Harmonic Inc.

Welcome to the first quarter 2020 Harmonic Earnings Conference Call. My name is Livia and I will be your operator for today's call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Michael Smiley, Investor Relations. Michael, you may begin.

Thank you, Livia. Hello, everyone. Thank you for joining us today for Harmonic's first quarter 2020 Financial Results Conference Call. With me today are Patrick Harshman, President and Chief Executive Officer, and Sanjay Kalra, Chief Financial Officer. Before we begin, I'd like to point out that in addition to the audio portion of this webcast, we also provided slides, which you can see by going to our webcast or our investor relations website. Now, turning to slide two. 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 filed with the SEC, including our most recent 10Q and 10K reports and the forward-looking statement section of today's preliminary results press release. These documents identify important risk factors, which can cause actual results to material, differ materially from those contained in our projections or forward-looking statements. Please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP basis. These metrics, 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 8K. We will also discuss historical, financial, and other statistical information regarding our business and operations, and some of this information is included in the press release. The remainder of the information will be available on a recorded version of this call or on our website. Now I will turn the call over to our CEO, Patrick Harshman. Patrick?

Well, thanks, Michael, and welcome everyone to our first quarter call. Before delving into our recent business results and outlook, I'd like to briefly address the extraordinary situation we all find ourselves in. Harmonic is a people-first business, and we're deeply grateful for the support our employees and their families have received from essential service providers, and local governments around the globe. And our sympathies are with those who have been most impacted by the crisis. We're proud of the role we play in enabling vital broadband and video streaming services worldwide. And we're appreciative of the continuing strong partnerships with our many customers and suppliers. I'm particularly thankful for the extraordinary efforts being made by our employees to continue to support our customers and drive our business forward. As most of you know, several years ago Harmonic embarked on a journey to reinvent our company through new cloud-native technology and services that can be as transformative for our customers as for our own business. While the COVID-19 crisis has presented unexpected challenges, it's also shining a light on the power of our virtualized cable OS and cloud-based video streaming solutions, which have held up extremely well under increased operational pressures, providing our customers unprecedented real-time agility and scalability. as they respond to heavy network utilization and expansion opportunities. Although we have real near-term challenges to overcome, our key customers are fundamentally healthy, and our technology position is both powerful and unique, particularly our cable access and video SaaS solutions. Our objective is to emerge from this crisis stronger and even better positioned. Turning now to the first quarter results, COVID-19 impacted our global business during the final three weeks of March and our business in Asia Pacific throughout the entire quarter. Resultant revenue was $78.4 million, down 2.1% year over year, and non-GAAP EPS was negative 10 cents. We nonetheless maintained a solid balance sheet. Our cable access segment performed relatively well despite the late quarter disruption, with both revenue and key deployment metrics up strongly year over year. Our video segment performance was more heavily impacted, as several video appliance shipments and integration projects planned for March were delayed. On the other hand, our recurring revenue video SaaS and support services performed quite well. But taking a closer look now at our cable access segment, we did have a solid quarter. Revenue was $24 million, up over 85% year over year. We're now commercially deployed with 27 cable operators up 17% sequentially. And CableOS is actively serving over 1.3 million cable modems up 30% sequentially. These are good results for a quarter that is typically seasonally slow and where both shipments and deployments were somewhat impacted by COVID-19. Specifically, in March, we saw several ongoing CableOS deployments initially pause, restarts, and then proceed at a somewhat slower pace following the implementation of appropriate safety precautions. Looking ahead, the mid- and long-term outlook remains positive, evidenced by a strong project pipeline, although we do expect continued modest impact and deployment to new design wind velocity in the second quarter. Cable broadband is a healthy end market, and we're fortunate to have several cable industry leaders as foundational cable OS customers. Considering only the 27 operators who have already qualified and deployed cable OS, our addressable service footprint opportunity is now over 45 million modems served. creating a clear line of sight for significant expansion with already onboard customers. The fact that we saw only modest disruption to CableOS rollout activities in March is a testament to the commitment of both our and our customers' teams and of the core software advantages of CableOS, which can be remotely configured, operated, and supported in a way this industry has never seen before. Elaborating on this, and this is important in terms of competitive differentiation. We see accelerating demand for further broadband network segmentation to address significantly increased upstream traffic from applications such as Zoom. The latest data from the NCTA indicates that U.S. cable upstream peak traffic is up over 35% since early March, nearly double the downstream peak growth of 19%. Unlike downstream gigabit expansion, upstream expansion requires different tools and techniques and is historically much more costly and complex. And this is where CableOS really shines. Our new centralized shelf and the industry's only 2x4 remote PHY node, when coupled with our scalable virtualized core, are absolute game changers for cable operators planning upstream expansion, including in traditional centralized CMTS architectures. It's no coincidence that during the first quarter, we received our first material purchase order for our new centralized shelf product from one of our Tier 1 customers. a significant milestone on the road to expansion across the entire deployment footprints of our customers. Based on extensive customer conversations, our current expectation is that existing CableOS accounts will continue with modestly slowed rollout work through the second quarter, re-accelerating in the second half of the year, driven in part by even more aggressive upstream bandwidth investment. The near-term outlook is somewhat more variable when it comes to new accounts we're still working to open. But we have seen qualification activity slow at a couple of these accounts as they tactically respond to urgent operational challenges. We've also seen excellent progress continue to be made with several other target new customers, in particular larger prospects who are well equipped to manage tactical challenges while also executing on their strategic broadband initiatives. Again, the unique software foundation of CableOS is a game changer in terms of being able to advance these technology qualifications and trials remotely. We anticipate continuing to bring new customers on board in the second quarter, but likely with a slower initial rollout pace than originally planned, with deployment acceleration then happening in the second half of the year. So summarizing this cable access update, we delivered a strong first quarter. Our strategic growth plan continues to be executed well. And while COVID-19 creates near-term headwind and risk, the fundamentals and mid-term outlook for our cable access business are clearly positive. with the trend of virtualization likely now accelerated even more favorably for our solutions. Turning now to our video segment. Here we saw a greater COVID-19 impact. Segment revenue was $54.4 million, down 19% year over year, as our video appliances and integration sales fell well below our original expectations. Specifically, during March, we saw several high-confidence deals get delayed. We encountered situations where deals were signed, but customers' warehouses had closed so that shipments weren't possible. We were unable to complete some field deployment projects as access to customer facilities became closed. And in the supply chain realm, we contended with server constraints and a significant jump in shipment costs. Our video segment does business with a broad range of customer types all over the world, including traditional broadcasters, traditional pay TV players, media companies, and new streaming first customers. Among these, it was sales of our higher margin broadcast service to broadcasters and media companies, as well as business across all customer categories in Asia that were hardest hit. We do not believe we lost anticipated deals for competitive reasons, nor do we believe these deals will permanently disappear. Indeed, so far in April, we've seen a couple of deals that were delayed subsequently booked, and we're now seeing appliance activity begin to pick back up in parts of Asia. As we look ahead, considering all of these facts together with extensive customer and channel partner conversations. Our current expectation is that second quarter appliance sales activity will continue at a depressed level before rebounding in the second half of the year as customer facility lockdowns loosen. Now in contrast to appliances and associated onsite integration activity, the recurring revenue component of our video business remains solid throughout the quarter. That is our SaaS offerings that run on public and private clouds and our support services. In fact, we're seeing an acceleration of demand for our SaaS for video streaming services. During the quarter, we added nine new streaming SaaS customers, up 19% sequentially and 80% year over year. Among these new wins were two new tier one players, one a prominent international telecommunications company and the other a prominent domestic broadcast and media company. Remarkably, the international Tier 1 deal was signed in March, and the service is already on air, running on Microsoft Azure and streaming to consumers. This rollout speed and efficiency highlights why we're seeing growing interest in cloud-based SaaS platforms for premium video services. And while we now anticipate the current crisis will further accelerate industry transformation to SaaS models, in turn accelerating our core video segment strategies. While SaaS deals come without the upfront revenue and profit of our traditional appliance sales, which exacerbates near-term revenue headwinds, the long-term recurring revenue model we're building is ultimately more profitable, stable, and value-enhancing. And Harmonic is uniquely positioned to lead the premium video streaming SaaS market. And we're leaning into the opportunity more aggressively than ever. At quarter end, we had over 7,300 cloud-based linear channels deployed globally up 56% sequential. I want to share here a couple of additional data points that underpin this video SaaS momentum. During the quarter, we streamed on average over 38 petabytes a month from various cloud platforms, which is up over 200% year-over-year, a strong statement of growth and scale. We continue to leverage our unique multi-cloud capability in partnerships with Microsoft Azure, Google Cloud Platform, and our deployment expertise on AWS. And we're leveraging these scale gains and strategic relationships together with increasing customer word of mouth as part of a revamped outbound marketing push. I encourage you to check out our recently redesigned website highlighting both video streaming and cable access. In summary for our video segment, COVID-19 impacted the traditional appliances part of our business in the first quarter, and based on extensive customer dialogue, we expect more of the same in the second quarter, followed by a rebound and catch up on pent-up demand. In parallel, we're seeing a pickup in streaming SaaS demand, and we now see an opportunity to further accelerate execution of our video value creation strategy. We're determined and confident that we will successfully navigate through the current challenging conditions. and come out the other side an even stronger business. With that, I'll now turn the call over to you Sanjay for a more detailed discussion of our financial results and outlooks.