Harmonic Inc (HLIT) 2019 Q1 法說會逐字稿

Welcome to the Q1 2019 Harmonic Earnings Conference Call.

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

(Operator Instructions) 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 2019 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 the webcast portion of our IR site.

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 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 to GAAP, are contained in today's press release, which we posted on our website and filed with the SEC on Form 8-K.

We will also discuss historical, financial and other statistical information regarding our business and operations, and some of this 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.

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

Well, thanks, Nicole, and welcome, everyone, to the Q1 call.

Starting with our financial headlines.

Revenue was $80.1 million, gross margin was 54.5%, EPS was minus $0.05, and we generated $4.2 million of cash from operations.

Strategically, there was a lot of positive activity that we're looking forward to updating you on today.

At the top level, our CableOS initiative continues to progress.

Our lead Tier 1 customers made good progress in preparing for the Q2 and Q3 launches in multiple global cities, while our first wave of midsize cable customers further expanded their CableOS deployments, with total cable modems served over 670,000 at quarter-end.

In our Video segment, we saw a material step-up in both SaaS deal pipeline and in new SaaS customers, and we delivered our seventh consecutive quarter of Video segment profitability.

Now taking a closer look at our Cable Access segment.

There's no question, CableOS momentum is strong and building.

We've continued to expand and diversify our customer base.

The global number of commercial deployments and field trials was 32 at quarter-end.

Among these are several bellwether Tier 1s, including 4 of the top 8 North American and European cable operators.

As anticipated, this activity has not gone unnoticed by other operators, and during the quarter, we signed an important new agreement with the National Cable Television Cooperative to jointly offer CableOS to the co-op's over 750 cable operator members.

Through the end of Q1, paid CableOS deployments were powering DOCSIS 3.1 broadband service for over 670,000 residential and business cable subscribers, up 24% sequentially, demonstrating that our fully virtualized technology can and is being deployed and operated at scale.

We've also continued to extend our competitive advantage through new innovations.

Since the beginning of the year, we've made 8 new unique patent filings, further strengthening our already strong intellectual property position in both virtualized CMTS and distributed access architectures.

And turning now to the outlook, we're incredibly focused on our ongoing work with several Tier 1 operators, each of whom are planning to roll out CableOS this year as the core of their new distributed access architecture, or DAA, initiatives.

Now we acknowledge that this process of both getting our CableOS technology fully qualified, and also, jointly with these lead customers, designing and integrating the full end-to-end distributed network architecture, has taken longer than originally anticipated.

However, we see light at the end of the tunnel.

With 1 Tier 1 customer beginning volume deployments this quarter, Q2, where 2 other Tier 1s are driving hard toward aggressive Q3 rollouts.

One of these is the international operator we told you about last year when we announced having signed a greater-than-$50 million contract.

During Q1, this operator was our company's largest booking customer, and our supply chain has now been further ramped up to support them.

Although as Sanjay will discuss momentarily, we don't expect recognizing much revenue from this customer until the second half of the year.

So big picture, our view continues to be that these Tier 1 operators, together with previously announced midsized customers Com Hem and Buckeye, and now, several NCTC-member cable operators, really are the industry trendsetters.

Corroborating this view, the latest market research presented at the Light Reading cable conference just held in March, shows unequivocally that the market is pivoting our way, that is on a path to become dominated by virtualized CMTS and distributed access technologies, growing to just under $2 billion by 2023.

We therefore maintain our positive financial outlook for our Cable Access segment.

Specifically, our full year guidance is unchanged, powered by both scaling Tier 1 deployments throughout the second half of the year and by a rising tide of business from smaller- and medium-sized operators.

So in summary on cable, public market data, our own recent orders and backlog and our visibility into our customers' detailed deployment plans all cause us to remain confident that CableOS is poised to create real value for our customers and our company in 2019 and beyond.

So turning now to our Video segment.

Here also, a strategic transformation to a new value-enhancing business model is taking hold.

Essential to the video transformation has been the move from our historically broadcast-centric appliance business to a more profitable and predictable over-the-top streaming business, where we provide our technology as either software running on COTS servers or Software-as-a-Service running on public, private or hybrid cloud.

And the story of the first quarter was a significant step-up in customer dialogue around our SaaS.

Through the end of the first quarter, over 6.5 million consumers worldwide were receiving live 24/7 video services created and delivered through our VOS SaaS, up 70% year-over-year.

This is impressive operational scale, steadily transforming the market's perception about the quality of service possible from a cloud-based 24/7 live video SaaS.

And behind this consumer scale statistic is a growing base of video service providers using our SaaS, #25 at quarter-end, up 32% sequentially.

Recently announced video SaaS customers include PCCW in Hong Kong, Siminn in Iceland, and INDYCAR, who went from start to on-air with a beautiful live sports picture in an amazingly fast 5 weeks.

To help us further accelerate this SaaS growth, we recently announced a compelling new partnership with Akamai and Microsoft Azure.

Through this partnership, our VOS360 SaaS, which is run mostly in AWS to date, will now also run on Microsoft Azure with Akamai as the CDN delivery partner, giving media companies both best-in-class and easy-to-scale services, and therefore enabling them to efficiently capitalize on growing consumer demand for high-quality video streaming.

Azure's global footprint provides us access to data centers worldwide, aligning well with our global over-the-top streaming strategy.

Not surprisingly, our SaaS deal pipeline has grown substantially in terms of both absolute dollars and percentage of total video business pipeline.

While this is good news from a strategic point of view, positioning us for an increasingly rich mix of recurring revenue, growing SaaS deal pipeline also creates a short-term booking and revenue headwind evidenced in the first quarter because we're finding the SaaS sales cycle is taking longer as the industry is still climbing the SaaS learning curve.

And that said, our first quarter Video segment financial performance was solid.

Our combined SaaS and service revenue, that is the recurring portion of our Video segment revenue, was $24.1 million, accounting for 36% of total segment revenue.

Segment gross margin was again a healthy 57.5%.

And despite the transformation activity and associated near-term headwinds, we kept the business profitable for the seventh consecutive quarter.

And so in summary, considering both our Cable Access and Video business segments, we've invested and innovated for the future, transforming our business with industry-leading cloud-native technologies and services that are now beginning to empower our customers in new and strategically important ways.

And consequently, we believe our business is well-positioned for long-term growth and value creation.

And on that note, I'll now turn the call over to you, 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'll be referring to are provided on a non-GAAP basis.

For the first quarter of 2019, revenue was $80.1 million, at low end of our expectations.

However, this was balanced by strong gross margins of 54.5% at high end of our expectations and lower operating expenses of $47.5 million, resulting in a $0.05 EPS loss, which are at the midpoint of our guidance range.

These results were coupled with strong cash of $69.9 million and book-to-bill ratio greater than 1, positioning us well for the rest of the year.

Turning to Slide 6 to take a closer look at our Q1 results.

Revenue of $80.1 million compares to $113.6 million in Q4 '18 and $90.2 million in Q1 '18.

The sequential decline reflects typical seasonality while the year-over-year decline reflects broad and customer transitions in both segments, which I will cover momentarily.

We will now turn to our segment revenue and results.

Cable Access revenue was $12.9 million, above the midpoint of our guidance range compared to $24.1 million in Q4 '18 and $18.5 million in the year-ago period.

While we steadily ramp the CableOS and DAA activity in our Cable Access segment over the past 4 quarters, you will recall that our Q1 guidance anticipated a pause by a couple of Tier 1 customers who were temporarily slowing to implement trial-informed improvements to their system architectures before volume deployment.

As I will explain momentarily when I discuss guidance, we expect this delay to be resolved during the second quarter.

In our Video segment, we reported revenue of $67.2 million compared to $89.5 million in Q4 and $71.7 million in the same quarter last year.

The sequential comparison reflects typical seasonality while the year-over-year comparison reflects the combined effect of a shift in timing of certain deals from the first quarter to later in the year, and that factor gets mentioned growing customer interest in SaaS.

As we put more emphasis on SaaS, we have seen that SaaS opportunities are taking more time to close relative to our traditional appliance-based video processing opportunities, thereby creating a near-term impact on bookings, backlog and upfront revenue.

To be clear, we are pleased that our SaaS pipeline has significantly improved sequentially, and we understand the initial revenue delays are an inherent short-term impact of a SaaS transition journey.

Gross margins were 54.5% in Q1 compared to 54.5% in Q4 and 55.3% in Q1 '18.

Cable Access gross margin was 39.3% in Q1 compared to 43.6% in Q4 and 46.7% in Q1 '18.

The sequential decline was a result of product mix.

Video segment gross margin was a healthy 57.5% in Q1, consistent with both Q4 and Q1 '18.

We are particularly pleased that we have maintained strong Video margins despite softer video revenues in the quarter.

The sustained high-50s Video segment margin is due to a consistently higher mix of software and services.

I want to highlight a revenue classification change we made in the income statement this quarter to provide more transparency into our recurring revenue.

We had previously classified our total revenue in 2 categories: products and services.

To better reflect the nature of our business and sharpen the focus on our revenue priorities, we have updated our revenue categories to appliance and integration, and SaaS and service.

Now appliance and integration revenue category comprises of nonrecurring hardware, software licenses and professional services revenue.

The SaaS and service category consists of ongoing usage-based fees from our SaaS subscription offerings and support revenue from our appliance-based customers and reflects our recurring revenue streams.

We have continuously been strengthening our recurring revenue base, focusing on innovative new support services for our traditional appliance-based solutions, and as just mentioned, expanding our new cloud-based SaaS offerings.

During the first quarter, our SaaS and service revenue represented 34.6% of our total revenue compared to 26.8% in Q4 '18 and 29% in Q1 '18.

Our recurring revenue category has higher gross margins than our appliance and integration category, thereby setting a stage for long-term margin expansion as we expand our SaaS and services revenue.

Our total gross margins on SaaS and service were 61.3% in Q1 '19, 64.5% in Q4 '18, and 56.3% in Q1 '18, demonstrating solid year-over-year margin expansion.

The modest sequential decline in SaaS and service margins was primarily a result of timing delays of closing certain renewals.

And going forward, we may experience similar fluctuations between quarters.

Our SaaS customer base increased from 13 customers in Q1 '18 to 19 customers in Q4 '18, and now, to 25 customers in Q1 '19, growing 32% quarter-over-quarter and 92% year-over-year.

We are still in the early stages of our SaaS evolution and expect to continue to steadily expand our installed base.

We are replacing our ARR metric, which was purely limited to new SaaS customers, with a measure called recurring revenue, which is our SaaS and service revenue.

We believe this change will provide a more complete view into our total recurring revenue stream.

Coming back to the income statement on Slide 7. We maintained strong expense controls during the quarter, and as a result, our Q1 operating expenses were $47.5 million, below our guidance range and lower than our operating expenses in both Q4 and Q1 '18, which were $49.3 million and $49.4 million, respectively.

The sequential decrease is primarily reflective of continued expense management, seasonally lower sales commissions and recovery of certain previously reserved receivables.

Our Q1 operating loss was $3.8 million.

This is a net result of our Video segment, which contributed $2 million of operating income, offset by our investment in our CableOS program, which resulted in operating loss of $5.8 million.

Our Q1 operating loss of $3.8 million compares to an operating income of $12.7 million in Q4 and $0.5 million in Q1 '18.

We ended with weighted average shares of 88.2 million compared to 89 million in Q4 and 83.9 million in Q1 '18.

The year-over-year increase in basic shares is due to issuance of ESPP and performance-based compensation shares during the quarter.

Q1 EPS was a loss of $0.05 compared to $0.04 EPS income -- excuse me, compared to Q4 EPS income of $0.11 and a loss of $0.01 in Q1 '18.

Q1 bookings were $81 million compared to $92.8 million in Q4 and $102.6 million in Q1 '18, resulting in a book-to-bill ratio of 1.01.

Bookings were down modestly year-over-year for the reasons mentioned previously, our improving efforts to convert historically appliance-based video customers to cloud-based SaaS and an anticipated temporary pause in DAA rollout activity by a couple of Tier 1 cable customers.

While not visible in bookings and backlog yet due to the inherent headwinds I mentioned earlier, our pipeline of SaaS opportunities has grown significantly, both quarter-over-quarter and year-over-year.

We are looking forward to seeing bookings rebound as our customers' understanding of benefits of SaaS offerings mature and SaaS deals' time-to-close reduces.

We will now move to our liquidity position and balance sheet on Slide 8.

We ended Q1 with a cash of $69.9 million.

This compares to $66 million at the end of Q4 and $52 million at the end of Q1 2018.

The sequential increase in cash of $3.9 million is a reflection of cash generated from operations of $4.2 million, offset by net cash used in investing and financing activities of $300,000.

Our day sales outstanding at the end of Q1 was 66 days compared to 65 days in Q4 and 75 days at the end of Q1 '18.

Our days inventory on hand was 72 days at the end of Q1 compared to 45 at the end of Q4 and 56 days at the end of Q1 '18 as we get ready for our increased shipment activity in both segments for the second quarter.

At the end of Q1, backlog and deferred revenue was $187.2 million.

This compares to $186.4 million in Q4 and $224.4 million in Q1 '18.

While the backlog and deferred revenue appears to be very similar to the 2018 year-end, there is a significant shift in the backlog of Cable Access segment.

Cable Access backlog increased by 38% quarter-over-quarter.

In summary, the start of the year was reasonable in terms of overall financial performance compared to our expectations.

Strategic progress was solid, and therefore, we expect our remainder of 2019, particularly the second half, to deliver improved financial performance.

Now let's turn to Slide 9 for our Q2 '19 non-GAAP guidance.

The second quarter is expected to be critically important to our business and to set the company up for a strong second half.

In Q2, we expect video bookings to rebound as SaaS pipeline conversion improves and Cable Access bookings to rebound as our Tier 1 cable operators prepare for CableOS deployments, ramping up in the second half.

In terms of our guidance for Q2 2019, we expect revenue in the range of $80 million to $90 million, with Video revenue in the range of $70 million to $75 million and Cable Access revenue in the range of $10 million to $15 million; gross margins in the range of 52.5% to 53.5%; operating expenses to range from $51 million to $52 million; operating income to range from a loss of $10 million to $3 million; EPS to range from a loss of $0.11 to $0.05; an effective tax rate of 12%; weighted average share count of 88.9 million; and finally, cash at the end of Q2 is expected to range from $60 million to $70 million.

Turning to our full year outlook on Slide 10.

We expect revenue in the range of $385 million to $430 million, with Video revenues in the range of $285 million to $300 million, and Cable Access revenue in the range of $100 million to $130 million.

As you can see, for our Cable segment, our original full year expectations are unchanged, and with even greater visibility into our largest customer's deployment plans, we are quite confident in reconfirming our previous annual guidance.

Regarding Video, having seen through the first half and the trend of more-than-expected traditional opportunities moving to our SaaS pipeline, we believe it is prudent to modestly decrease our full year segment guidance, so we are taking the Video guidance down modestly by $10 million at high-end and $5 million at the low-end.

Gross margin in the range of 50% to 53.5%; operating expenses to range from $195 million to $205 million; operating income to range from a loss of $12.5 million to an income of $34.6 million; EPS to range from a loss of $0.19 to a profit of $0.27; an effective tax rate of 12%; our weighted average share count to range from 89.3 million to 91 million shares; year-end cash to range from $65 million to $85 million.

In summary, this is a critical year for our business, and we remain very focused on execution.

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

Okay.

Thanks, Sanjay.

Perhaps tackling your final comments there, we want to wrap it up by highlighting our strategic priorities and expectations for the remainder of the year.

For Cable Access business, our objectives are to further scale our current CableOS deployments; to secure new design wins with additional operators such as the National Cable Television Cooperative members; and most importantly for this year, to ensure our Tier 1 customers' volume DAA deployments through the second half are successful.

For the Video segment, objectives are to continue our journey to becoming the leading live over-the-top streaming solution provider; to leverage our SaaS offerings and associated relationships with Microsoft Azure and Akamai; to expand our addressed market, tapping into new higher-growth customers and business models like the recently announced INDYCAR relationship; and to deliver consistent segment profitability just as we've done over the past 7 quarters.

So I want to close by thanking our strategic customers and partners, our talented team members and our stockholders for your continued support.

With that, we'd now like to open up the call for questions.

(Operator Instructions) And our first question is from John Marchetti from Stifel.

Just wanted to jump in real quickly here, Patrick, on the guidance and the outlook, particularly in the CableOS segment.

Not surprisingly, given the guide for Q2, it implies obviously a very, very healthy ramp just to even get to the low end of the full year outlook.

You mentioned one customer coming in a little bit in 2Q, seeing that hopefully expand into Q3 and Q4 as we go through the year.

Just curious if -- from your perspective, if that visibility, relative to where we were this time last quarter, has actually improved?

If you're actually seeing some of that momentum?

Or if it's more still just dialogue at this point?

Just trying to get a little bit more comfortable with that implied second-half ramp.

Yes.

Thanks, John.

The visibility has definitely -- has improved substantially.

We -- frankly, we had good visibility in the fall, as we mentioned and Sanjay just alluded to, coming out of a couple of significant scale trial activities.

So there was a couple of major architectural change decisions made by our lead customers.

And going into the beginning of the year, frankly, there was a little bit of uncertainty about the exact timeframe that those could be implemented and how we would kind of get back on track.

But the good news is all that work is just about done and we feel as though we're largely currently getting back on track.

And as a result of that, we've got extremely detailed insights into plans for the remainder of this quarter and the remainder of this year.

And our reconfirmed guidance is based on those detailed plans.

So we're not just talking about verbal dialogues here, but we're talking about very detailed spreadsheets, and frankly, plans that we're investing in, putting our money behind, and our customers know that in terms of our supply chain, et cetera, as I think Sanjay also referred to.

I mean I can tell you that I've been in personal contact with senior executives of our lead Tier 1 customers all within the last several weeks or months, reconfirming my team's understanding and our joint expectations, us together with our customers, for what we're going to achieve together.

So this is not a broad-based statistical ramp we're talking about.

Indeed, it is a real step-up as you suggested or have noted.

And instead, it's a couple of very big guys turning on in a significant kind of way.

It doesn't say that there's no risk, but our confidence around that, our visibility into that is quite high.

And consequently, there's a lot of determination and excitement right now within our company.

And maybe as a -- oh, I'm sorry, go ahead, Sanjay.

Sorry.

Go ahead, John.

No, I was just going to say, maybe as a follow-up to that, there's obviously some concern that if these do continue to delay out or push out a little bit, that it has the potential to change the competitive landscape a little bit.

And I'm just wondering, Patrick, if you could comment for a minute or 2 just on sort of what you're seeing there, particularly in light of some of these delays that seem to be taking a little bit longer than some of us had hoped for.

Listen, I still -- I don't -- we don't know what we don't know.

But everything we do know -- these aren't just DAA deployments.

They're deployments in architecture that depend critically on the virtualized, actually, cloud-native aspect of our CableOS offering.

And we have not heard of anything else being even demoed in the lab successfully competitively.

So it's hard to imagine, frankly.

I think it's not prudent to ever be overconfident, but it's hard to imagine that there is a serious threat in the near-term competitively around the cloud-native or virtualized aspect of this.

Again, it doesn't mean we're overconfident, I hope.

But it's not something that we see as a realistic risk in the near term, John.

And then maybe if I can just sneak one last one in on the Video side real quick.

Sanjay, could you quantify at all maybe what the actual sort of revenue headwind that we're facing?

As SaaS has ramped up, it seems a little bit quicker than you had anticipated certainly in the first half of this year, and it looks like that's expected to continue just given the reduction to the full year outlook.

Yes, John.

So let me tell you that for the first quarter, we expected approximately 5% of our bookings to come from SaaS.

And for the whole year, we are planning 5% to 10%.

In Q1, we were slightly behind the plan and for the reasons which I discussed in my prepared remarks.

But all the opportunities are still with us and still in the pipeline and as the year progresses, we should be able to close them.

And the headwinds in terms of SaaS are actually of 2 categories: One is just a ratable recognition versus upfront, which is kind of baked in the plan.

But the second headwind basically is the delay of sort of ratable revenue itself.

And as the booking expectations are now being based on a longer sales cycle, so they'll take more time to close versus the plan.

So -- and if with the SaaS bookings are getting delayed versus our planned timing, we will see more or less headwinds for that for recognition.

And the impact is also coming on appliance bookings as well for the same reason.

So the impact is modest as of now in Q1.

But as the pipeline time-to-close improves, we may be able to get back, and hence, we have taken a prudent approach for the Video business for the year.

Rich Valera from Needham & Company is online with a question.

Looking at that back-half ramp, Patrick, I'm wondering if you could give any color on your expectations for kind of the hardware-software mix there.

Clearly, if it's hardware, that would require a very significant production ramp for you, but if you could give any color around how you think about that in terms of kind of nodes versus licensing that you can kind of turn on with a key.

Well, it's going to be really the first real volume of the whole package.

So we do expect, as these are DAA, we do expect it to be node-rich and, frankly, heavier than on average in the past.

And I think that's what is behind some of the margin trends that Sanjay communicated.

But we expect to go along with that, the CableOS software licenses.

So as we've noted in the past, at least qualitatively, you can expect, and we expect, more hardware revenue than license revenue but probably more gross profit associated with the software licenses, giving us, on balance, the target margins for the CableOS business that we've talked about.

So it's -- we think it's going to be the things that we've been looking forward to for a while, the balanced mix of the 2. Sanjay, anything else to elaborate on that?

Yes.

No, I'll just give some more color.

In terms of the guidance, if you look at the guidance for Cable segment, is -- margins we use are in the range of 35% to 45%, and I think midpoint close to 40% is what we would expect depending upon how the product shift mix changes.

But we will see both in Q3 and Q4 how it shapes up, but I think having an average of 40% is the right mix.

And if you see like last year, we got close to 44% as well, and we had a decent mix of hardware and software.

So I think the mix is going to improve in outer years.

And as the DAA rolls out completely, we may shift of more licensing coming on later.

But this year, 35% to 45% is a range we've used.

And from our experience of mostly simple order Q1, which was primarily hardware-dominated, we came at 35% in our guidance for purely Q2.

So I think that gives a shape for the mix for the second half.

Got it.

And one more, if I could, around your Tier 1 customers.

Patrick, it sounds like from your comments that there are 3 total Tier 1s you expect to ramp in the second half, just wanted to clarify that.

And then I was hoping you could repeat and/or add to the comments around your international Tier 1 customer that sounds like you're expecting significant bookings from in Q2, if not, I think, you expect to be your largest bookings customer.

So if you could just elaborate on those 2 points, I'd appreciate it.

Sure.

So just the beginning, we've highlighted among our customers, we said there's 4 of the top 8 operators.

So what we're referring here specifically the Tier 1 is 4 out of the top 8 across if you look at North America and Europe combined.

So there's domestic and international in there.

And indeed, 3 of the 4, we expect to really get rolling with significant volume before the year-end.

One of those 3, we -- is on the cusp of getting going here in Q2.

And the other 2, we expect to be kind of the light to turn green in Q3.

So that's -- I guess, I think that's one part of it.

The fourth Tier 1, I think we're a little less confident about when real volume starts.

They're perhaps a little bit behind the other 3.

So 1 of the first 3 is -- I just wanted to tie back to something we've talked about before, 1 of the 3 who is going to get going in a high-volume way is the same international operator -- unfortunately, still unnamed -- that we referred to a couple of quarters ago when we said we signed the largest contract in company history, over a $50 million deal.

And the point that I wanted to highlight here is although we've yet to recognize revenue, and in fact, although they have yet to start deploying in the field in volume, their confidence has risen to a level where against that contract now, they've started a significant flow of orders to us.

And in fact, in terms of order input, they were our largest booking customer in the first quarter.

And we've already had a strong start to the second quarter with this customer as well.

And so we're convinced enough that we have ramped up our pipeline additionally from where it was in the fall to accommodate this additional value -- volume, excuse me.

And so we're looking forward to that activity really being a big impact as part of the combined Tier 1 activity between now and year-end.

I'll pause there.

Rich, does that answer the question?

Yes, that's exactly what I was asking for.

Steven Frankel from Dougherty, your line is now open.

Patrick, I'd like to go at this visibility question maybe a little different way and maybe you can help me connect the dots.

So you mentioned that you have increased visibility, you have a customer that's going to ramp in Q2.

Now we don't see that ramp in the revenue.

Is that because the ramp in Q2 is actually that customer putting the Remote PHY notes that they purchased last year out in the field and starting to ramp up deployments?

Or are you saying there's a revenue ramp at that customer that's not in the guidance you gave us today?

They're -- it's mostly the former, Steve.

As you do recall, clearly, we booked and we shipped a pretty heavy volume of nodes in the back 1/3 of last year in anticipation of this ramp starting really at the end of the year.

We had that pause.

And some of them have been consumed.

We now expect the consumption to really grow.

So the Q2 part -- the biggest part of the Q2 ramp with this customer is consuming stuff that's already been purchased and delivered.

And Steve, to that point, I'd like to point out some data points which are very clear to us in -- from the numbers.

And if you look at our total backlog, as I pointed in my prepared remarks, Cable backlog is up 38% quarter-over-quarter.

If you look at inventory, it's up -- it's 72 days versus 45 or 56 days in comparable periods.

And this number of days is up primarily because of our DAA nodes, which we've been manufacturing.

And not only just the inventory, if you look at our off-balance sheet purchase obligations, including inventory, for our total Cable business, it's up 24% quarter-over-quarter and actually 60% year-over-year.

And the trend you see in the Q1 bookings and also the Q2 bookings to date for Cable are in a very similar ratio of what we expect the ratio of annual Video and Cable revenue to be.

So the bookings -- current bookings are aligning in the same fashion as we expect the revenue to shape up, which gives us a lot of confidence that it's coming back in shape.

And as Patrick pointed out, we have this more than $50 million deal with a large Tier 1. We received a significant piece of bookings in this quarter, and that's approximately $9 million we have received of that.

And the revenue of that is very minimal at this point.

So all these facts give us the confidence for the second half.

Great.

And then on the Video SaaS transition, where do you expect this new metric of SaaS plus service to be by for the full year?

So we had 35% recurring revenue for Q1, as I pointed out, approximately.

And -- but there's a split.

Video is approximately 36% and Cable is 28%.

Our expectation for full year is total around to be 30%-plus.

But again, for Video and Cable, the ratios are different.

So let me tell for Video for the whole year, it's going to be a little higher than Q1 because of our growing SaaS portion, say, is going to grow to 36%-plus.

But for Cable, as second half ramps for CableOS, that revenue will mainly qualify for appliance and integration category and i.e.

the nonrecurring category.

So we should expect SaaS and service revenue not as high as we saw in Q1, so it could drop to 10% to 15%.

But overall for the whole company, we expect it to stay at 30%-plus.

And we believe this is a very strong indicator of significant and stable income cash generation, especially when we are transition in both the segments.

And if you leave the percentages apart, if you just look at the absolute dollars, we believe the total absolute dollars has to grow.

We expect the absolute dollars to grow from -- exceed from high $20s million to at least mid-$30s million.

Okay.

And then on this SaaS move, would you characterize these as new or -- new customers like an INDYCAR?

Or are you also seeing increased demand from your traditional broadcast customers that are now essentially moving away from appliances to SaaS as they bring up incremental applications?

It's definitely both, Steve.

For example, recent press releases covered both.

INDYCAR is absolutely a new kind of customer.

And particularly, we think they're -- increasingly, we think that there's a real sweet spot around new players dealing with live sports.

That being said, we also announced PCCW, who is the incumbent telecom operator in Hong Kong and a real mind share leader in the broader Asia theater.

And that's a case where they're a traditional -- historically, they've been a traditional appliance customer and they are pivoting now to SaaS.

So we're dealing with both.

And in particular, the latter, the traditional guys, I think it's where I'd characterize it as a headwind.

Where traditionally, we would close a new appliance deal quite quickly, having that dialogue around okay, what are the new economics, what's the new operating model.

If they pivot to a SaaS platform, it's -- there is a learning process there.

And I think it's understandable.

But ultimately, it's a very positive trend that more and more of incumbents are looking at this.

And it's also a positive trend that we are expanding the addressable market to new over-the-top players.

Simon Leopold from Raymond James is online with a question.

This is Victor Chiu in for Simon.

Thanks for the detail and the insight into the expectations for the second half Cable growth.

I was just wondering if you could help us understand the dynamic maybe a little bit of the expected growth from these 3 or 4 cable customers.

Are they replacing entire chunks of legacy footprint?

Are they adding virtual CCAP from new deployments or a mix of both?

It's a mix of both.

Let me, I guess, make 2 comments.

DAA is all about pushing fiber deeper and significantly stepping up the capacity of the network to deliver kind of the quantum step-up in broadband data rates to consumers.

Some operators have already started that with legacy and are now going to pivot, and that's the case of one of our lead Tier 1 customers.

And others are kind of waiting for this to begin the initiative of pushing fiber that much deeper.

So it is a little bit of both with these particular Tier 1s.

But Victor, by focusing so much on the Tier 1s, I want to make sure it doesn't get lost, if you'll allow me, the fact that it's not just about that.

I know there's been a lot of interest and we put a lot of focus -- we have a lot of focus on scaling our Tier 1 customers.

But at the same time, I don't want -- I hope it's not lost that even before we get to a Tier 1, we're just under 700,000 connected cable modems at the end of the quarter.

And that whole -- that part of the customer base is growing and frankly, most of that is not DAA at all.

That's just been rip and replace legacy DOCSIS 3.0 systems and replacing it with virtualized DOCSIS 3.1.

And we're seeing, even more so than we would have thought initially that, let me call it the small- and medium-sized operators' 3.1 upgrade is turning out to be an interesting market on its own, not contingent on DAA.

So just want to make sure that is not lost as you think about the total opportunity set that we're pursuing here.

Yes, that's definitely helpful.

Yes, that's definitely helpful.

That's definitely helpful.

And I just wanted to the shift really quickly to your -- to the Video business.

Outside of the changing shift in the consumption model and the move to software, I guess thinking more broadly, how should we think of the state of this market in general?

Should we think of it as you're in harvest mode rather than growth?

And if it's the latter, can you remind us what some of the key catalysts are that we should be looking out for that are most impactful to the video business, like I guess for example, tracking with 4K, streaming proliferation, et cetera?

Well, look, that -- I have to say, that's a loaded question.

I mean you don't have to look any further than some of the customers' earnings announcements last week to understand that the pay-TV arena or pay video service arena is turbulent, to say the least.

We have several large customers who are in the midst of a variety of M&A activities, all fighting ferociously with each other as well as a whole host of new players.

And indeed, as you said, one of the dimensions of that competition is around quality of service.

So we -- for us, the most interesting area is around streaming and here, we see both the incumbents as well as new players, as we discussed a moment ago, making significant investments in new streaming capabilities.

A big theme is personalization, both of the content and of the advertising and the promotional material.

And quality is also a -- is a big deal, particularly around live sports, consumers more than ever are expecting high-quality services, resolutions to their big screens as well as to their small screens.

So it's a -- it really is an opportunity-rich area where you some of our customers on the defensive, some of them on the offensive.

And by going to SaaS, we think that we're able to arm our customers, both historic as well as new, with more flexibility than they've ever had to go to market with in this really rapidly changing environment.

George Notter from Jefferies is online with a question.

I guess I wanted to dig in a bit here on CableOS.

If I go back 2.5 years ago when you signed this warrant arrangement with Comcast, and we know that 9 months ago, you completed field trials there.

We can see that certainly in the vesting of the warrants and the differential between GAAP and non-GAAP revenue.

I guess I'm just curious if this whole narrative now, we're talking to multiple Tier 1s ramping up, does this include Comcast?

Or are we talking about other operators in the mix here?

Well, George, I can't comment specifically on Comcast, other than -- in terms of relating it back to any of my comments about timing.

The Comcast relationship, stemming back from that original agreement, continues to be extremely important to our company.

And our -- it is a top priority of our business in general and our CableOS initiative, in particular, to be a successful technology partner deployed in volume by Comcast.

Other than that, I won't say more about Comcast in particular.

But I think it's -- of course, by highlighting that there's several Tier 1s, 4 out of the top 8 across North America and Europe, the point there is that no matter how you cut it, there's others involved besides Comcast.

We think that what we're working on and what we started working on with Comcast a couple years ago is just the right idea.

And particularly, the forward -- most forward-looking of the operators, we think that they've come around to that kind of thinking.

And it's not just they've come around to it, there's now substantial investment and activity there.

So we -- our aspiration is that Comcast is an important contributor to revenue and gross profit going forward, but by no means the only contributor.

And our ambition over the next several years is to be #1 in this space.

I mean I'll be clear about it.

And if you take a look at that market research, perhaps you were there at the Light Reading event in Denver a couple of weeks ago, but that research is clear that the majority of the spend is going to be in virtualized CMTS and associated DAA components.

And so our view is that the company that is #1 in virtualized in DAA is going to be #1 in this market, and that is our ambition.

It's turned out to be a longer journey than we thought, particularly end-to-end DAA system involves a lot of other components, not just the virtualized CMTS.

So what's happened is, is the pie has gotten larger, but also more complex; that complexity has manifest itself as more time to market.

The good news is the resultant opportunity and the resultant resonance with more than just 1 operator have both moved in a very positive direction from our perspective.

Got it.

And then I guess maybe that's an interesting segue.

You mentioned that you're not seeing competitive products in lab trials, it sounds like, anywhere.

I guess I'm wondering why do you think that is, just your opinion.

I mean it seems to me that virtual CCAP has been kind of in the forefront, I think of the conversation around this industry for a number of years now; I mean 2, 3 years certainly.

I mean why do you think there aren't competing products in the labs that you're seeing?

Any views there?

I don't really know, George.

I mean I will tell you that we've invested a lot and it's nontrivial.

It's taken a long time.

And frankly, we had to head start because we also had experience with cloud-native coming from the video side.

So even before we started this initiative, we had already started at the corporate level to pivot ourselves into a software and cloud kind of company.

So I think that was a little bit of wind at our back.

And I think that there's also been a -- until relatively recently, I think you'll recall this, but there's been a lot of skepticism or questions out there.

Is software scalable?

Is it going to work, et cetera, et cetera?

So I think it's -- I think that there's been some doubters and naysayers out there.

And so it may be the case that some of our competitors legitimately viably didn't really believe that this technology was going to be the right answer until more recently.

Now listen, I'll emphasize again, I don't know what I don't know and maybe they're just about to release something new and exciting that we're completely unaware of.

And that could be the case, too.

But I think yes, I think I'll stay on the fact that it's difficult, it's time-consuming.

It takes a unique skill set, which is quite distinct from what I would say the traditional CMTS development capabilities are.

And that takes some time to assemble from the time when you actually believe that this is the right architectural direction.

Tim Savageaux from Northland Capital is online with a question.

Lot of numbers swimming around in my head here.

So a quick question on that kind of backlog and bookings and then kind of a broader question on Cable Access.

You mentioned a 40% sequential increase in backlog on the cable side.

On Cable, for Cable.

Yes.

Right.

And was there also a comment about bookings from a proportional standpoint being kind of more in line with where you expect the year to come out from a revenue standpoint or [words to that] effect?

Or obviously, the backlog increase implies a book-to-bill above 1. I guess to make it quick, how far above, I guess would be one question.

And given the ramp that you're expecting in the second half, I'd imagine -- you talked about a rebound in bookings, but it's not as if they were down for Cable in Q2.

But I guess further growth, would you expect that backlog growth to accelerate in Q2?

Yes.

We do expect the backlog growth to accelerate in Q2 for both segments.

But what I was pointing earlier was 38% is an increase only in Cable backlog we have seen in Q1 compared to prior quarter, Q4.

And bookings in Q1 as well as the bookings in Q2 today, which I mentioned was the new bookings happening, are in the same proportion of revenue expectation, i.e.

in the same proportion of Video and Cable.

So yes, these are giving us more confidence in terms of how the year should be shaping up.

Great.

And the Cable Access question is I think coming out of last quarter, at least part of my takeaway might have been that it may not have necessarily been Harmonic's technology per se, but challenges on the customer's part and operationalizing that technology, which is around a pretty large-scale project.

And as you've seen the year has developed, I guess how would you distinguish between those 2 issues, which is to say the maturity of your hardware and software technology relative to the customer's capability to operationalize it?

And has that -- to the extent you comment about increased visibility, is that part of it?

Or what kind of visibility do you have on that front?

Operationalization is certainly part of it, Tim.

But the bigger issue is -- I would say falls under the umbrella of integration, particularly the DAA architecture is broad.

It not involves not only the CMTS component, it involves a lot of additional external networking equipment.

It's tied in because it also carries legacy video services as well as new video services over IP.

There is integration with both new and legacy set-top boxes, other video devices, et cetera.

So it becomes a pretty big, broad integration project, specifically around DAA.

So sometime around last fall really, the pivot for us, it's never 100% black and white, but I'd say pivoted away from kind of getting the virtualized CMTS ready and was more end-to-end integration.

And then working through issues, some of which touched us, others which were really independent of us.

And it's those integration and system-level issues that have been, I think, taking a little bit longer than anyone expected over the past several months and that we actually think we're now just nearly clear of.

And of course, that ties into the -- well, that's just maybe another way of saying operationalization, what you just said.

So that said -- and that's one of the other reasons that, Tim, if I could, why we continue to hammer on the fact that where we have kind of just the clean, let me call it a centralized deployment of CableOS as a centralized CMTS, we're nearly 1 million, we're trending towards 1 million connected cable modems and the systems are stable, working well and performing from a business metric point of view just as good as the -- just as reliably as the CMTS systems that they replaced.

So we're more confident than ever that the core CableOS as a CMTS is increasingly, I would say, rock-solid.

And now we're really getting there together with our customers in these broader end-to-end systems -- DAA systems.

And it's going to be exciting to see these things launched here over the next several months.

Okay.

Well, thank you, Tim, and thank you, everybody else, for joining the call today.

We're excited about where we're headed with the business.

We're going to make good progress this quarter and toward the rest of the year, and we're looking forward to you on updating -- we're looking to updating you all on our continuing progress.

Thanks very much.

Okay.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.