership in over-the-top streaming applications. Through the first quarter, Harmonic has now deployed over 32,000 high-quality linear over-the-top channels worldwide, which is up over 50% from just 6 months ago. Of these, over 2,500 are now cloud-native linear channels, successfully running in hybrid public and private cloud environments, up over 100% from 6 months ago.

Looking ahead, as over-the-top applications incorporate more live and linear video globally and as consumer expectations for streaming video quality continue to increase, Harmonic's industry-leading and public-cloud-enabled video solutions, create a unique platform for new wave of video business growth.

And one final comment on our video business. With healthy first quarter bookings and a continuing shift to software services and SaaS, we continue to carry forward record backlog and deferred revenue, enabling improved financial visibility and stability as we head into the rest of 2018.

So as with CableOS, we certainly have more work to do, but we're pleased with the progress on our video business.

I'll now turn the call over to Sanjay for a more detailed discussion of our financial results and outlook.

Thank you, Patrick, and thank you, all, for joining our call this afternoon. As you just heard, we delivered a strong start to 2018. We delivered strong results across a number of financial metrics. Revenue in gross margins and EPS were all at or near the high end of our guidance range, and expenses came in at the low end. We maintained a good cash position and entered the quarter with a book-to-bill ratio greater than 1.1, which means we are maintaining a strong backlog as we head into the rest of this year.

As we turn to Slide 6 to review our Q1 results, I would like to remind you that the numbers I will be referring to are on a non-GAAP basis. Revenue was $90.2 million compared to $101.1 million in Q4 '17 and $83.5 million in Q1 '17. We delivered year-over-year growth in the quarter driven by strength in Cable Access segment, renamed from Cable Edge. Cable Access segment revenue was $18.5 million compared to $13.5 million in Q4 and $9 million in the year-ago period.

As we previously communicated, the revenue ramp in Cable Access segment has begun. As the Cable Access segment continues to ramp, we expect to see inherent variability in revenue streams from new products and services throughout the year, but continue to expect the segment to contribute $100 million of revenue in 2018.

Video revenue was $71.7 million compared to $87.6 million in Q4 and $74.5 million in the same quarter last year. The sequential comparison reflects typical seasonality while year-over-year comparison reflects the timing difference of professional services relating to lower SaaS bookings this quarter and also product mix shift to more software.

As I will discuss momentarily, Video segment margin and gross profit increased year-over-year. We had one greater than 10% revenue customer this quarter, Comcast, who contributed 14% of total revenue.

Gross margins made strong progress and were $55.3 million in Q1, up from 50.1% in Q4 and 52.1% in Q1 '17.

Cable Access gross margins were 46.7% in Q1 compared to 29.9% in Q4 and 29.1% in Q1 '17. The strong sequential and year-over-year margin increase is primarily the result of growing CableOS access.

As you may recall, that CableOS is more software-oriented than our historical Cable business products. Video segment gross margins was 57.5% in Q1 versus 53.2% in Q4 and 54.9% in Q1 '17. This higher Q1 Video segment margin was due to product mix with a higher composition of video software and services delivered this quarter as expected in our ongoing video business transition. We maintained strong expense control without compromising our strategic investments in future growth. As a result, our Q1 operating expenses of $49.4 million at the low end of our guidance range. Operating expenses of $49.1 million in Q4 and $54.9 million in Q1 '17. This 10% year-over-year operating expense reduction reflects a continuation of careful cost control throughout the company and from the R&D transformation from a capital-intensive hardware development model to a predominantly software development model.

Q1 operating income of $0.5 million was driven by our Video segment, which contributed $2 million to operating income and 2.8% operating margin in the quarter, offset by our continued investment in our CableOS program. Q1 operating income of $0.5 million compares to $1.6 million in Q4 and a loss of $11.4 million in Q1 '17.

Our Q1 EPS loss of $0.01 compared to $0.00 in Q4 and a loss of $0.14 in Q1 '17. This strong year-over-year improvement was driven by improved gross margins in both our segments and careful cost management throughout the company. We ended with a weighted average basic share count of 83.9 million compared to 82 million in Q4 and 79.8 million in Q1 '17. The sequential increase in basic shares is due to issuance of ESPP and performance-based compensation shares during the quarter.

Q1 bookings were $102.6 million compared to $122.9 million in Q4 and $82.1 million in Q1 '17. The markets transition to OTT and virtualized systems is materializing as we expected. And the strong year-over-year bookings growth reflects the alignment of opportunity and focused execution.

While we still have a lot of work ahead of us, I'm encouraged by our first quarter results and committed to leveraging our mid- and long-term value creation opportunity.

Moving to Slide 7. I would like to provide some context regarding the impact of new ASC 606 revenue standard, our growing SaaS business and the comparative segment cost allocation change announced last quarter.

Regarding the new revenue standard, we have implemented ASC 606. During this first quarter, our ASC 606 revenue was $90.2 million. Revenue would have been $89.4 million under the previous revenue standard. The impact of 606 adoption was not material to our business in Q1.

From a balance sheet perspective, as a result of the new standard, we reduced deferred revenue by $5.3 million and decreased our backlog by $5.8 million, with a corresponding increase of $11.1 million in our equity. Please note that while the equity impact reflects the revenue we lost as a result of adopting the standard, we anticipate picking up some additional revenue during 2018, which would not be recognizable under the legacy standard, thereby partially offsetting the 606 adoption impact on our anticipated 2018 revenue.

In addition, the adoption of this new standard caused us to capitalize previously expensed commissions of approximately $1.4 million, primarily relating to our SaaS business. This will be amortized over the applicable future service periods.

Our revised guidance of 2018, which I will be covering in a few minutes, is in accordance with ASC 606 and considers these expectations. I want to remind everyone that ASC 606 is purely an accounting change in terms of timing of recognition and does not change our customer billing, operating cash flows or the underlying health of our business.

Regarding SaaS. The annual recurring revenue or ARR for our SaaS deals grew by 5% from $9.1 million at the end of 2017 to $9.6 million at the end of Q1 2018.

Total contract value, or TCV, associated with the new OTT SaaS deals signed during the first quarter was $1 million or 1% of our total bookings. While this is lower than our annual expectation of 5%, we anticipated SaaS bookings softness in Q1 as we experienced inherent variability in revenue streams from new products and services during the quarter in 2017. It was also the first year of our SaaS initiative for the company.

For the full year 2018, we expect SaaS bookings to slowly ramp and stay close to 5% of total bookings. As I noted on our last call, we enhanced the financial transparency of our 2 operating segments during the fourth quarter of 2017. Historically, we employed an aggregate allocation methodology based on total revenues to attribute professional services revenue and sales expenses between our Video and Cable Access segments. Beginning in the fourth quarter of 2017, we had operate a more precise attribution methodology as activities relating to selling and supporting our CableOS solution have become increasingly distinct from those of our video solutions. Since this change was made during the fourth quarter of 2017, our sequential results are directly comparable by operating segment without any need for adjustments. However, for a year-over-year comparison, the financial results of our operating segments, we would need to apply the new attribution methodology to Q1 '17 results. This would increase the reported Q1 operating loss for our Video segment by $1.1 million while correspondingly decreasing the operating loss of our Cable Access segment without, of course, any impact to our total combined company results. Therefore, with this adjustment, our Cable Access segment revenue and margins increased over 70% and 95%, respectively, on a year-over-year basis. I will now move to our liquidity position and balance sheet on Slide 8. At the end of Q1, backlog and deferred revenue was $224.4 million, a record high for the fourth consecutive quarter. This compares to a $224.4 million in Q4 and $184.2 million in Q1 '17. With a book-to-bill ratio of 1.1, our bookings in excess of revenue for the first quarter were offset by a reduction in our deferred and backlog due to the ASC 606 impact I just mentioned.

We ended Q1 with a cash of $52 million. This is compared to $57 million at the end of Q4 and $55.3 million at the end of Q1 '17. The sequential decrease in cash reflects our investments in working capital of approximately $8 million during the quarter. Note that the $15 million working capital facility we established with Silicon Valley Bank in 2017 has never been used, and we currently still do not intend to access this facility. Our days sales outstanding at the end of Q1 was 75 days compared to 62 days at the end of Q4 and 76 days at the end of Q1 '17. Our days inventory on hand were 56 days at the end of Q1 compared to 46 days at the end of Q4 and 90 days at the end of Q1 '17.

Now let's turn to Q2 non-GAAP guidance on Slide 9. Note our guidance is under the new 606 standard. Considering recent business and market dynamics, for Q2 2018, we expect revenue in the range of $88 million to $98 million, with Video revenue in the range of $70 million to $76 million and Cable Access revenue in the range of $18 million to $22 million. Please note that at the midpoint of our guidance, this range reflects year-over-year growth of approximately 13%. Gross margins in the range of 52% to 54%, operating expenses to a range from $49 million to $51 million, operating profit to a range from a loss of $5 million to a profit of $4 million, EPS to range from a loss of $0.07 to a profit of $0.02, and effective tax rate of 16%, and the weighted average basic share count of approximately 85.4 million and a diluted share count of approximately 86 million. Finally, cash at the end of Q1 is expected to range between $45 million to $55 million.

Moving to Slide 10. Previously, our annual guidance was under ASC 605. Set out below is a revised annual guidance, which incorporates the expected changes due to ASC 606. Specifically, our guidance now incorporates an anticipated negative impact of $5 million on annual revenues and $1 million on sales commission expenses. There are no changes in annual guidance other than this ASC 606-related impact. Revenue in the range of $375 million to $425 million, with Video revenue in the range of $285 million to $315 million and Cable Access revenue in the range of $90 million to $110 million. We do not expect the typical revenue linearity in the business as we ramp our Cable Access Business. Gross margins in the range of 51% to 52%, largely dependent on the mix of hardware and software in our Cable Access segment; operating expenses to range from $197 million to $205 million; operating profit to range from a loss of $15 million to a profit of $26 million; EPS to range from a loss of $0.22 to a profit of $0.18; and effective tax rate of 16%; and the weighted average share count to range from 86 million basic shares to 87 million diluted shares. We expect cash to range from $45 million to $55 million.

I would like to conclude by stating that we had a solid quarter and delivered strong financial results. We continue to remain focused on delivering long-term profitable growth and driving our growth initiatives. I will now turn the call back over to Patrick.

Thanks, Sanjay. We want to close by reviewing our strategic priorities.

For our Cable Access Business, objective number one is to continue to successfully scale our first wave of CableOS deployments, encompassing both centralized and distributed architectures. Leveraging this growing CableOS market momentum, objective number two, is to secure new design wins with additional operators, both Tier 1 and midsized and smaller customers. And our third objective is to deliver on our $100 million 2019 Cable Access segment revenue target, further positioning this business for both industry leadership and, as Sanjay says, profitable growth.

Turning to the Video side of the house, objective number one is to further accelerate the success and growth of our over-the-top platform, across regions, end-media and service provider verticals. The second objective is to continue to extend our SaaS offerings, thereby expanding our adjustable market and further enhancing our customer value proposition. And our third objective is to deliver consistent segment profitability, just as we've done over the past 3 quarters.

Our continued focus on these priorities enabled tangible strategic and financial progress in the first quarter. 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 the remainder of 2018.

So with that, let's now open the call for questions.

(Operator Instructions) And our first question comes from Matthew Gagliano (sic) [Galinko] of Sidoti.

I think you started breaking out SaaS ARR last quarter. I was wondering if you could give us an update on that metric?

Yes, sure. The SaaS ARR last year, we ended the year 2017 with approximately $9 million and it's moving to $9.6 million at the end of Q1. And that's in continuation of our additional bookings we got at the same time with the increased run rate of quarterly revenues from the previously booked deals.

Got you.

So it's approximately 5% increase in the quarter.

Okay. And do you still have the expectation -- or could you just kind of update your expectation on what the SaaS mix looks like in 2018 or what you're targeting?

So our SaaS bookings, as you see last quarter -- last year, was approximately 5% and this year for the complete full 2018, we are still expecting around 5%, although Q1 falls -- fell a little short like 1% as I mentioned in the prepared remarks. But throughout the year, we believe we'll be able to capture that and bring back to 5%. So overall, our expectations are still the same, and we believe that ARR is going to continuously grow quarter-over-quarter. That's how we saw that happening in 2017. And we believe 2018, also every quarter, we should expect the growth in ARR.

Got you. All right. One more, if you don't mind. I think you talked last quarter about starting into Tier 2 operators with CableOS. Any updates on that initiative? Do you have any ongoing trials or field deployments in Tier 2 operators?

Well, just to say, Matt, that's going well. I highlighted here over 15 commercial deployments and advanced trials. And that is a -- represents a mixture of Tier 1 and smaller operators. Frankly, Tier 1 continues to be the main strategic focus of the business. But as the technology further hardens and matures, and we get a little bit more breathing room from some of the Tier 1 engagements, we've been able to spread our wings continuously, and we're making good progress with the medium-sized and some smaller guys. So it's work in progress. Long term, we see a big part of the opportunity being with the midsize and longer, and smaller guys and we're encouraged by the progress we've driven so far in Q1.

And our next question comes from Steven Frankel of Dougherty.

Patrick, let's start with this large new international CableOS win. Maybe characterize for us why you think you won that deal and how is this going to be deployed? Is this a greenfield or is it a rip-and-replace? How is the customer planning on deploying the technology?

So fair questions. Look, as I've said several times, we think what we've done is quite powerful. It's aligned strategically with the broader technology visions of the Tier 1 operators worldwide. There's a strong push behind network function virtualization, et cetera. And so what we've done resonates with the other things that they're pushing in the broader parts of their technology platform. So we're engaged with Tier 1s right around the world. And so it's exciting to see this particular customer, us to come out on top of their RFP process. And we think it was a combination of the technology capability mapping up with their vision, and us proving it out in their lab. So they tested and banged and convinced themselves that it's not just a compelling vision but, in fact, that it's real. So the second part of the question, we expect it to be a mix of greenfield and rip and replace. Part of the opportunity is connected to and indeed pushing fiber deeper, gigabit service deeper into the network. And so you'll see that part essentially being greenfield, if you will. But our understanding of the deployment plan is that it's hybrid. You'll see fiber going deeper in some areas. So -- and in other areas is for common technology and operational efficiency, all the advantages of virtualization. We think there'll be another element which is, as you say, rip and replace.

Okay. And can you update us on where the backlog is in the CableOS business now?

So Steve, we generally do not break out the backlog by Video and Cable segment. Historically, we haven't done that. However, I'm happy to share that directionally, our backlog has increased from Q4 to Q1. It's going up in the right direction and, in fact, in the right quantity as well, as we would expect, which would support our guidance for Q2 and our annual expectation for the growth.

Okay. And was this -- to go back to this big deployment, that sounds like that's a mix of a piece with Remote PHY and another piece that may not have the Remote PHY element?

Yes. I mean, as a reminder, the heart of the system, the CableOS software stack, is kind of agnostic to where the PHY is, whether it's next door in a centralized data center or whether it's pushed down deep in the network. That's part of the beauty of the system. Or indeed, you can have different PHY locations for different subregions, different traffic patterns, different consumer profiles, et cetera. So it's our software stack deployed essentially. And the long-term plan is to have so-called PHY. In some parts of the network [applied] remotely deep into the network. In other parts, more conventionally or centrally, as the terminology goes.

Okay. And what can you tell us about your major customer? We've been kind of waiting for the next stage of that relationship to develop. What's happening with that field trial and development process?

Well, I think you're referring to Comcast and the news that we can report because we're obligated to report it is that they were greater than 10% customer. As Sanjay mentioned, they were 14% of revenue customer, which is good news. They're a very key customer, obviously, the #1 Cable operator in the world, and so to be doing volume business with them is, I think, very positive for us. And frankly, it's been some time since we've had any customer represent 10% of revenue. So that's -- I think that's the detail that we can share. More broadly beyond that, I can simply tell you that going back to the last conversation in the international win, we think that what we're doing is -- it's -- it represents new and change, but it's really captured the imaginations of most of the Tier 1s worldwide. And so in our view, it really isn't a question of if, but it's when, and we're pushing hard, and we think we're making good progress across the board. And I think I have to leave it at that. Please understand I can't comment any more specifically on Comcast or any other specific operator.

Two more quickly. So on this Comcast again, of that 14%, is that a mix of Video and Cable Access? Or that was chiefly Cable Access revenue in the quarter?

No, that's a mix of total revenue. Not any particular segment but in total.

Okay. But I'm -- I guess I'm asking, was there a contribution from both businesses?

Yes, there is contribution from both.

Okay. And then on the 606 impact, how much of that revenue headwind is in the Q2 guide?

So what we experienced in Q1, a very small, insignificant piece, around [$500,000, $600,000] net impact. That's very similar to what we're expecting in Q2 as well. And as we learn more about 606, we've taken an approach for the $5 million impact on the guidance. But Q2 is already baked into the Q2 guidance, very similar to the impact of Q1.

Okay. So obviously, the anticipated impact scales up in the back half of the year if the [volume]...

Exactly. I would suggest, like in terms of modeling purposes, it's in the back, so Q3 and Q4. For easy purposes, split equally into 2 quarters.

And our next question comes from Tim Savageaux of Northland.

In several notable milestones, and I want to follow back up on the Tier 1 international award that you've referenced as well. And maybe try and relate that to what looks to be an expanding universe of field trials and deployments. I think you said 15, up from 12. If I recall properly, but as you look across that universe of trials and early deployments, but I guess is what you announced with the Tier 1 international operator typical of the size of opportunity that you're pursuing within that group, unusually large for Comcast? We assume the opportunity may be several times what you announced with the international operator. But can you give us a sense of -- and also having mentioned some Tier 2 opportunities, is what you announced here today kind of indicative of the average kind of opportunity you're pursuing in this base trials?

Well, I think you have to start from the point -- the place where we think that this is evolving towards a $2 billion market. So that's -- that really frames the opportunity that we think we're pursuing. Cable worldwide is dominated by what we call the Tier 1. So the big guys. And so the spend in this category amongst the top 10 Cable operators is certainly north of $50 million. And so as we think about the opportunities we're pursuing with Tier 1s, this is absolutely indicative or maybe even a smaller than the eventual opportunity. That being said, it's not always the case. It's probably the minority of the cases of the opportunities we're pursuing that are formerly constructed as an RFP for a certain project with a certain size. And for us, it's really more about gaining design wins and leveraging footprint to grow and grow and grow, and really get after -- our objective is to be #1 in this $2 billion space. So we're going to touch a little bit meandering. I think it's representative of what we see, if not on the small side as we think about our Tier 1 opportunities. It's bigger than the opportunity that we think is in front of us for the tens or dozens of midsized and smaller operators. So we're finding it coming in all shapes and sizes, Tim, and -- but it's a great step forward. And not only because of that customer win, but because it is kind of a small cable community. And so what we're building here is credibility as well as a footprint within any one operator. So we're encouraged by that progress. So we think it's -- coming out on top in $2 billion space is not going to happen overnight. But it's going to be step-by-step, and this is a pretty encouraging step forward.

Got it.

And I like to just add that it's not only just the size but also what does the gross margin profile come with the deal is very important for us as we expect our growth and as we ramp. So this deal, not only in terms of size, but with the margins which we're expecting with the deal falls exactly within our expectations for this CableOS success.

Appreciate that color. And while we're on CableOS margins, they're notably strong in the first quarter. And I imagine that's sort of mix-related in some way. Although it looks like kind of implicit in the guidance, you might expect that to come down throughout the year. I might imagine through a greater mix of node shipments or what have you. But if you can -- while you're there, in terms of baseline margin expectations for CableOS, I'm wondering if you could talk a little bit about the drivers of the strength in Q1 and whether indeed you see that moderating a bit as maybe more hardware-oriented aspects of the deployments begin?

Yes, Tim. Definitely. So if you look at last year, our margins for CableOS were like 29.9 -- or like less than 30%. And definitely, Q1, we expected the ramp to happen together with the margins, and it's coming in line with our expectations. The margins in Q1, as you said, are great. But at the same time, during this year, while coming up with the guidance, not only for the quarter but for the whole year, we have considered the range of approximately 40% to 50%. And yes, it could vary among the quarters. There is some variability among each quarters, how the mix plays up. But our expectation is to stay within 40% to 50%.

Got it. And final question. At this for now over on the video side, you mentioned as a key objective to maintain profitability there, I wonder if you can try and maybe put a few more metrics around that. And with regard to potential operating margin targets on the video side. It does seem, given high 50s gross margins that double-digit operating margins could be achievable over time. And as you look out through the end of the year and kind of what's sort of implied in your annual guide, if you could update your thoughts or expectations there on the operating margin side for the Video segment.

Yes. I mean, we got good margins, 2.8% in Q1. And while I can share that, we expect to be profitable in the Video segment. In fact, in both segments, we expect to be profitable from an operating profit standpoint. In terms of percentages, they would fluctuate within the year among various quarters. But overall, I believe we will be close to 5% or less than 5%, around that. At the same time, there will be some variability among each quarter.

Let me just add onto that, Sanjay. I think it's important to remember that we're in the midst of a transition from what was a traditional appliance-oriented broadcast business to a much more software and over time SaaS-centric over-the-top streaming business. So you'll see, I think some variability in terms of where the model is working. And I think our objective is to kind of walk before we run. I think you're absolutely right. If we look longer-term, and even beyond this year, we see a business where the gross margin profiles are continuing to improve, and we see the overall profitability continuing to improve. I mean, the near-term objective is executing that transition and doing it in a way that we're keeping the bottom line healthy and stable. So I'd say we're kind of in the walk phase there and -- but we do look forward to, if you will, running ultimately with a higher operating margin profile. But we'll keep you posted on that long-term objective.

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

Just first, I wanted to verify that I got one of these numbers down correctly. I believe the Cable Access gross margin for the quarter was 46.7%. Is that correct?

Yes.

Great. And so just sort of, I think, maybe following on to the previous question. Is there something specific about how the business would flow in with new customers that would help us think about the trending? For example, when you sign up a new customer, is there initially a significant software contribution that would boost gross margin that would then tail lower as the hardware aspect, the nodes are shipped hence a lower gross margin as you follow on? Is that the right way to think about it? I guess, I'm trying to understand what led to the surprisingly strong contribution gross margin in the March quarter.

So the guidance we gave during the quarter and the margins which came in, I think they pretty much sync up. So I think it's -- came in within our expectations. Honestly, we are not surprised because that's what we were working towards in this quarter. At the same time, to go back on the earlier part of the question, the mix, how software, products, licensing and services are going to play is going to vary among quarter-to-quarter. Every customer would have a different need. There'll be different timing of shipments of each of these. But the timing would vary. The timing would vary not only in terms of the margin but also in terms of the dollar value of revenue and expected margins as a result. So there is software. Definitely, a software piece is big in CableOS, but also there are services, customers which are in the early phase of deployment needs additional services and support from us, which are at pretty healthy margins as well. So I think it's all a mix of how all these things are playing together and coming in for this strong margin compared to last year. And that's the expectation for the whole year as well.

So I think Patrick sort of referred to this as a transition year, which makes a lot of sense if we sort of bridge '17 into '18 as a transition period. I'm wondering if you've thought or could quantify what your long-term objectives would be in terms of a gross margin and operating margin profile for the company?

Yes. We -- as I've said earlier, we have 40% to 50% margin expectation this year for Cable Access segment, which is a mix of various things. At the same time, the long-term objective is definitely going to be higher than 50%, but how much is hard to quantify and give guidance at this time. I think, as Patrick said, we have to walk before we run. So I will not rather set a high expectation right now, but we want to be successful this year the way we have delivered our results this quarter. And once that is behind us, then I think we can think about guiding more or guiding ahead to base on how things will play out.

Okay. And I just wanted to check on -- in terms of the over-the-top business that you've talked about, is that primarily the result of the production and playout products? If not, what's driving it and how material should we think about over-the-top within the overall revenue?

It's not primarily the production and playout. It's actually more on the delivery to consumers side. So 2 big drivers of it, Simon, are new virtual MVPD place, where you see so-called skinny bundle trying -- being rolled out domestically and internationally. We are an increasingly involved player in enabling those kinds of services. And also, touching P&P, maybe this is where you're going with your question. By virtue of our historic production and playout area, we have a lot of relationships with content owners and media companies who were starting to go direct-to-consumer. And we're playing a role also in these direct-to-consumer over-the-top streaming services. So those are 2 key drivers of the over-the-top activity. Admittedly, the traditional broadcast infrastructure is declining. The over-the-top stuff is growing fast. So net-net, we're kind of treading water. But we think by continuing to expand our position, our capability in over-the-top, we're striving for making it a net topline growth driver for us.

Great. And one last one just switching back to the CableOS and the CCAP aspects of this business with the nodes. Could you talk about where you see the competitive environment today?

Sure, sure. If you would allow me, Simon, let me just take a half a step back at the risk of mudding the water further on the whole margin question because I think it relates to this follow-on question. I -- It is important to understand that our CableOS software itself is kind of agnostic, whether it's a distributed architecture or so-called centralized architecture. Now we'll certainly -- I think, the big disruption, if you will, that starting to come to the whole Cable Access space is around distributed networks. I think we can see most clearly that we're going to have a leadership position there and we can forecast playing strongly there. I think what is a little bit more of a question mark is how successful we'll be over time actually capturing part of that centralized market, if you will, which will have a relatively higher software component. And that's a little bit of the uncertain that we have mix -- forecasting the mix. But I think so it's key to understand that our business and our success is not wholly or exclusively predicated on putting nodes out there and redoing the access network. And indeed, most of the deployments we've done to date have veered towards -- the majority of activities is veered toward centralized. Now all that being said, I think your question was about specifically around Remote PHY. We don't know what we don't know about what our competitors are up to, but it's -- we had our first software -- virtualized CMTS working in 2016, and we've been working feverishly with the leading customers since then to further enhance and mature and advance the platform. So our belief, based on things like the recent RFP win that we've talked about here and the feedback we're getting from our customers is that we've maintained quite a strong lead in both the whole virtualized part of the equation as well as the Remote PHY piece of things. And I hope it doesn't sound at all like overconfidence where there's other good companies participating in this market, and we're very mindful of that. But we're completely focused as I mentioned in our prepared remarks. So we've continued to file patents in this area. And we're learning a lot in the field and putting that back into the design cycle. So we -- our understanding is that we maintain a pretty strong lead in the market, and it's something that we'll be working very hard to maintain as we go forward.

And our next question comes from George Notter of Jefferies.

This is Kyle here for George. I'm wondering if you could give us any additional little color on how many customers that you had in the quarter that are driving the year-over-year improvement in the Cable Access segment right now? I would assume that, that would be your large commercial deployment mainly, and then some additional revenue from the field trials that you mentioned?

It is a mix. We disclosed here 15 commercial deployments and, let's say, advanced to trials worldwide. And while our strategic emphasis continues to be on Tier 1s, it's -- that represents a mix of larger and medium and even a couple of smaller accounts. So it's still -- I think it's still a relatively modest cross-section of the total global cable landscape. But it -- it's something that continues to expand. Of course, our strategy is drive real success with the early players and then use that as a platform to build on and bring in more customers.

Sure. Thanks a lot. And would that be mostly the commercial deployment or would -- I guess I'm trying to get a sense for how big the collection of field trials are versus the commercial deployments? Is there anything further you can give us on that?

Of the 15 -- let me be clear. It's not just 1 or 2 commercial deployments. It is a mix. But we're -- the revenue that we're driving, the revenue outlook for this coming quarter and for the coming year definitely relies on multiple customers contributing.

Okay. And one last one for me. You mentioned the R&D cost savings in your prepared remarks. Just wondering if you could give us a sense for how we should think about that going forward? Is there -- do you have any kind of dollar value target or should we just think of R&D growing slower than revenue or becoming a smaller percentage of revenue in a given quarter? How should we think about your initiatives on R&D and the cost savings you're getting from going to software platforms and SaaS products?

Yes, Kyle, the savings which saw in Q1, and even we kicked off these initiatives in last year, around Q4. So we are realizing those benefits this quarter. At the same time, our guidance for the whole year as well as Q2 entails these savings are benefits already. So if you stay within the OpEx guidance of $49 million to $51 million and maybe take the midpoint and use that as a run rate for the whole year, that should address the savings already. So that's an initiative we took last year, and it's playing well in accordance with our expectations.

Okay. Sure. And then should that -- should we think of that trend continuing into the next year? And like how -- what's the duration of the trajectory, you think? Or is there a point when those savings are kind of fully baked into the financial results?

Well, specifically for R&D, as the initiatives have been put into place and we are realizing those benefits, while we would expect that to continue even in -- beyond 2018. But at this point in time, I'm really reluctant to go out beyond 2018 and give more color for 2019. So I think 2018, we are within the range of 49 to 51 a quarter, where R&D is definitely a big piece. And -- but directionally, those 2 savings should continue every year.

And our next question comes from Tim Savageaux of Northland.

I wanted to follow up briefly on the comment again about the Tier 1 international win. I think you mentioned that your expectation was for a modest revenue impact in calendar '18. I just want to kind of focus back on that. And sort of along the lines of some of the previous questions about -- as you look and reiterate your $100 million target here, I think we can assume perhaps a plurality of that comes from your largest customer. But it seems like that's diversifying pretty nicely. So as you reiterate that target, it seems that the new win kind of doesn't have any influence on that. But can you talk about what, if anything, you do expect from this new win in '18, and whether that's kind of supporting your $100 million target or more of a '19 thing?

Yes. I'd like to provide some color on that. Basically, as we've said, this is a multiyear agreement, and it's going to provide some modest revenue in '18. And the reason being, although it's a $50 million agreement which got signed, at the same time, it ramps up next year, 2019. And then you'll see most of the revenue. This year, we will see some shipments related to that. But as the customer also prepares for it and gets ready for CableOS implementation, that there's going to be a time lag between when we shift and how it ramps in 2019. And as our backlog grows and as the business continues, this is supporting, it underpins the confidence on the technology. And not only the $100 million target we have for this year, but basically there are more years to come, and we have to start building backlog for that right now. And this is definitely heading in the right direction for that purpose.

All right. Well, thank you. So that ends the Q&A. Thank you, all, for joining us today. We appreciate your participation, and we look forward to talking with you all soon.

Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference call. This does conclude the program and you may all disconnect. Everyone, have a great day.