Harmonic Inc.

Q2 2020 Harmonic Earnings Conference Call

and Sanjay Kalra, Chief Financial Officer. Before we begin, I'd like to point out that in addition to our audio portion of the webcast, we've also provided slides to this webcast, which you may see by going to our webcast on 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 sections 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 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 SEC on Form 8K. We will also discuss historical, financial, and other statistical information regarding our business and operation, 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. And now, I'll turn the call over to our CEO, Patrick Harshman. Patrick?

Well, thanks, Michael, and welcome, everyone, to our second quarter call. Harmonic delivered better than expected results in the second quarter as our cable access business continued to grow and our video business picked up more new SaaS customers. That said, the COVID-19 pandemic created headwinds around the globe, particularly challenging in Asia Pacific and for traditional TV broadcasters. Resultant revenue was $74 million, down 13% year-over-year, and EPS was negative 6 cents. Encouragingly, cash performance was positive, and Book the Bill was greater than one. We saw good signs of market recovery in June that have continued into July. As highlighted in our call last quarter, our customers are fundamentally healthy and our technology position is both powerful and unique. And this is what we see playing out. Resilient cable access and video SaaS momentum and a new 5G-related opportunity for our video business that I'll discuss in a few moments position us for a return of profitability in the second half of the year and sustained future growth. Taking a closer look now at our cable access segment, we had another solid quarter. Revenue was $26.5 million, up 100% year-over-year. We're now commercially deployed with 29 cable operators worldwide, up two from the first quarter and 81% year-over-year. And CableOS is actively serving 1.7 million cable items, up 116% year-over-year and 27% sequentially. Good results in any market condition. Looking ahead, we expect this momentum to continue. We recently announced Vodafone Germany and Millicom as two additional market leaders, previously referred to as anonymous design wins, who are now successfully deploying cable OS at scale. Vodafone is the largest cable operator in Europe, passing over 25 million homes in Germany alone, and a global industry leader across all access communication platforms. Millicom is also an industry leader, operating across nine countries in Latin America. They're both one of the largest cable operators and a leading wireless service provider in the region. and notably a pioneer in cloud-native 5G. The fact that the largest cable operator in North America, the largest cable operator in Europe and a cloud-native leader in Latin America have all selected CableOS speaks for itself. A validation of how fundamentally different and powerful our CableOS is when compared with legacy solutions. The pace of field deployments we saw during the second quarter and the way some of our customers began leveraging the advanced telemetry and operational efficiencies that come with a truly virtualized platform highlight the disruptive advantages of our cableOS architecture and services. While the COVID situation somewhat slowed our progress onboarding additional new customers during the quarter, we nonetheless added two new cable operators actively deploying cableOS, and we secured several additional new design wins with deployments scheduled to commence in the second half of the year. Among these was our first significant cableOS purchase order in Asia Pacific. Around the world, the trend towards our solution is unmistakable, and word of mouth is spreading among cable operators. Our pipeline of serious new account engagements, both tier one and smaller operators, is stronger than it's ever been. We now expect at least one additional top five North America cable operator to be purchasing cable OS by the end of the year. In addition to continuing to gain cable market share, a key goal is to expand our address market by moving into the fiber access space, a global market that's larger than the cable access space we address today. To be clear, this move is based on our same virtualized software core that is at the heart of CableOS. While containerized access has been our first application, we're leveraging the container architecture to seamlessly add additional access applications. In this case, both XGS and 10GE pods. Initially focusing on cable customers who operate both data over cable and fiber of the premises networks. A unified core access platform will be a further game changer for our customers in terms of operational efficiency and service flexibility. We've made good progress on this program and are now preparing to commence initial field trials. We'll keep you updated on this important incremental growth initiative. Summarizing this cable access update, we delivered a solid second quarter. We provided further evidence that industry-leading cable operators around the world are moving to cable OS. Our pipeline of serious engagements with both additional Tier 1 and smaller operators is strong and growing. We continue to aggressively push our technology forward, expanding our competitive lead, and Addressable Market. And our mid- to long-term growth outlook remains positive. Turning now to our video segment. As anticipated, COVID-19 impacted us throughout the quarter, although we finished somewhat better than originally forecast. Segment revenue was $47.5 million, down 34% year-over-year, as on-premises activity at many media companies, particularly in Asia Pacific, was locked down. We remain close to our global media customers and are confident that business originally anticipated for this year has simply been delayed and not canceled or lost. Since mid-June, we've been seeing a growing number of these delayed appliance projects restarting in Asia and elsewhere, and we now expect a corresponding revenue rebound in the fourth quarter. On the other hand, the recurring revenue component of our video business remains solid throughout the quarter, and we're carrying a strong opportunity pipeline into the second half. In particular, we saw an acceleration of demand for our streaming SaaS offerings that run on public clouds. During the quarter, we added nine new streaming SaaS customers, bringing our total video SaaS customer base to 66, up 16% sequentially and 136% year-over-year. Another key video segment development of the quarter was the cultivation of a new business opportunity related to 5G. The FCC-mandated reclamation of C-band satellite spectrum for 5G means that many media companies who use C-band for video distribution will need to re-engineer their video delivery systems to prevent compression and, in many cases, moving to hybrid satellite and IP delivery networks, an opportunity that fits squarely into the sweet spot of harmonics expertise and market relationships. We estimate this to be a new several hundred million dollar global opportunity that will play out over the next couple of years. We recently announced a partnership with satellite leader SES to begin this work, and we expect associated revenue to commence in the fourth quarter of this year, contributing materially to the strong video revenue rebound in our second half guidance. The near-term revenue boost associated with this 5G opportunity is a good complement to our more gradually growing recurring revenue SaaS model. As I mentioned a few moments ago, we now have 66 SaaS customers, and we expect this number to continue to grow as we work to convert what is now our strongest ever sales pipeline of SaaS prospects. Regarding existing SaaS accounts, we currently recognize revenues in the range of less than $10,000 to over a million dollars per quarter. It's important to understand that this quarterly SaaS revenue scales with video traffic and personalization processing volume, such as personalized digital ad insertion. This is a fundamentally different business model than that of our traditional video appliance sales. For example, we had SaaS customers who initially delivered nominal revenue to us as they were getting their streaming services off the ground, but now, as their services have become more successful, deliver quarterly revenue to us that has grown by multiples. So our SaaS growth opportunity has two dimensions. First, the number of service providers on our platform, and second, streaming and personalization volume per service provider. Big picture? Well, the exact rate of revenue growth remains challenging the forecast, in part because it's tied to our customers' success in growing their businesses. Overall streaming volume is undoubtedly a long-term growth play. We consider the customers we're signing on now to be acorns that each have the potential to grow into large oak trees. So a summary for our video segment and coming back to the second half of the year. We're encouraged that our backlog in deferred revenue grew during the second quarter. that many global media companies are now reopening their labs and data centers, that some live sports are returning, and that our SaaS customer acquisition momentum has remained strong. While the third quarter will likely remain sluggish as on-premises international media projects ramp back up, we anticipate the recovering global market, the new 5G-related opportunity, and our growing SaaS customer base with their growing streaming values will all combine to enable both a solid second half rebrand and sustainable for long-term value creation. And on that note, I'll turn the call over to you, Sanjay, for a more detailed discussion of the financial results and outlook.