Harmonic Inc (HLIT) 2019 Q4 法說會逐字稿

Welcome to the Q4 2019 Harmonic Earnings Conference Call.

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

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

I would now like to turn the call over to Nicole Noutsios, Investor Relations.

Nicole, you may begin.

Thank you, operator.

Hello, everyone, and thank you for joining today -- joining us today for Harmonic's Fourth Quarter and Full Year 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 our webcast on the 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 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've 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'll turn the call over to our CEO, Patrick Harshman.

Patrick?

Well, thanks, Nicole, and welcome, everyone, to our fourth quarter call.

Harmonic delivered another strong quarter, capping a pivotal 2019 that was successful, both financially and strategically.

The financial headlines are revenue of $122.2 million, up 7.5% year-over-year; 52.3% gross margin; and $0.12 non-GAAP EPS, as both our Cable Access and Video businesses contributed meaningfully to our operating profit.

Harmonic's strategic headlines are equally compelling.

Over the course of the year, our virtualized CableOS solution leapfrogged the competition into the industry-leading position, while our live streaming video capabilities achieved significant new scale milestones.

As a result, we're heading into 2020 with a transformed technology foundation, with positive business momentum and uniquely positioned at the intersection of the core market dynamics of gigabit broadband access and streaming video.

Taking a closer look at our Cable Access segment, where we had another strong quarter.

Revenue was $43 million, up a little over 78% year-over-year, and operating margin was 8.5%, as one of our new Tier 1 international customers began to contribute meaningfully.

Full year revenue was $124.9 million, up 37% year-over-year.

Highlighting continuing strong market momentum, during the quarter, we secured new design wins and received associated initial multimillion dollar purchase orders from 2 international Tier 1 operators.

We expect to begin commercial deployments with these new operators in the first half of 2020.

To the end of the fourth quarter, CableOS had been commercially deployed by 23 cable operators globally and the associated number of actively served cable modems grew to over 1 million.

Approximately 1/4 of these live cable modems are served through distributed access architectures as DAA has matured and now become the fastest-growing architecture we're deploying.

More significantly and beyond direct financial benefits, both our virtualized centralized and DAA deployments are now starting to deliver compelling consumer benefits versus traditional CMTSs measured by improved service reliability and end customer satisfaction, compelling hard data that several of our customers are beginning to share with other operators, creating a growing positive word-of-mouth tailwind.

Looking ahead, it's important to understand that these early deployments so far cover only a small portion of our customers' footprints.

Specifically, the 23 cable operators who have commercially launched CableOS and part of their network, collectively serve approximately 45 million cable modems today.

That's approximately 40 times the 1-plus million modems we currently serve for them.

So growth opportunity is twofold.

First, we're focused on ensuring this first wave of 23 deployed customers continue to be delighted and moving towards leveraging CableOS across their entire footprint of approximately 45 million modems.

And second, we're working on securing new design wins with additional operators in order to address the remainder of the global market.

While launching these early customers and securing new design wins has been our primary focus over the past year, we've also continued to aggressively invest in R&D and extend our technology leadership position.

Our recently announced CableOS expansion to support fiber-to-the-home, new cloud-native orchestration and real-time analytics capabilities and our new managed services combined to both extend or lead relative to other players in the market and expand our addressable opportunity.

In the addressable market opportunity, big picture remains very favorable for Harmonic.

The Dell'Oro Group continues to forecast an approximately 50% compounded growth rate towards an approximately $1.2 billion virtualized Cable Edge and distributed access market by 2023.

This is a market category that Harmonic largely invented that we're leading today and that we're well positioned to lead going forward.

And with the new fiber-to-the-home and managed service opportunities I just mentioned, not yet factored into these market size estimates, our growth opportunity is only going to get larger.

So summarizing our CableOS update, we made great progress in 2019 with groundbreaking initial deployments, early customer operational success stories, new Tier 1 design wins and solid financial execution.

We're well positioned.

We're investing in both additional R&D and focused sales and service teams to go after the opportunity.

And we're determined to capitalize on our innovation-led market momentum for 2020 and beyond.

So turning now to our Video segment.

Here also, our ongoing strategic transformation is showing real progress.

Our Video business is steadily transforming from a market-leading broadcast-centric appliance business to a market-leading over-the-top streaming business, where we provide our technology as either software running on COTS servers or a Software-as-a-Service running on public or private cloud.

Continuing the trend of the past several quarters, Q4 was characterized by solid growth of over-the-top streaming deployments with both traditional and new customers, offsetting stagnant broadcast appliance sales.

Specifically, Video segment revenue was $79.2 million, up 32% from the third quarter.

Associated gross margin was 60%, a new record that underlines our continued successful software and service transition.

Segment operating profit was 14% despite ongoing investments in our stream transformation, highlighting the strong fundamentals of our Video business.

During the quarter, we added 12 new live streaming SaaS end customers, bringing our total to 48, which is up 33% sequentially and 153% year-over-year, our strongest quarter yet of new SaaS customer additions.

Associated annual recurring revenue grew to just over $16 million, up 70% year-over-year, a solid foundation for continuing profitable expansion of our live stream platform.

As with CableOS, our drive to bring new customers onto our new streaming video platform is complemented by compelling innovation pipeline.

We continue to be excited about our new live streaming delivery optimization solution, which is targeted at the significant unsolved industry problem of reliably personalizing and scaling live streaming video, particularly live sporting events with exceptional quality.

Having this live streaming delivery optimization capability increases our addressed market and further differentiates our streaming platform.

To provide a deeper glimpse into why we're seeing solid growth of streaming customers, we want to share a couple of key differentiators.

First, throughout 2019, we saw steady quarter-over-quarter growth of utilization of our platform, exceeding 1 petabyte per day of live streaming traffic delivered from our cloud platforms during the fourth quarter, highlighting the scalability and robustness of our solution, which, as you know, is critically important for our customers' fast-growing streaming services.

Second, the ability to leverage multi-cloud strategies is increasingly valuable to many of our customers.

And so our unique integration and deployment partnerships with Microsoft Azure, Google Cloud Platform and AWS are differentiating Harmonic in the market.

Third, over the course of 2019 and over multiple cloud platforms, we delivered over 99.9999% of reliability, which, to the best of our knowledge, is market-leading performance in ensuring consumer quality of experience, which is, again, critically important to any streaming service provider's bottom line.

So while we still have work to do in growing our cloud-based live streaming platform to the business scale we're targeting, our steady customer acquisition and growing reputation for operating excellence position us well to reignite the growth of our Video business.

So in summary, considering both our Cable Access and Video business segments, 2019 was a breakout year of business transformation, leveraging powerful new cloud native technologies and services and several strategic design wins and deployments around the world.

We're redefining the trajectory of our business and of the market we address.

We're looking forward to further market impact, profitable growth and value creation in 2020 and beyond.

I'll now turn the call over to you, Sanjay, for further discussion of our financial results and outlook.

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

Before I share with you our quarterly results and outlook, I would like to remind you that the financial results I'll be referring to are provided on a non-GAAP basis.

As you just heard from Patrick, for the fourth quarter of 2019, we delivered strong financial results with revenue and EPS above the high end of our guidance range.

Revenue was $122.2 million and gross margin was 52.3% resulting in EPS of $0.12.

We improved our working capital this quarter, ending with cash at $93.1 million and book-to-bill ratio of 1.15.

We are entering 2020 with a solid financial foundation.

Turning to Slide 9. Q4 revenue was $122.2 million compared to $115.7 million in Q3 '19 and $113.6 million in Q4 '18, resulting in 5.6% quarter-over-quarter growth and 7.5% year-over-year growth.

Gross margin was 52.3% in Q4 compared to 67% in Q3 and 54.5% in Q4 '18.

For the full year, total revenue was $402.9 million, down $1.8 million compared to 2018, but above the high end of our guidance range, as our cable revenue grew 37% and video revenue declined 11%.

We had 3 greater-than-10% revenue customers during the quarter.

Comcast contributed 20%, Charter contributed 14%, and Vodafone contributed 13% of total revenue.

Looking more closely at our Cable Access segment.

Revenue was $43 million compared to $55.7 million in Q3 and $24.1 million in the year ago period.

Cable Access gross margin was 38.3% in Q4 compared to 77.1% in Q3 and 43.6% in Q4 '18, as DAA hardware shipments picked up.

As anticipated, year-over-year growth was strong, reflecting growing success of our CableOS solution.

Revenue and gross margin declined sequentially only because during the third quarter, we recorded onetime software revenue of $37.5 million related to the 175 million CableOS software license agreement closed with Comcast in July 2019.

In our Video segment, we reported revenue of $79.2 million compared to $60 million in Q3 and $89.5 million in the year ago period, resulting in 31.8% quarter-over-quarter growth and a decrease of 11.6% year-over-year.

On the other hand, Video segment gross margin was a record 60% in Q4 compared to 57.7% in Q3 and 57.5% in Q4 '18.

Taken together, these results point to the continued profitable Video segment transition to software and SaaS.

Through expanded support services for our traditional appliance-based solutions and through cloud-based SaaS offerings, our recurring revenue base continues to grow with expanding margins.

During the fourth quarter, recurring SaaS and services revenue was 29.7% of our total revenue, up from 28.2% in Q3 '19 and 26.8% in Q4 '18.

SaaS and services revenue was $36.3 million in Q4 compared to $32.6 million in Q3 and $30.4 million in Q4 '18.

SaaS and services gross margins were 63.7% in Q4 '19, 60.6% in Q3 '19 and 64.5% in Q4 '18.

Continuing to drive recurring revenue growth and margin expansion is a key component of our long-term value creation strategy.

Supporting this objective, our video SaaS pipeline continues to grow.

The total subscription ARR for our SaaS deals was $16.3 million at the end of Q4 '19 compared to $9.6 million at the end of Q4 '18.

This 70% increase in annual ARR reflects both an increasing SaaS customer base, which increased from 19 in Q4 '18 to 36 in Q3 '19 and to 48 customers in Q4 '19, growing 33% quarter-over-quarter and 153% year-over-year and increased usage of our SaaS offerings by our customer base.

As we look at the rest of our income statement on Slide 10, we maintained strong expense control during the quarter.

Q4 operating expenses were $49.2 million compared to $47.7 million and $49.3 million in Q3 '19 and Q4 '18, respectively.

The combination of strong cable revenue, healthy video gross profit and solid expense control, resulted in good profitability in the quarter.

Our Q4 operating income was $14.8 million, comprises of $3.7 million from our Cable Access segment and $11.1 million from our Video segment.

This Q4 operating income of $14.8 million compares to an operating profit of $29.9 million in Q3 and $12.7 million operating income in Q4 '18.

This income translated into solid Q4 EPS of $0.12 compared to Q3 EPS of $0.25 and EPS of $0.11 in Q4 '18.

Regarding the share count behind this EPS calculation, we ended the year with a diluted count of 97.5 million compared to 97.6 million in Q3 and 89 million in Q4 '18.

The marginal sequential reduction of 0.1 million shares is a net effect of an increase of 1 million shares of employee-related RSU grants and option exercises, 0.5 million shares of Comcast warrants in the money as a result of recent increase in our stock price, offset by 1.6 million share reduction associated with dilution from all convertible debt, a substantial portion of which was refinanced during third quarter.

The annual increase of 8.5 million shares reflects the combined effect of 4.1 million shares for employee-related RSU grants, option exercises and employee stock purchases; and 2.6 million shares for Comcast warrants; and 1.8 million diluted shares for all convertible debt.

Please note, our diluted calculation considers our average trading price of approximately $7.50 per share for Q4, $6.9 per share for Q3 and $5.5 for Q4 of 2018.

And we use the treasury stock method for convertible note and warrant calculations.

During Q3, we refinanced approximately 65% of our convertible notes due in 2020 with favorable terms for the company.

The new notes due in 2024 carry a coupon rate of 2%, with a conversion price of $8.66 compared to the original notes which carry a 4% coupon with a conversion price of $5.75.

We plan to pay off the remaining principal of the original notes in cash in December 2020.

Using an if-converted method, as a result of September refinancing, we immediately reduced the potential dilution by 5% and annual interest expense by 19%.

Once the remaining $45 million of the original notes are paid off in cash at the end of 2020, our refinancing will effectively reduce the potential dilution by 40% and annual interest expense by 55%.

Q4 was the first full quarter of dilution savings benefit from our recent refinancing, as we reduced 1.6 million shares in Q4 compared to Q3.

Q4 bookings were strong at $140.1 million compared to $126.5 million in Q3 and $92.8 million in Q4 '18, resulting in a book-to-bill ratio of 1.15 in Q4.

Our full year bookings were $440.2 million, and annual book-to-bill ratio was also healthy at 1.1, underlying the positive market momentum we created in 2019.

We'll now move to our liquidity position and balance sheet on Slide 11.

We ended Q4 with cash of $93.1 million.

This compares to $66.7 million at the end of Q3 and $66 million at the end of Q4 '18.

This cash increase of $26.4 million is comprised of cash generated from operations of $30.2 million in Q4 and $1.3 million cash generated for financing activities, primarily stock option exercises, ESPP purchases, net of cash used for capital purchase activities of $5.4 million, primarily due to purchases of fixed assets, approximately $3 million of which is related to fixed asset additions for our new headquarters facility, which is under construction.

Our San Jose headquarters lease expires in April 2020, and we are currently in the process of making additions to fixed assets and leasehold improvements for the new headquarters facility we are relocating to.

For the new facility for which we have signed a new 10-year lease, we expect to incur a total CapEx of approximately $20 million, of which $3 million was incurred in 2019 and the remaining $17 million will be incurred in 2020.

Beginning in May, the new lease facility will reduce our annual cash outflow for rent by approximately $5 million and annual pre-depreciation OpEx by approximately $2 million.

Our days sales outstanding at the end of Q4 was 65 days compared to 78 days in Q3 and 65 days at the end of Q4.

Our days inventory on hand was 45 days at the end of Q4 compared to 68 days at the end of Q3 and 45 days at the end of Q4 '18.

At the end of Q4, backlog and deferred revenue was $210.2 million.

This compares to $192.5 million in Q3 and $186.4 million in Q4 '18.

Please note that not yet included in this backlog metric is over $200 million of contracted CableOS demand associated with 3 Tier 1 CableOS customer contracts, which we have previously discussed, including our agreement with Comcast, which we have begun to recognize into backlog and revenue.

Regarding the Comcast software license agreement, let me provide a reminder of what we explained last quarter about the GAAP and non-GAAP accounting treatment.

For the $175 million Comcast CableOS software license agreement, the total license revenue to be recorded will be net of warrant vesting charge of approximately $20 million, resulting in a net GAAP and non-GAAP revenue of approximately $155 million over a period of 4 years.

Now let's turn to Slide 12 for our Q1 2020 non-GAAP guidance.

For Q1 2020, we expect revenue in the range of $80 million to $90 million, with Video revenue in the range of $60 million to $65 million and Cable Access revenue in the range of $20 million to $25 million.

Gross margin in the range of 50% to 52%, operating expenses to range from $48 million to $50 million, operating loss to range from $9.5 million to $1.5 million, EPS to range from a loss of $0.10 to a loss of $0.03, an effective tax rate of 10%, weighted average share count of 95.8 million shares, and finally, cash at the end of Q1 is expected to range from $70 million to $80 million impacted by our new lease as discussed earlier.

Moving to Slide 13, we are providing corresponding full year 2020 non-GAAP guidance.

Specifically, for the full year, we expect revenue in the range of $390 million to $430 million, and Video revenue in the range of $260 million to $280 million, with Cable Access revenue in the range of $130 million to $150 million.

Gross margin in the range of 50% to 55%, operating expenses to range from $190 million to $202 million, operating income to range from $5 million to $34 million, EPS to range from a profit of $0 to $0.26, an effective tax rate of 10%, the weighted average share count to range between approximately 97.7 million shares to 101.2 million shares, year-end cash to range from $50 million to $60 million, after paying off the remaining principal of our old convertible debt with approximately $45 million in cash in December 2020 and a total leasehold improvement addition of $17 million for our new headquarters.

We expect revenue to grow steadily on a sequential basis beyond the first quarter, with growth trends through the second half of 2020, similar to what we saw in 2019 and 2018.

In summary, we delivered a strong 2019.

The strategy of the company is working effectively in both segments, and we remain very focused on continued execution.

With that, thank you, and back to you, Patrick.

Okay.

Thanks, Sanjay.

On that note of execution, we want to finish by highlighting our strategic priorities for 2020.

Our Cable Access business will build on our success in 2019 by scaling our existing Tier 1 customer deployments, securing new design wins with additional global operators and successfully launching our complementary new managed services and fiber-to-the-home solutions.

For Video segment, our objectives are to accelerate the growth of our live streaming business, to expand our addressed market to include new nontraditional streaming customers through our SaaS platform and to continue to deliver solid segment profitability.

Finally, before closing, I want to recognize our employees for their passion to innovate and serve our customers, our customers for their collaboration and business and our stockholders for their support as we continue to transition our business.

Together, we've accomplished a lot and positioned ourselves for a compelling future.

Thank you all.

And with that, we'd like to now open up the call for some questions.

(Operator Instructions) Our first question comes from John Marchetti from Stifel.

I was hoping you could spend a minute.

When I look at where we are from a projection perspective, as I look out into 2020, using the midpoint of your range, we're looking at about 2% growth.

You've obviously had some new wins, both internationally and domestic.

There seems to be a lot going on here.

Just curious how we think about all of this coming through, and when we can maybe see a little bit faster growth rate materialize.

Just curious where we are in this cycle maybe and how you think this plays out, not only in '20, but as maybe we look a little bit more longer term.

John, this is Sanjay.

Thanks for the question.

I think it's relevant if we look at both Video and Cable separately for this.

More in terms of Cable, if you look at the midpoint, it's growing at 12%, but we had this $37.5 million as a onetime software license pickup for Comcast in Q3.

If we take that piece out from last year's numbers, we are actually growing in Cable segment at midpoint by approximately 60%, which is very similar to what Dell'Oro in its market report projects as well.

So I think we have to take the $37.5 million out to do the comparison as that's nonrecurring and is onetime.

That said, for Video, the -- at midpoint, it's a 3% decline versus at high point it's a similar number of the range at what we ended at this year.

But in terms of Video, note that we are profitable and, combined with our gross margins and increasing ARR, we are on the right track for profitability and long-term value for our Video business.

Okay.

And just to be clear, Sanjay, the 2 international customers that were referenced in the remarks, those are 2 additional customers?

Are those the ones that we mentioned last year, and now they're actually contributing to results?

I'm just trying to make sure I'm not missing something here.

The 2 we announced today are additional to what we said earlier.

So in total, it's 5 Tier 1s.

So number one -- just to clarify, number one was Comcast, which we all know and we have discussed earlier.

We have announced 2 Tier 1s with more than $50 million and more than $55 million.

And today, we announced 2 more.

Of course not the names, but in total they are 5.

And any sense relative to those -- the $50 million, $55 million number, I mean, are these 2 new ones sort of in that same ballpark in terms of revenue contribution over time?

Why don't I take that one, John?

It's Patrick.

The short answer is yes.

Both of them have the potential to deliver comparable numbers.

They went after it a little bit differently.

The ones we talked about previously, for their own reasons, wanted to sign frame agreements with us.

So those are broad contracts as we've discussed and not orders, not sitting in backlog, as Sanjay noted.

The latest 2 took a different approach.

No big frame agreement with some big headline multiyear financial number, but they -- after extensive qualification processes, they qualified us.

So that's good going, and they placed initial multimillion dollar orders with us, that are, in fact, are part of backlog that we reported today.

And so it's a different approach, no big frame agreement.

But both of them, back to your original question, have the potential to deliver comparable results and scale over time.

Our next question comes from Simon Leopold from Raymond James.

Just a quick clarification upfront.

You mentioned 3 greater-than-10% customers.

I got Vodafone at 13%, Charter at 14%, but I missed Comcast.

What was that one?

Comcast is at 20% for Q4.

Great.

And so if we think about the disclosure you gave us on the modem penetration, you talked about, basically, CableOS being at 1 million modems, but you're talking about operators that have 45 million modems.

How can we think about the value of that?

I just feel like if we multiply the current business by 45 million, we're overstating it.

So can you give us sort of some sense to think about what's the value of the opportunity?

Well, let's break it apart into 2 halves.

Obviously, Comcast is part of that, and nominally 50% of that.

And as you know we've -- you know the value of the software license agreement there.

The additional opportunity, as we've discussed, is hardware sales, which do scale with penetration of the service and services that we can deliver to Comcast.

So indeed, I think the Comcast piece scales in one way.

All of the others are priced, let's say, more conventionally, and that is a price per gigabit delivered on both the software license as well as the hardware, Simon.

And so for the rest of it, actually, we think that the linear scalability is about right.

And so we see substantial opportunity just to converting the rest of their footprints.

Now converting the footprints is not a foregone conclusion.

Our agreements with them don't require them to do that.

But we see, to the extent we are delivering the operational and financial value that we think we are and that they're starting to tell us that we are, we like our chances of converting the rest of these operators to, over time, to being 100% or nearly 100% based on CableOs.

And maybe just pivoting to the Video segment.

In terms of the way this business is trending, it looks like you've got certainly the mix shift towards the recurring revenue.

Do you see it returning to year-over-year growth at some point during 2020 or is that more of a 2021 event?

Is that a metric you can even think about today of a quarter where you have year-over-year growth in Video?

Yes.

It is.

As you see from our annual guidance, which we'll certainly strive to exceed, but we don't think that, that happens in 2020.

I think it is important to remember that there's 2 distinct things going on here.

One is a conversion to -- of some of the customers to SaaS.

But even before we get there, there's a notion that we've rendered the whole product line as software.

So even if you're not going to SaaS, even if you're still doing capital purchasing or perpetual license purchasing of our product, increasingly often, you're not getting to the server or the enabling hardware from us.

You're buying it directly from HP or Dell, let us say.

And so Simon, that creates a clear headwind on the top line.

So I think it's quite different than the value that we deliver and hence our continued focus on gross profit and operating profit.

Very rough numbers, the traditional hardware sales, the appliances themselves can be up to 50% of the revenue that we were doing in -- delivering in the past at virtually no margin.

So I think the challenge -- and we're going to continue to work on you to try to get you and everyone else to not think just in terms of video because as we turn over the hardware sales to HP, let us say, that is going to be a top line headwind that I would argue really doesn't, in any way, negatively impact the value we're delivering or creating in the market.

We're still delivering the same software.

The fact that we delivered 60% record gross margin this quarter, the fact that we still had 14% operating income on the business, while their top line was down, I think, goes to the fact that on the top line, we're losing empty calories.

So I think we've still got to go through the rest of that process of flushing out those empty calories, if you will.

And at some point, yes, then I think that the top line will begin to reflect the fundamental growth of the business.

But in the meantime, I -- we believe that focusing on the gross profit and the operating profit of the business segment are actually more meaningful in terms of gauging the progress of this business.

And that makes a lot of sense to me.

Is it something where you'd feel comfortable at some point maybe forecasting the gross profit dollars rather than focusing on gross revenue?

Yes.

To be candid, it's something that we're thinking about quite actively.

The risk is sounding like we're kicking the can down the road.

We're here announcing the fourth quarter of 2019, so you've got no deviation from us in terms of the historical way we've talked about the business.

But as we go into 2020, we are thinking about alternative ways of describing current results and future expectations, and we look forward to continuing that dialogue with you.

Our next question comes from Rich Valera from Needham & Company.

Want to try to understand what's baked into your 2020 cable guidance in terms of new wins or if that's primarily delivering against your existing portfolio of wins.

I'll start and maybe you can chime in.

Qualitatively, let's say, it's primarily our existing portfolio of wins.

We're quite excited about the competitive market momentum and the new design wins.

At the same time, one of the lessons of 2019 is that the time between design win, qualification, initial bookings, maybe even initial shipments and recognition of revenue is -- can be lengthy and is -- has risk of variability to it.

So I would acknowledge -- I think we would acknowledge that we've taken a somewhat conservative take on how quickly we'll be able to convert new design wins into revenue during the year.

So I'm highlighting that because we're quite confident and aggressive about continuing to sign up new customers and new design wins and say we're somewhat more conservative about how quickly that water falls into revenue.

But make no mistake, whether water falls into revenue in 2020 or not, we think 2020 is going to be a watershed year of additional design wins, positioning us extremely well for multiyear growth delivery.

Yes.

That's helpful.

And then on Comcast, Sanjay, you talked about how much you got in the third quarter from the ELA.

Can you say what you got for all of 2020 from the Comcast ELA -- I'm sorry for 2019 for the Comcast ELA?

Well, for the -- we did announce that for full year, Comcast represents approximately 23% of our total revenue, that's among both the segments.

But in terms of ELA, we did get 37.5% in Q3, and then we said $4 million to $7 million we'll get every quarter.

So for 2 quarters at the midpoint, if you take $6 million, we got close to $50 million this year from ELA.

Perfect.

Got it.

And 1 more, if I could.

Just you -- back at the, I think, the SCTE show, you announced a new PON capability within the CableOS platform.

Can you -- has there been any traction with that?

Have you gotten any sort of initial design wins or sort of [prospect] with that at this point?

The progress is good.

No design wins yet, but we're working -- we're active with a couple of lead, I'd call them, strategic customers.

The first -- we don't expect revenue contribution in the first half of this year, we expect it to be.

Again, based on our experience around the initial virtualized CMTS, we expect the first half to be characterized by lab and field trial work, which we expect to transition into revenue beginning in the second half.

But the response has been quite positive.

And to be clear, we're at least in the early innings here.

We're focusing on cable operators who are also doing fiber-to-the-home.

And so the story -- the advantage is a unified access platform that is simultaneously supporting -- provisioning the whole thing, both access and fiber services.

And that is definitely a message that has resonated strongly since the announcement.

Our next question comes from Steven Frankel from Dougherty.

Patrick, given the slow start to the year in Cable Access, could you give us some insight into what kind of visibility do you have into these Tier 1s and their deployment plans in 2020?

It's a great question.

And it's mixed.

The more mature the engagement, the better the visibility is getting.

So for our early customers, where we already recognized revenue, domestic, and beginning in the fourth quarter, more significantly a lead international customer, we've got pretty decent visibility.

And that really is -- to the earlier question, that really is the backbone of the 2020 forecast.

As the engagements that are a little bit newer, the visibility isn't quite there.

What we've seen, as you know, Steve, is that there's a number of things that go into making these deployments work.

It's not just a simple switch of a CMTS, it's a broader ecosystem.

And so as mentioned earlier, we're arguably a little bit conservative in our estimate of how quickly all these other things will come together.

So the visibility is less precise for the newer customers.

And then beyond those we're engaged with, our plan does call for additional design wins certainly during the year.

And there, I would say, we're the most conservative in terms of how quickly those design wins will turn into revenue.

So there's certainly upside there, but we're not picking it in, and we're cautious -- we'd be cautious about you baking it in until we get going a little bit faster.

I mean the one last thing I would say, though, is that as the whole thing becomes more mature, we expect these sales and deployment and revenue cycles to decrease.

It's just a little bit premature for us to kind of call the knee in the curve at that point yet.

But that's something that we'll be tracking on and reporting back to you as we go through this year.

I'd just like to add as a reminder that as we build our ramp in 2020, there may be some variability along the way within quarters due to the customer mix and product mix in the quarter.

We did see that in 2019 as well, but I just want to give a reminder it could happen in 2020 as well.

Okay.

So -- and again, to just go back through these 2 large Tier 1s that were won in Q4, you have little to no revenue in the 2020 forecast at this point relative to those customers?

I'd say we have modest revenue, principally in the second half of the year.

And then to go back to your comment in Video about used to be 50% pass-through hardware, kind of where did that exit Q4 in terms of pass-through hardware as a percentage of revenue in Video?

Well, you can see it in the gross margin of 60%, which is a blended number.

So in fact, still over 50% of our Video sales are associated with some kind of pass-through hardware.

I like that, that phrase.

But that percentage is declining, and with that, we were seeing the gross margin move up.

And how quickly do you expect that to trend towards kind of, let's call it, sub-25%...

The truth is, I don't know.

We're definitely seeing some acceleration there.

But frankly, if you asked me a year ago, I would have thought it would be further along, Steve.

So we're watching it.

And that's part of our challenge in answering some of the questions that we get asked about revenue.

Particularly the more -- some of the more traditional players in the broadcast space still like to get a box or an appliance.

And so some of them haven't tipped as fast as we anticipated.

On the other hand, service provider crowd is increasingly, I think, converging their view of how they'll deploy this technology with their broader cloud or data center strategies.

Maybe let's go at it a different way.

If we look out a couple of years and if hardware becomes a much smaller piece, what kind of gross margin does the SaaS/software business get as it shifts to SaaS?

Is that a 70%-plus gross margin business?

Yes.

I think that will be fair.

That's reasonable, and that's definitely the long-term path we are marching towards.

Okay.

And then just to be clear on that year-end cash position, that's a function of the $17 million in improvement?

And what did you say, $45 million of bond repurchases, that's where the cash is going for the year?

Correct.

Yes.

So if any -- but away from that, the business is now in a mode where you generate -- you're starting to generate consistent cash flow, right, from the business?

Yes.

Yes.

I mean, we generated $26 million, $27 million cash this year, and we expect to generate cash next year as well.

And definitely, yes, the 2 things you pointed out are the main reasons for fluctuations in cash in 2020.

And Patrick, pivoting back to CableOS, what kind of level of interactions do you have today with the, let's call them, Comcast syndication partners, those operators that typically follow Comcast's lead?

Are they having discussions along CableOS as well at this point?

Or is it still early days?

Well, I'd prefer not to mention any specific customer.

I mean we do know that there is a group of customers, as you say, Canadian operators and COTS principally, who have a so-called syndication relationship around video with Comcast.

Now we consider those important North America cable operators.

So like all important cable operators, we're absolutely engaged in conversations with them.

Whether they might work directly with us or whether they might engage with Comcast in a so-called syndication deal around, I don't want to speculate.

I think it's an opportunity to be able to work with those and other operators in more than one way.

Any time choices created for delivering technology, I tend to think it's a good thing.

So we historically have relationships with all of those operators.

We have historically delivered product, EdgeQAMs and video, to all those companies.

So we've got good relationships.

And of course, they've got a very special relationship with Comcast.

So one way or another, absolutely our aspiration is to see Comcast -- excuse me, to see CableOS become part of the story there.

And it won't be a surprise to anyone that, that's part of our -- it's on our hit list for going forward.

Our last question comes from Tim Savageaux from Northland Capital Markets.

Focus back on the Cable Access business and a comment you made earlier about the -- well, I guess, about the gross margin in the quarter.

Well, a couple of things.

First, given the upside on the top line, Sanjay, before you talked about normalized kind of growth relative to your market forecasts and normalizing for the Comcast software piece, is it reasonable or some of the dynamics you saw in the quarter some -- should we add some element of pull into that?

And I guess, you had this dynamic previously, maybe that was on the Video side.

But is there an element of unanticipated strength in demand in cable access in the quarter?

And how I guess -- how I link that, that's maybe taking away from '20 to some degree.

And that was a hardware oriented, right?

You seem to have had a very strong quarter, just kind of parsing out the gross margin results on the remote side, node side, maybe even like 2/3 of revenue in the quarter.

And I wonder if that's -- if we can look at that as kind of multiple quarters of demand heading forward and there is some sort of dynamic about some of this Q4 strength, maybe taking away from what you might have expected in '20.

Yes.

Tim, so in Q4, we had a catch-up of revenue for one of our Tier 1 international customers, which started ramping in Q4.

Actually, that's a variable of rev rec.

We had been delivering on this customer since mid of 2019.

But the rev rec came in -- which was dependent on acceptance, came in Q4 as we received that acceptance in Q4.

So it did have a piece of catch-up, which you see, and hence the number was higher than expectations for Q4.

Now that said, in terms of the node shipments, the node shipments we did last year, and they will also happen in 2020, they are baked into our guidance.

But there will be variability among the quarters on how the node shipment would go.

In fact, there's a seasonality aspect to the nodes and the time of their deployment.

They become more active in the second, third quarters than the first quarter.

So that's the piece which will be variable, but definitely no shipments and hardware shipments are baked in for the entire year.

All right.

Well, let me try and come in that again.

I mean I also maybe looking at your Comcast concentration in the quarter as well, I mean, assuming that, that went down, the software element went down to that run rate level you described and even also assuming some Video in there as well, that's a pretty significant quarter of hardware shipments to Comcast.

And like I don't know whether the catch-up from the international Tier 1 you described is also hardware or software in nature, and maybe we can review.

That's a good opportunity to talk about the cadence with which you -- it seems like you saw some hardware shipments initially with Comcast, and then obviously the big license and catch up on the software side.

As you look at your other 4 Tier 1s, the 2 frame agreements and the ones you've just announced, what kind of dynamics do you expect there between kind of hardware and software as we head through the year?

And is -- we're not going to look at kind of our run rate node business.

Is what we saw in Q4 indicative of typical quarterly demand at Comcast?

Should we be looking at $15 million, $20 million a quarter in node revenue there?

Or is that kind of -- how would you characterize that at least?

I don't think there's anything more we can say specifically about Comcast, Tim.

But I think you do bring up a good point that we should further clarify.

A couple of points.

First, not only -- beyond Comcast, the other international operator who started to contribute strongly in the fourth quarter revenue and the 2 new ones, all of those Tier 1s, although not exclusively, the primary initial architecture selected as DAA.

So in fact, there will be strong hardware elements.

And as you alluded to and you recalled from a year ago, DAA deployments are experienced now as they're characterized by hardware shipments upfront because, in fact, there's a lot of logistics, provisioning, installment, et cetera, versus the corresponding software can be delivered more just in time.

And so yes, we're actually very much in that mode now.

And with these Tier 1s focusing on DAA, you can expect the initial wave to be hardware followed by software to light that hardware up.

And then our anticipation is another re-up on the hardware, and that goes a little bit to what Sanjay was mentioning previously about perhaps some amount of cyclicality quarter-to-quarter.

Now I think over time, and where you're getting to is we bring more customers into the fold and as these deployments all become more mature, I think we're going to get to a more statistically average hardware and software per quarter.

But we're still not there yet.

So we're still kind of in early days, and that's why it doesn't fuss us too much to see a particular quarter kind of up or down on revenue, heavier on hardware, heavier on software.

I think we're really just in that start-up phase where the flywheel isn't quite moving as fast.

But I think with this increasing number of DAA design wins that we've now getting under our belt, I think we can anticipate during 2020 or perhaps by the end of 2020 to be to a more -- a place where we are seeing more repeatable statistics quarter-to-quarter.

But you're right in highlighting that we're not there yet.

But I think it's all part of the start-up phase with Tier 1s around DAA.

Got it.

Does that help?

Does that address what you're trying to get at?

It does.

It does.

I appreciate that.

And I guess, last question on the strong order bookings and increase in backlog.

I think the $200 million kind of outside of that, has that number changed?

Is it -- I think that's the number you've been talking about pretty consistently in terms of the kind of -- I don't know if that's meant to represent the value of the frame agreements that you're talking about.

And so should we look at it as that number as kind of stayed there, and the backlog increase is really mostly a result of the new Tier 1s you've announced?

So Tim, the number has reduced since Q3.

However, it's still over $200 million.

And thank you all for joining the call today.

We appreciate your continuing interest and participation, and we look forward to continuing to execute on these compelling opportunities in front of us and to talking with you all again soon.

Have a good day.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.