Harmonic Inc (HLIT) 2018 Q3 法說會逐字稿

Welcome to the Q3 2018 Harmonic Earnings Conference Call.

My name is Candace, and I will be your operator for today's call.

(Operator Instructions) Please note that this conference call 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 Third Quarter 2018 Earnings Conference Call.

With me today 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 the webcast, we've also provided slides to this webcast, which you can see by going 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 documents that 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 can cause actual results to differ materially from those contained in our projections or forward-looking statements.

And please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP basis.

These items, together with corresponding GAAP numbers and a reconciliation of GAAP, are contained in today's press release, which we posted on our website and filed with the SEC on Form 8-K.

We will also discuss historical, financial and other statistical information regarding our business and operations, and some of those information is included in the press release.

But the remainder of the information will be available on a recorded version of this call or on our website.

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

Well, thanks, Nicole, and welcome, everyone, to our Q3 call.

We're pleased to again be reporting a positive quarter, with solid year-over-year financial and business progress enabled by the ongoing success of our strategic CableOS and video software and SaaS transformations.

Specifically, continued CableOS progress delivered 153% year-over-year revenue growth for our Cable Access segment, while the combination of solid over-the-top streaming and ultra-high-definition sales drove 7.2% operating income for our Video segment.

Other notable corporate financial highlights include 11% year-over-year revenue growth, 5.6% operating income and a $7.6 million cash increase to our balance sheet.

Taking a closer look at our Cable Access segment.

CableOS success continues to steadily build.

We expanded the combined number of commercial deployments and field trials to 25 customers, up from 20 reported last quarter.

Among these, we publicly announced last week our deployment with Buckeye Broadband, who have migrated 100% of their greater than 120,000 subscriber broadband service footprint from competitor systems to CableOS.

This is a compelling case study as CableOS enabled both the introduction of new gigabit services for Buckeye's residential and business customers and behind the scenes, significant operational efficiencies through the consolidation of approximately 15 former CMTS sites to a single CMTS operational center, where CableOS software is running on dense commercial off-the-shelf servers.

Buckeye has been a great business partner and communicating openly about the benefits of this CableOS-powered DOCSIS 3.1 upgrade, garnering a lot of positive attention at last week's annual cable industry conference in Atlanta.

Including this Buckeye broadband deployment, CableOS is now actively delivering broadband service to over 480,000 cable modems worldwide, up 20% from last quarter.

Now let me be clear, this is over 480,000 live 24/7 consumers and business customers who are paying for and receiving broadband service that is being delivered through CableOS.

The key takeaway here is that CableOS's virtualized software architecture can and is being successfully deployed and operated at scale, delivering significant benefits to our OE customers.

Another positive milestone attained during the quarter was the commencement of volume shipments of our new Remote PHY nodes for distributed access architectures, also known as DAA.

Specifically, node shipments were up 174% from Q2, contributing materially to Q3's record CableOS revenue.

The nodes are in the process of being deployed in the field by our customers, and once installed, will be followed by companion CableOS software license sales.

Coming out of last week's cable industry conference, there's no question that DAA is going to become a major part of cable's future and that we are establishing ourselves as the industry leader in DAA.

So all this activity continues to drive a positive financial trajectory.

Segment revenue was $28 million, up 153% year-over-year and 39% sequentially.

And operating profit was 1.5%, our second consecutive Cable Access segment profit.

And our strategic design wins and project pipeline continue to support attainment of approximately $100 million of revenue in 2018 and continued growth in 2019.

And so looking ahead, global customer feedback during the recent cable event in Atlanta made it clear that the combination of our technology leadership, our initial wave of wins with influential customers, increasing market understanding of the advantages of both virtualized and distributed access solutions and our growing expertise in successfully deploying these solutions, all position Harmonic uniquely to be the market leader in the next generation of scalable cable access.

Okay.

So turning now to our Video segment.

Here also, we're seeing continuing evidence of our strategic initiatives gaining momentum in the marketplace, driving consistently improved financial performance.

Video segment operating income was 7.2%, making Q3 the fifth consecutive quarter of positive segment operating income.

Enabling this operating profit consistency, segment gross margin was 57%, reflecting an improving mix of software sales.

Looking ahead, we continue to carry forward strong Video segment backlog and deferred revenue, enabling segment visibility and performance consistency.

Underpinning this more consistent financial performance is the transformation of our historically broadcast-centric appliance business to a more profitable and predictable over-the-top streaming software and SaaS business.

Demonstrating that this strategic transformation is on track, Harmonic has now deployed over 35,000 high-quality live and linear over-the-top streaming channels worldwide, up 4% sequentially and 23% year-over-year, further strengthening our position in the growing live premium video streaming space.

Staying with the theme of quality, during Q3, we also saw continued demand for ultra-high-definition solutions.

UHD-related sales in the third quarter were up 138% sequentially, which is particularly impressive when we recall that Q2 UHD sales were up 200% year-over-year.

We are well positioned to take advantage of growing worldwide interest in deploying and monetizing high-quality ultra-high-definition programming.

Also key to our Video strategy is expanding our addressable market through our new cloud-based SaaS offerings.

Raising our visibility in the streaming world and leveraging the combination of our market-leading ultra-high-definition and SaaS capabilities, we recently partnered with NASA and Roku to launch a new streaming channel based on stunningly beautiful NASA content.

Since this channel was launched in September, the app on Roku has been installed over 58,000 times.

Leveraging this video technology leadership positioning and following a land-and-expand approach to new business development, we're pleased to report that the number of active revenue-generating video SaaS customers has grown to nearly 20, up 200% year-over-year.

So look, in summary, in both our cable access and video business segments, we continue to make excellent progress in bringing truly differentiated and relevant solutions to market and, as a result, in improving our financial performance.

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

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

Before I share with you my detailed quarterly remarks, I would like to remind you that the financial results I will be referring to are provided on a non-GAAP basis.

As you've just heard from Patrick, our third quarter performance was solid.

We at least have sequentially delivered a profitable quarter in both of our segments, supported by strong results across a number of key financial metrics.

Revenue and gross margins were at high end, while the lower operating expenses came in below our guidance range.

This resulted in a profitable quarter, with EPS exceeding expectations.

This was coupled with strong balance sheet and an improved cash position.

This performance marks 5 consecutive quarters of solid financial and strategic execution.

And we turn to Slide 6 to review our Q3 results.

Revenue was $101.4 million, near the high end of our guidance.

This is compared to $99.4 million in Q2 '18 and $91.6 million in Q3 '17, resulting in 2% quarter-over-quarter growth and 11% year-over-year growth.

This top line growth is primarily due to our Cable Access segment.

Cable Access revenue was $28.1 million compared to $20.2 million in Q2 and $7.5 million in the year-ago period, resulting in a 39% quarter-over-quarter and 153% year-over-year growth.

As you have seen, activity in our Cable Access segment has been progressing steadily throughout 2018.

Of particular note, in Q3 was a sequential increase of 174% in shipments of CableOS nodes for new distributed access architectures, underscoring an expanding addressable market opportunity for our Cable Access segment.

Video revenue was $73.3 million compared to $79.2 million in Q2 and $84.2 million in the same quarter last year.

As a reminder, Q3 is typically a weaker quarter seasonally, with last year being an exception, when we saw Video revenue catch up after a very slow first half of the year.

Consistent with the past 2 quarters, in Q3, we had one greater-than-10% revenue customer, Comcast, who contributed 16% of total revenue.

Gross margin was 52.1% in Q3 compared to 54% in Q2 and 53.4% in Q3 '17.

Cable Access gross margin was 38.7% in Q3 compared to 50.3% in Q2 and 9.2% in Q3 '17.

The sequential decrease in gross margin reflects the increased mix of DAA node shipments.

These go out the door before corresponding CableOS software licenses, which customers prefer to take just in time after the node has been deployed in the field.

So to be clear, as field installation of nodes ramp up and as enabling CableOS core software turn on, the blended Cable Access margins are expected to improve.

Video segment gross margin was 57.2% in Q3 versus 55% in Q2 and 57.4% in Q3 '17.

The sequential increase reflects an improved mix of video software, as expected in our ongoing video business transition.

We maintained strong expense control without compromising our strategic growth investments.

As a result, our Q3 operating expenses are $47.2 million, below our guidance range of $49 million to $50 million, consistent with recent operating expenses of $47 million in Q2 and $47.7 million in Q3 '17.

Q3 operating income of $5.7 million was primarily driven by our Video segment, which contributed $5.3 million and 7.2% operating margin in the quarter.

This marks 5 consecutive quarters of video operating profitability.

Also, we are pleased that our Cable Access segment was sequentially profitable, generating approximately $400,000 of profit this quarter compared to $500,000 profit in the prior quarter despite increasing our Cable Access R&D spending during the quarter.

Total Q3 operating income of $5.7 million compares to $6.8 million in Q2 and $1.3 million in Q3 '17.

Q3 EPS was $0.04 compared to Q2 EPS of $0.05 and a loss of $0.01 in Q3 '17.

This year-over-year EPS improvement was driven primarily by our cable segment turning around from an operating loss to an operating profit and overall vigilant cost management.

We ended Q3 with a weighted average diluted share count of 87.8 million compared to 85.8 million in Q2 and 81.4 million in Q3 '17.

The increase of approximately 2 million shares is mainly due to the issuance of approximately 1 million shares of ESPP and performance-based employees' RSUs and of approximately 1 million shares of previously granted RSUs, options and warrants becoming in the money this quarter.

Note, this quarter, we also saw some dilutive effect due to Comcast warrants, which vested as we successfully achieved the critical field trial acceptance milestone for which we filed an 8-K in early August.

Q3 bookings were $79.5 million compared to $107.9 million in Q2 and $96 million in Q3 '17, resulting in a book-to-bill ratio of 0.8.

This bookings result was in line with our expectations since, as mentioned previously, Q3 is typically seasonally slow, especially internationally due to summer vacations and due to timing of support contract renewals.

We ended the quarter with backlog and deferred revenue of $207.6 million, down 10% sequentially but still up 3% year-over-year and near the high end of what we have seen historically.

I would like to now provide some context regarding the impact of SaaS activity on our Video segment results.

Specifically, total contract value or TCV of Q3 SaaS bookings was $4 million compared to $6 million in Q2.

Total ARR for our SaaS deals was $9.7 million at the end of Q3 compared to $9.6 million at the end of Q2.

Our ARR is comprised of subscriptions and related professional services.

Subscriptions-related ARR increased from $8.6 million in Q2 to $9.3 million in Q3, and subscription-related professional services decreased from $1 million in Q2 to $400,000 in Q3.

This 8% increase in subscription-based ARR reflects both an increasing SaaS customer base and increased usage of our SaaS offerings.

As Patrick pointed out earlier on the call, our SaaS customers grew by 200% year-over-year.

Looking ahead for the full year 2018, we believe that total SaaS bookings will continue to be approximately 3% to 4% of total bookings.

We believe we are still in early stages of our SaaS evolution as we continue to grow and expand our installed base.

As I have noted on our previous calls, we enhanced the financial transparency of 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 adopted a more precise attribution methodology as the activities relating to selling and supporting our CableOS solutions have become increasingly distinct from those of our Video solutions.

Since this change was made starting Q4 2017, our sequential operating segment results have been directly comparable without any need of adjustment.

However, for year-over-year comparison of operating segment results, we need to retroactively apply the new attribution methodology to Q3 2017 results.

This decreases the reported Q3 '17 operating income of our Video segment by $2.7 million while narrowing the operating loss of our Cable Access segment without, of course, any impact to the total combined company result.

Therefore, with this adjustment, our Cable Access segment revenue and margins both increased 153% on a year-over-year basis.

I will now move to our liquidity position and balance sheet on Slide 7. As mentioned previously, at the end of Q3, backlog and deferred revenue was $207.6 million.

This compares to $230.4 million in Q2 and $200.9 million in Q3 '17.

We ended Q3 with cash of $61.7 million.

This compares to $54.1 million at the end of Q2 and $50 million at the end of Q3 '17.

The sequential increase in cash of $7.6 million primarily reflects cash generated from operations of $2.4 million and net cash generated from financing activities of $5.2 million.

Our days sales outstanding at the end of Q3 were 70 days as compared to 75 days in Q2 and 70 days at the end of Q3 '17.

Our days inventory on hand were 43 days at the end of Q3 compared to 45 days at the end of Q2 and 57 days at the end of Q3 '17.

In summary, while we have a lot of work ahead of us, overall, I'm encouraged by our third quarter results and our year-to-date performance, which we have delivered while remaining committed to our mid- to long-term value creation opportunity.

Now let's turn to Slide 8 of our Q4 non-GAAP guidance.

For Q4 '18, we expect revenue in the range of $105 million to $118 million, with Video revenue in the range of $80 million to $83 million and Cable Access revenue in the range of $25 million to $35 million; gross margin in the range of 49% to 50%; operating expenses to range from $49 million to $50 million; operating income to range from $2.2 million to $9.6 million; EPS to range from $0.01 to $0.07; an effective tax rate of 16%; a weighted average diluted share count of 89.2 million; and finally, cash at the end of Q4 is expected to range from $55 million to $65 million.

I want to pause here and provide a little more color on our Cable Access revenue range.

Consistent with the trend of past 2 quarters, we expect the shipments of DAA nodes to steadily grow again sequentially in Q4, which is positive news.

What is somewhat lesser than is the quantity of nodes which need to be shipped as demand is dependent on the pace at which previously shipped nodes will be deployed in the field and correspondingly when associated CableOS core software licenses will be purchased and turned on.

Hence, this beginning ramp of volume DAA deployment and associated operational learning curve demands a wider Cable Access guidance range than in the prior quarters.

As DAA becomes more mature, we expect revenue timing visibility to improve.

Moving to Slide 9. For our full 2018, we now expect total revenue in the range of $396 million to $409 million, with Video revenue in the range of $304 million to $307 million and Cable Access revenue in the range of $92 million to $102 million.

This compares to our prior guidance of $388 million to $411 million, where Video revenue contributed $296 million to $309 million and Cable Access contributed to $92 million to $102 million.

Gross margins in the range of 52.5% to 53%, marginally better than our prior guidance of 52% to 53%; operating expenses to range from $192.5 million to $193.5 million, improved from our prior guidance of $195 million to $197 million, primarily due to strong expense management; operating profit to range from $15.1 million to $22.5 million, improved from our prior guidance of $6 million to $24 million, primarily due to improved gross margins and reduced operating expenses; EPS to range from a profit of $0.09 to a profit of $0.16, improved from our prior guidance of a loss of $0.01 to a profit of $0.16; an effective tax rate of 16%; and a weighted average share count of 86.9 million diluted shares.

We expect cash to range from $55 million to $65 million, improved from our prior guidance of $50 million to $60 million.

As a result, the only notable changes to full year guidance which we provided in our last earnings call in July are narrowing of our Video revenue range by $8 million at the low end and $2 million at the high end, narrowing operating income by $9.1 million at the low end and $1.5 million at the high end, improving our EPS low end by a range of $0.10 with no change at the high end and increasing our cash guidance range by $5 million.

As a reminder, there is no change to our annual cable guidance of $92 million to $102 million.

Before I conclude, I would like to inform you that with our proactive planning around potential tariffs, we do not expect any significant impact from tariffs to our financial results.

I would like to conclude by stating that we have delivered 5 strong consecutive quarters both strategically and financially, and the outlook for Q4 remains positive.

We remain focused on executing our strategic initiatives and delivering long-term profitable growth and shareholder value.

So with that, thank you all and back to you, Patrick.

Okay.

Thanks, Sanjay.

I want to wrap it up by again highlighting our strategic priorities.

For our Cable Access Business, objective number one is to continue to successfully scale our first wave of CableOS deployments.

Leveraging our growing CableOS market momentum, objective number two is to secure new design wins with additional operators, both Tier 1 and midsized customers such as Buckeye Broadband.

And as cable operator investment plans and DAA solidify, objective number three is to establish ourselves as the clear technology and market share leader in DAA.

Turning to our Video segment.

Objective number one is to continue to grow our over-the-top streaming solutions across media and service provider verticals.

Objective number two is to leverage our SaaS offerings to expand our addressed market tapping into new higher-growth customers and business models.

And objective number three is to deliver consistent segment profitability, as we have done over the past 5 quarters.

Our commitment to these priorities has enabled clear strategic and financial progress through the first 3 quarters of 2018 and continuing confidence in driving renewed growth, profitability and shareholder value.

I'd like to thank our global employees for their creativity and commitment, our strategic customers for their partnership and our shareholders for their continued support.

Let's now open up the call for questions.

(Operator Instructions) And our first question comes from James Kisner of Loop Capital Markets.

So I just want to clarify first your comments regarding the guidance for Q4 in Cable Access and that wide range.

Is that wide range more related to just the size of inter-quarter bookings?

Or are there some significant slugs of revenue in there that are awaiting revenue recognition, as I kind of understand those dynamics?

So James, thanks for the question.

I think there are 2 things which I pointed out in my prepared remarks, and I'll provide you a little bit more color.

The range of $10 million entails 2 things, which we are going to get clarity on as we progress in the quarter, but we believe it's going to fall within this range.

One is the quantity of nodes, which we will ship for the DAA nodes we talked about.

We have seen sequentially the quantity is going up from Q1 to Q2 and Q2 to Q3.

Q3 to Q4 also, we expect that to go up.

But how much that's going to go up is that something which we are still trying to nail down to precision.

At the same time, that's also dependent on the way our customers are going to deploy those nodes in the field.

And whilst the deployment continues at a certain pace, we will ship more nodes, and then the corresponding software licenses, which will follow it, would also come after that.

So this range of $10 million entails both these things, the quantity of nodes as well as the CableOS software, which will kick in only after deployments are completed.

Okay, that helps.

Also sort of, I guess, wondering too about the gross margin retention.

It seems like if I'm kind of modeling the Video margin flattish that you could have something sub-35% in the Cable Edge business.

And it sounds like that's really temporary, given that you don't have a lot of experience in CableOS.

I mean, it seems like this would be an anomalous quarter.

Is that correct?

Like from here, could this stay at this level for several quarters until CableOS ramps?

Or how should we think about that Cable Edge gross margin given your guidance for Q4 just sort of on a longer-term basis?

Yes, Jim, so you're right.

In terms of total margins for the quarter, we are guiding 49% to 50%.

And Video is close to 55% in that calculation, and as we have seen throughout Q1 to Q3, getting 57.5% to 57.2% and 55% in Q2.

I think a range of 55% for Video is totally reasonable.

But in terms of cable, the mix shift and together with the guidance range of revenue we entailed, which includes nodes as well as software, currently, we are anticipating close to high 30s because that's what we experienced in Q3 as well.

And you're right, this is temporary, we believe, as far as the software component is not in this.

But as software component starts kicking in, over a period of a couple of quarters, we would expect the gross margins to return or rebound and get back to what we had shown earlier in Q1 and Q2.

Okay, that helps a lot.

Just a couple more quick ones and I'll pass it.

Do you have any thoughts on just -- I know this is brand-new cycle for you.

But any thoughts about Q1 seasonality at this point?

Might it be more or less seasonal than typical?

I mean, nodes, I think, are pretty weak usually seasonally in Q1.

Any thoughts at all on seasonality?

So James, at this point, we are giving guidance for Q4, and we are making our full year more precise and we are not giving guidance for next year.

And in our next call in early next year, we will provide more color on Q1 and next year.

Okay.

Just last one.

I guess, on these 25 trials, it's a nice increase to add 5 more.

I guess, within that 25, do you see more about kind of some of these are progressing towards actual wins?

I mean, does it feel like -- if there's any kind of quantity that you can give us and number of trials that have been completed?

Or just this number, it's just hard to understand the meaning of that.

Or maybe talk about conversion rate to acceptance.

Just -- also just in terms of the cable modems deployed, how much have you recognized?

And is there a point, you think, some point you're going to see a pretty significant inflection in the number of modems supported?

Or is that just going slowly grind higher to the way as in the last couple of quarters?

And I'll pass it.

Yes, so James, it's -- everybody, it's a little hard to generalize.

Every operator -- cable operator kind of goes about things a little bit differently.

Look, to be clear, we think nearly 0.5 million live end consumers or business customers are being served through CableOS is a pretty material milestone.

Indeed, that volume is actually being addressed by less than half of the 25 deployments in advanced trials that we've talked about here.

So under the umbrella of 25, assuming they all move to volume deployment, we see a significant amount of business latent there in the pipeline.

In some cases, I mean, we talked about a large customer contract of over $50 million, I think, a quarter or 2 ago, I can't even recall.

That customer, we're still working towards a national deployment and they aren't reflected at all in the 480,000 consumers.

On the other hand, we -- Buckeye Broadband, as I said, come along and it's pretty exciting that they flipped 100% of their footprint in volume deployment to CableOS.

So it's a little bit of a mixed bag in terms of the different approach, different cable operators have to evaluating testing and then deploying in the field CableOS.

I think the real thing too to take away is that number one, it's working at scale.

That's for sure.

And number two, that the number of customers who is getting deeply engaged with us, either in terms of full-on deployment or whether it's advanced field trials, is growing to be a significant number.

in what, after all, is a fairly concentrated industry.

So I -- we're -- we continue to be excited by the uptake, the real-time energy that our customers are putting into evaluate and early deployments of CableOS.

And we, as I said earlier, we think that this pipeline of activity will, Sanjay said, we're not giving you a quantitative view on 2019, but we definitely think that the future continues to look bright for CableOS.

And our next question comes from George Notter of Jefferies.

I guess, I wanted to keep going on CableOS.

I think one of the marquee opportunities for you guys there is with your largest customer.

You've got a warrant deal out there as well.

Any new milestones?

Obviously, you guys talked about the one back in August with, I think, you called it field trials.

But anything more to say there in terms of the progress with that customer or potential for breaching additional thresholds and milestones coming up through the balance of the year?

And then also, I wanted to go back to the deferred revenue and backlog figure.

I think you said $230 million, which I think was down versus $206 million.

Can you talk about what drove that delta sequentially in deferred revenue and backlog?

Well, I'll take the first part, which as regrettably, again, I'll be brief, George.

Unfortunately, we can't comment in any detail on what's going on with Comcast.

We did hit that milestone that resulted in an 8-K filing and the vesting of warrants.

And beyond that, there is nothing we can disclose publicly.

I would say, though, that Comcast as well as a number of other operators were at the recent cable show in Atlanta in force, and several other executives spoke at some length as part of the conference.

And I think you'll find a lot of interesting commentary about what they're aiming for, what they're doing technologically.

In fact, just today, there's a pretty interesting write-up in Fierce Telecom, where Comcast executives were reflecting on lessons learned from deploying a virtualized CMTS.

So this is a situation where we're going to have to let them speak for themselves.

But the good news is I think there is some interesting stuff out there to be gleaned from.

And I'll turn the second part over to you, Sanjay.

Yes, so George, I'll get back to your question on warrants.

So the 2 milestones, one was originally when we signed the deal and the second one, field acceptance vested.

The remaining other milestones, which were detailed in the 8-K we filed in September 2016, are not at all technology acceptance-related.

They are all commercially -- based on commercial business.

So technology risk is behind us.

It's all about deployment.

And other remaining warrants have not been vested yet.

And once they vest, we will make a public announcement for that as well as it is for the previous vesting.

Also, color on the other part of the question on backlog.

The backlog actually was $207.6 million at Q3 and it has dropped from Q2.

Q2 was $230.4 million.

But the drop of backlog is totally within our expectations.

Q3 seasonally has been a low bookings quarter, as I mentioned in the prepared remarks.

We do generally eat up from backlog in Q3, but the book-to-bill ratio has usually been more than 1, and we actually build it up.

But in Q3, we eat it up.

So it's a part of the normal seasonality we've seen.

And in Q4, we are expecting the trend to continue as well.

And the backlog is up year-over-year.

I think it's an important metric.

It is.

It is over 3% up year-over-year, definitely.

Got it, okay.

I'm sorry, and then deferred revenue backlog, you would anticipate would be up sequentially, of course, in Q4 seasonally?

Well, seasonally, there -- it could be that book-to-bill ratio could be 1 or 1.1 or 0.9.

It usually fluctuates and we will have to see.

But it's going between 0.9 and 1.1.

We generally don't guide to the bookings number, but it's in the range of 0.9 to 1.1.

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

I wanted to touch on the mix expectations on the Cable Access business.

You've talked about the wide range, and I just want to get a better understanding of the gross margin implication for that because I think when you're suggesting gross margin by segment, you talked about Cable Access being high 30s again.

And I'm sort of struggling with what would be on the high end?

So if you do get to that $35 million, is that the assumption that you have more licenses and, therefore, that should be a higher gross margin?

Or if you get to the $35 million of Cable Access in the fourth quarter, should we think of it as net gross margin dilutive?

I'm just sort of trying to think about the mix within the mix question.

Well, I'll tell you what, I'll give you a CEO answer and then -- I understand the struggle in terms of building a model, but the truth is there is not just one answer to that, Simon.

There is a scenario where the node demand really takes off, and we could imagine getting the $35 million largely on nodes.

So there's a scenario where we're high end on revenue yet the margin is low because it's still tilted towards hardware.

There's a different scenario, let me call it kind of modest upside in nodes, but -- where a modest upside in hardware, but then actually, good progress is made deploying those nodes, and so we also see incremental purchases of the associated software licenses.

So there's a slightly different mix formula for getting to the high end of the range and that would give a different gross margin result.

And what we're trying to be very transparent about is that I think it's still early days.

And I think you see this again also from our customers' own statements.

They're working out a lot of the operational issues associated with DAA.

And so there's a number of different mix scenarios that can play out.

And so we're acknowledging that it's still early days.

There's a couple of different scenarios -- deployment scenarios that can underpin this range, and yes, those different scenarios actually correspond to slightly different gross margin ranges as well.

So I think it creates a little bit of a challenge for all of us in precisely modeling Q4, and I think we just want to acknowledge that.

But take a step back, I think it's all goodness.

I mean, frankly, it's not that long ago that people were saying, "DAA, it's still several years off.

It's not possible." And the fact that we're sitting here today talking about ramping shipments of DAA being a reality, that our customers are talking about it being the reality at this recent trade show, I will take the uncertainty of the next quarter or 2 any day in exchange for the fact that the train feels like it's leaving the station.

And then actually, it dovetails nicely to my following question, which is last earnings period for the June ending quarters, one of your competitors talked about the DAA opportunities sliding out into 2019.

And it sounds like you're probably more upbeat about DAA happening.

I'm wondering to what extent you can look at the industry overall and to what degree are you seeing yourself gaining share?

Or would you characterize this as simply your customer mix might be different than your competitors' customers?

How do you think about the sort of company-specific versus industry trend?

Yes, I think all good questions and candidly not ones that we have super crisp answers for, Simon, but let me take a step back.

There's no question that the DAA is coming and it's coming industry-wide.

And for those who want to dig deeper, I'd point you to a recent Kagan modeling that has been done by the industry and a couple of our customers specifically referenced.

In there, we see a nontrivial proportion of the new Cable Access spend projected over the next couple of years slosh into DAA.

I do think underneath that, different customers are progressing at different paces.

So we have one large customer, who I think on a recent Heavy Reading webinar said they're going to be beginning rolling out in volume in the fourth quarter of this year.

We don't think that's every MSO by any means.

But certainly there are some who are leaning into it and leaning into it heavily.

So I guess, you also asked about market share.

I mean, to me, this is kind it's a brand-new blue water kind of scenario, so it's -- I don't know if that's the best analogy, but I mean, it's a little bit, from our perspective, it's more of a question of landgrab initially than it is kind of market share sloshing around.

We think this is a new space.

We think we've got significant technological advantages, and we also think we've got an operational deployment experience head start with at least a couple of the early adopter operators.

So it's a new space.

It's growing.

It's not growing as kind of uniformly across all the operators, but there's a couple big ones who are quite aggressive.

And we think that we're positioned at the right place to be capturing a kind of a pole position kind of from day 1 here.

And it doesn't mean our visibility is perfect, but it does mean that we can see it moving.

And I think our Q3 results speak to the fact that we're pushing product out the door specifically in the service of this activity.

And our next question comes from Steven Frankel of Dougherty.

Patrick, I'd like to go back to CableOS and this notion of you have 25 customers in some form of deployment or field trial.

And maybe if you can give us a feel for how many customers have completed their field trials.

And have there been any cases of a customer doing that and not talking to you about moving forward with the deployment?

The answer to the last part of the question is no.

But to be clear, there's some who are moving more quickly and aggressively than others.

Nobody has said, yes, "That's not for us," but I think the question is out there for several operators exactly with what pace they'll be rolling out.

We talked about 480,000 end consumers being fed, Steve, and that's a -- the majority of that is a minority of the 25 that we're engaged with so far.

So there's only a couple that have really deployed in real volume, but we're encouraged by a number of engagements, both those that have hit volume in the field and those that, I'd say, building towards that.

So it's a little bit all over the map with the different operators, but as I said earlier, we're encouraged by the logos, if you will, and the encouraging progress we're receiving across the board as well as having hit this volume milestone of nearly 0.5 million consumers being fed active commercially right now.

And you've obviously talked a lot in your guidance about this visibility issue around nodes.

How do you get a handle on that inter-quarter?

Are you getting any feedback or any visibility into nodes actually being deployed?

Or your feedback is simply going to be that they call up and order software and that's how you know you've kind of moved from one milestone to the next?

No, we're working very closely with our customers on this.

I mean, it is new technology, and so I think we and our customers are learning as we go.

I don't know if you'd call it the bleeding edge, but it's certainly the leading edge.

And I think we'll be open about the fact that there is a lot of learning and discovery going on.

I meant it's a little bit painful, but I think that, that's what happens when you're leading this.

The good news is we're acquiring those experiences that I think are operationally part of the value proposition we'll be bringing to the next round of customers.

So no, we're actively engaged in what's happening in the field across all of our customer accounts.

And so there's a heavy dialogue between our deployment team, our field support team, our account management organization and the rest of the company.

And if I go back to the beginning of the year, I had some discussions with you and others at Harmonic.

And there was this notion that nodes are commodities and we don't really care in the end if we get the node as long as we get the software.

But it sounds like you've at least captured a lot of mindshare in the node business and you're talking some good numbers here.

Has that changed over time and that now you want to sell nodes in every case that you can?

Well, we're looking to grow the business however we can.

There's no doubt that the nodes are a lower margin, lower gross profit element of the solution.

That being said, particularly in early days, and although we've been involved in a lot of interoperability testing, the early customers just wanted to work, so I think there's a lot of value in bringing the whole end-to-end solution.

So that's one piece of it.

But certainly, another piece of it is for every node that we deliver, we believe that there's a virtualized CMTS software license that's going to come.

And so from that perspective, we're happy to get them out there and to get to these early DAA systems going not only because of the gross margin profit associated with the node itself but also because of the companion license.

And as Sanjay was saying earlier, if you think about this business on a blended basis, the blended margin point is quite interesting.

In early days, we see the node volume curve out in front of the software license piece of it, but the licenses will come.

And on a steady-state going forward business, it's an attractive blended business.

Yes, I'll just add to it that the nodes are very much still accretive to our margin dollars as well as to the bottom line.

And like, for example, in Q2 for Cable Access, we saw a margin of approximately 50%.

This time, it's 39%.

So it's always a mix of nodes and software.

And as far as they're accretive and adding to the bottom line, we'll go for it.

And as we scale more, we should improve those margins as well.

So I think it's a good business to be in.

Okay, great.

And then Sanjay, I don't want to leave you out.

So in terms of your cash guidance for Q4, what scenario gets to the low end?

It would seem to me like Q4 would be a cash-generation quarter, but that's not necessarily implied in your guidance if I have the numbers correct.

It should be, Steve.

What we are seeing is as there is this $10 million range and how much of cash we will need to keep for working capital changes, that is something we are keeping a reserve for.

Otherwise, if that equation bodes well, we should be in the middle or close to the high end.

But there's a working capital piece which we are not very clear on.

That's what it really entails.

And then, you mentioned that you kind of engineered your way around the tariffs.

Has that come at any gross margin cost or you're kind of -- you had enough visibility to this year that you're able to do this without sacrificing gross margin?

Not at all, no impact on gross margin.

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

Congrats on the ongoing cable ramp.

That's kind of the focus of my first question, which is to say if you look at what you saw sequentially in terms of Cable Access growth, that was a pretty sharp increase.

It looks as if Comcast overall at a customer was just up slightly.

So I wonder if we could look at those 2 facts and conclude that your Cable Access business is diversifying a bit.

And what are your expectations there for how important large Tier 1 operators will be in the overall mix of business over time versus what seem to be a growing number of Tier 2 and even Tier 3 type operator opportunities that in the aggregate look like they could be pretty material, too?

Yes, I think it's a good question or a good observation.

We were quite clear that early on, the focus was on Tier 1, not only because that's -- like the bank robber said, that's where the biggest volume is -- or the money is, but also because in this industry, the Tier 1s are influential.

That being said, we have expanded out and I think the Buckeye case study is a great one, a medium-sized operator who very forward-looking and absolutely a great win for us and highly respected operator and an engineering team here in the U.S. in particular and influential.

So we're definitely spreading our wings.

And I mean, maybe it's an easy answer, but longer term, I expect our revenue to somewhat be proportional to where the subscribers are.

Certainly, in a concentrated industry with a couple of big players domestically, a couple of really big players in Europe, et cetera, our aim is to do well with the biggest players.

But equally, half the market is -- at least half the market is what I'd call the midsized and smaller operators.

And in many instances, those smaller operators are -- can be more aggressive about embracing newer technology, taking advantage of real efficiencies.

And in many cases, they're the ones who have to fight the hardest in terms of competitive dynamics, competing against telco services, coming 5G, what have you.

And so we're actually impressed by the resonance we're seeing with what I'd call the medium and smaller-sized operators both in this country and in other countries.

And so it's over time we're excited about not only the Tier 1 opportunity but the other guys as well, as your question suggests.

Fine.

Let me maybe focus more back on the Tier 1s.

And you referenced an article today, and that's certainly been my observation in the weeks heading up to the cable show and at the show itself.

Comcast has been, I think, more vocal with regard to their commitment to this technology and really making a lot of noises around accelerating deployment.

How do you contrast that with your -- the range of your guidance in Q4 for Cable Access?

And your sort of commentary there, is it really, I guess, maybe should we distinguish between a pretty significant commitment to roll the technology out versus kind of operationalizing that on a quarter-to-quarter basis is the real swing factor here?

Yes, I mean, I guess, 2 comments.

One, if you do check out this Fierce Telecom article, I mean, as you say, my reading of it is twofold: number one, a strong commitment to the architecture; but at the same time, candid acknowledgment of the broader operational challenges of doing something new, and I think we all understand that.

And so what I don't understand, those executives or frankly executives at any one of the other large MSOs as being too focused on just the coming quarter.

They're talking about where their focus is over the next couple of quarters to a couple of years.

And I think from that -- obviously, we're tightly focused on executing quarter-to-quarter.

But we shouldn't lose sight of the fact that this is an opportunity that is ramping and will be ramping over the arc of the next couple of years, and I think the recent commentary from cable operators really speaks to that.

So our objective is obviously to manage the business quarter-to-quarter but make sure that we not miss the forest for the trees, if you will, and that is the broader opportunity that is clearly building.

And as you say, I think that the commentary of several cable operators at the most recent Atlanta event and some kind of press and webinars leading up to that makes it clear that they're tooling up for I'd almost call it broadband 2.0, a real step-up in terms of the service capability that they're rolling out and not only to residential customers but also to business customers.

And I mean, you just have to be impressed looking at the opportunity and their collective commitment to maximizing the opportunity through investment in new technology and architectures.

Okay, great.

And I will finish up with one question, moving back to bookings and order trends.

And I just want to make sure I understand something you said, Sanjay, but to preface that, you've had pretty strong to very strong order bookings really for the last 5 quarters or so.

Book-to-bill is above 1. Including what I think was in Q4 of '17 a very strong video bookings-driven number, you also look back to your point, historically, you've been down about 20% sequential in Q3 back when there was no CableOS business.

So should I infer from that, that most of the booking weakness or decline that you saw in the quarter, is that historically seasonally on the Video side?

And do you have any comment about kind of the cadence or seasonality of bookings on the Cable Access side?

And the question I had is, Sanjay, you said you think that you expect the trend to continue.

I don't know if that trend was working through backlog in Q3 or building it for the previous 5 quarters.

I heard your book to bill question, but I just want to come back -- answer, but I just want to come back to that.

So the trend we saw in 2017, and that's just because the 2017 first half was very different than the second half, so 2017 per se is not like, I would say, is directly representative of what the trend should be.

But if we leave last year and go back to prior years, you'll see that's the range we fall in Q4, which I mentioned earlier.

But at the same time, I'll also acknowledge that as the CableOS business ramps up, the ratios of historical trends for our total bookings to total revenue may not exactly make sense going forward.

So there's a little bit of adjustment needed for how the cable business is playing in the entire book-to-bill ratio and the conversion.

So it's not very clear; hence, the reason we don't guide for it for Q4.

But for Q3, what we saw is definitely more on the video side, which was seasonal, which I mentioned earlier.

I hope that provides some color on the booking.

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

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

Well, it's time for us to thank you all for joining us today.

We appreciate the support, and we look forward to speaking with you all again soon.

Good afternoon.

Okay, 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.