Harmonic Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 Harmonic Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. David Hanover. Please go ahead, sir.

Thank you, Operator. Hello, everyone, and thank you for joining us today for Harmonic's first quarter 2021 financial results conference call. With me 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 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 harmonized with the SEC, including our most recent 10Q and 10K 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 metrics, together with corresponding GAAP numbers and a reconciliation of GAAP, are contained in today's press release, which we posted on our website and filed with the SEC on Form 8K. We will also discuss historical, financial, and other statistical information regarding our business, 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, David, and welcome, everyone, to our first quarter call. Harmonic delivered another solid quarter with seasonally strong new bookings and solid year-over-year revenue, earnings, and cash growth. And both our cable access and video segments, again, contributed meaningfully. and both carry substantial backlog and deferred revenue into the remainder of the year. For cable access, the story has continued scaling by existing customers and new customer wins, driving 79% year-over-year segment revenue growth. For video business, demand for both our broadcast and streaming solutions remained healthy, enabling us to deliver 29% year-over-year segment revenue growth. Big picture, Armonic continues to respond well to both current challenges and opportunities, leveraging and continuing to invest in differentiated technologies, deep customer relationships, and an extraordinary global team. All of this translates into strong market momentum and an increasing growth outlook for the remainder of the year. So focusing first on our cable access segment, we delivered another strong quarter. We were commercially deployed with 53 cable operators worldwide, up 96% from the first quarter of 2020. And these deployments scaled to serve over 3 million cable modems, up 127% year-over-year. Segment revenue was $41.3 million, up 72% from a year ago. The margin sagged somewhat as we had a heavier mix of DAA hardware in the quarter, and our hardware was impacted by higher costs. We nonetheless again delivered positive segment operating margin. Looking ahead, we're well-positioned to continue this pace of revenue growth. We see broad market momentum for next-generation multi-gigabit broadband solutions, spanning fiber, cable, and wireless. and the emergence of cloud-native software working in concert with an open distributed access architecture as the winning formula. And within Cable, Harmonix cloud-native and DA solutions continue to be way out in front of the rest of the market. It was gratifying to have been recently recognized for the Deloro Group as the market leader in these next-generation technologies. To fully leverage our unique position, we're focused on three interrelated growth vectors, working with existing customers to scale CableOS deployment across their entire footprint, winning new customers from large tier ones to world broadband players, and expanding our address market to include fiber to the home and fiber to the business. We saw good progress in all three of these initiatives during the first quarter. Regarding customers who are already actively deploying KBOS, deployments are going really well. The pace is accelerating, and yet our solution has been rolled out to less than 6% of their combined footprints, which means we still have huge growth one way ahead of us with these already deploying customers. Regarding adding new customers, we also continue to make good progress. We received an initial multimillion-dollar purchase order from a new Tier 1 international operator, and we went several new regional and rural North America broadband customers during the quarter. And regarding fiber to the home, we closed our first deal in North America and have seen steady growth in our global sales pipeline, with engagement spanning a diverse group of larger cable operators and smaller rural broadband players. Underlying all this activity, we continue to invest heavily in new technology and services. Based on insights from our ongoing deployments, we're adding compelling new functionality to our cloud-native software core, support for new applications such as mobile backhaul, and we're engaged in innovative joint efforts with public cloud players around new edge cloud capabilities. And of course, our converged cable plus fiber-to-the-home solution continues to be a key R&D initiative. Finally, we're not immune to the global supply chain constraints. We're seeing shortages of several key components and related significantly higher costs, impacting most significantly our DAA and shelf hardware products. We're working hard to overcome these challenges, and as a result, while we expect higher costs and lower margins for these products for the balance of 2021, we're not backing off of our revenue growth target. We're aggressively seizing new opportunities to expand our DAA footprint and correspondingly raising our top line guidance. Summarizing for cable access, Harmonic delivered another strong quarter. Global broadband market trends are favorable. Near-term demand is healthy. Our early customers are successfully scaling. And we continue to add new customers, both large and small. The future of broadband access technology is clearly cloud-native core software powering a flexible distributed access network. And as a primary architect of this new model, Harmonic's broadband access future remains bright. Returning now to our video segment, we followed up a strong second half of 2020 with another solid quarter. First quarter segment revenue was $70.3 million, up 29% year-over-year, and up 5% from the first quarter of 2019, indicating growth that is more than just post-pandemic recovery. Gross margin was 55.1%, and segment operating margin was 5.4%, impressively demonstrating continued profitability despite business transformation headwinds. As you know, our key strategic transformation is from a purely broadcast technology and associated CapEx business model to a mix of broadcast CapEx and streaming SaaS with recurring revenue. Demand for high-quality live streaming solutions continues to grow, evidenced by a strong sales pipeline, several new streaming SaaS wins, and our near-record backlog in deferred revenue. During the quarter, we signed net seven new streaming SaaS customers, mostly customers that are new to Harmonic. bringing the total number of media companies on our streaming platform to 97, which is up 72% year over year. Approximately a quarter of these customers are still in the process of fully launching their new streaming services, underlying our continued streaming growth expectations. As a recent example, a prominent new sports streaming service that we signed in 2020 went live with us just a couple of weeks ago and is already delivering millions of daily ad impressions, with even higher ad volumes anticipated as the service expands. Since the ad insertion portion of our SaaS solution is charged on an impression volume, or CPM, the associated growth opportunity for this part of our video business is becoming more compelling. While streaming is the main headline, a secondary headline is revitalized broadcast demand. We're seeing a general rebound in broadcast project activity worldwide, of which we believe we're capturing an increasing share. We're also seeing 5G bandwidth reclamation continuing to be a catalyst for both near-term business and longer-term opportunity creation globally. During the first quarter, we continued to execute our announced program with SES, and several new 5G bandwidth reclamation projects came into focus, new projects that we now expect to contribute to the second half of the year in 2022. We're correspondingly raising our video segment revenue guidance modestly for the full year. Looking further ahead, we believe the success the industry is seeing with the C-band initiative is opening the door to a broader opportunity for wholesale IP video distribution via terrestrial fiber rather than satellite networks, a positive trend for sustained video broadcast investment. So in summary, we delivered another strong video quarter, characterized by solid revenue growth, gross margin, operating profit, new wins, and bookings. This performance highlights the resilience of our video business, our industry-leading technology, and our growing success extending our brand from the realm of high-end broadcast to high-performance cloud streaming and SaaS. Leveraging our strong backlog and deferred revenue and a robust video sales pipeline, we're moving forward through 2021 with real market momentum and conviction in our video growth plan. So let me now turn the call over to you, Sanjay, for a closer look at our financial results and outlook.

Thanks, Patrick. And thank you all for joining us today. Before I discuss our quarterly results and outlook, I'd like to remind everyone that the financial results I'll be referring to are provided on a non-GAAP basis. As David mentioned earlier, our Q1 press release and earning presentation includes reconciliations of the non-GAAP financial measures to GAAP that are discussed on this call. For the first quarter of 2021, we delivered solid results, generally above our guidance ranges. We reported Q1 revenues of $111.6 million, up 42.3 percent year-over-year, and gross margin of 50.4 percent, a 150 basis point improvement year-over-year. Operating margin was 4.5 percent, comprised of 3.1 percent for cable access and 5.4 percent for video. And we generated adjusted EBITDA of $9.1 million and EPS of 4 cents. We also had seasonally strong bookings during the quarter with a book-to-bill ratio of 0.9. As a result, we ended Q1 with a solid backlog and deferred revenue of $274.3 million, positioning as well for the remainder of the year. Now I will review our first quarter financials in more detail. Turning to slide seven, total company Q1 revenue was $111.6 million, a 42.3% increase compared to 78.4 million in Q1-20. As Patrick mentioned, we continue to see increased traction in our cable access business, ending Q1 with 53 commercial deployments, with a sequential growth of 20%, compared to 44 at December 31st, and up 96% year-over-year. Cable access revenue was 41.3 million, up 72.1%, compared to 24 million in Q1 2020. In our video segment, we reported Q1 revenue of 70.3 million, up 29.2%, compared to 54.4 million in the prior year period. We continue to see a recovering video activity worldwide during the quarter, including continued satellite C-band 5G-related revenue. We had two customers representing greater than 10% of total revenue during the quarter, Comcast contributed 23 percent of total revenue, and SES contributed 16 percent. As mentioned earlier, gross margin improved to 50.4 percent in Q1 2021 compared to 48.9 percent in Q1 2020, up 150 basis points. Cable access gross margin declined slightly to 42.2 percent in Q1 2021 compared to 43.3 percent in Q1 2020, down 110 basis points. reflecting increased supply chain costs and a higher mix of DAA hardware. As previously mentioned, cable access operating margin was 3.1 percent. Video segment gross margin was 55.1 percent in Q1 compared to 51.3 percent in Q1 of last year, a 380 basis point recovery to business as usual before the pandemic. Moving down the income statement on slide eight, Q1 21 operating expenses are 51.1 million compared to 47.9 million in Q1 20. The year over year increase was primarily due to increased cable access research and development and services and sales and marketing for both segments as we continue to invest in our growth initiatives. The secondary reason for the increase was the conversion of some employee incentive compensation from stock to cash as I will explain further when I discuss our guidance. We reported operating profit for the first quarter of $5.1 million, comprised of $1.3 million from cable access and $3.8 million from video. This is a substantial year-over-year improvement compared to an operating loss of $9.5 million in Q120. Adjusted EBITDA for the first quarter was $9.1 million, reflecting contributions of 3 million from cable access and 6.1 million from video. This compares to an adjusted EBITDA loss of 7 million in Q1-20 and translates to Q1 EPS of 4 cents compared to Q1-20 EPS loss of 10 cents. We ended the quarter with a diluted weighted average count of 103.2 million for shares compared to 103.3 million in Q4-20. The sequential increase is primarily due to the issuance of 2 million shares to employees for vested restricted stock units, ESP purchases, and performance-based compensation, and 0.9 million shares for convertible debt dilution as a result of our increased average stock price. Q1 bookings were 96.3 million, a 26.2% increase compared to 76.3 million in Q1 2020. It was encouraging to see another quarter of year-over-year bookings growth during the first quarter, demonstrating continued strong demand for our differentiated technology solutions. Turning to slide nine, we'll now discuss our liquidity position and balance sheet. We ended Q1 with cash of $100.8 million compared to $71.7 million at the end of Q1 2020. and 98.6 million at December 31st. The 2.2 million sequential cash increase is comprised of 1.7 million cash generated from operations, primarily attributable to the profitability in both our businesses. Net of 3.6 million cash used in the purchase of fixed assets and 4.7 million received from common stocks sold to employees under our ESPP and from stock option exercises. Our day sales outstanding at the end of Q1 was 69 days compared to 107 days in Q1 2020. The year-over-year decrease in DSO reflects continued overall collection improvements and the timing difference of certain large receivables. Our days inventory on hand were 58 days at the end of Q1 compared to 78 days at the end of Q1 2020. At the end of Q1, our total backlog and deferred revenue was $274.3 million, compared to $207.9 million at the end of Q1 2020, and a record $290.5 million at the end of Q4 2020, reflecting a sequential decrease of 6%. Our near-record backlog and deferred revenue reflects both increasing commitments for our large cable customers and our growing video streaming SaaS businesses. We are pleased to be maintaining a strong level of high quality backlog. Note that historically about 80 to 90% of our backlog and deferred revenue gets converted to revenue within a rolling one year period. Also the deferred revenue component of our total backlog and deferred revenue was 27% at the end of Q1 compared to 27% at the end of Q1 2020. Demonstrating that revenue conversion of backlog and deferred revenue continues at levels consistent with our expectations. As mentioned on previous calls, not included in our backlog is additional contractually agreed cable OS business with three of our tier one cable customers. At the end of Q1 21, this incremental amount was approximately 156 million, down from 158 million last quarter, as approximately 2 million went through the purchase order process and therefore moved into bookings. Taking these cable OS contracts into account, we have total future contracted revenues of $430.3 million, which provides us with a solid foundation for the remainder of 2021 and into 2022. Now I'll turn to our non-GAAP guidance for 2021 on slide 10. While COVID-19-related uncertainty and volatility still exist, Our customer activity and pipeline have substantially recovered since the height of the pandemic. On the other hand, we are contending with a somewhat unprecedented global supply chain situation, creating both cost and production timing challenges. Based on extensive conversations with our key customers and supply chain partners and internal analysis, we expect the demand recovery to continue throughout the balance of 2021. with our typically seasonally stronger Q4 and second half. And that meeting this demand will likely be somewhat at higher cost, particularly for our cable access hardware products. For the full year of 2021, we expect total company net revenue in the range of 435 to 480 million. At the high end, this reflects upwardly revised growth expectations for both segments. Gross margin in the range of 50.6 to 52 percent. At the midpoint of our guidance, this represents a decline of 120 basis points year-over-year. This reflects a slight increase in video gross margins and a lower gross margin on cable, which I will elaborate on shortly. Operating expenses range from 209 to 218 million, an increase from previous annual guidance due to increased cable access research and development expenses. and the decision to settle certain employee incentive compensation payouts with cash instead of stock, reducing dilution. The latter was a decision recently made with our board considering our stronger cash position and operating plan. Adjusted EBITDA to range from 25.1 million to 45.7 million, an increase of approximately 49% year over year at midpoint. EPS will range from $0.06 to $0.24, an effective tax rate of 10%, a weighted average diluted share count of approximately $104.7 million. And finally, cash at the end of the year is expected to come in between $110 to $120 million. On slide 11, I will focus on total company guidance for the second quarter. Revenue in the range of $102 to $112 million. at the midpoint of our guidance, this reflects an increase of 45% compared to Q2 last year. Gross margin in the range of 48.7 to 50.6%. At midpoint of our guidance, this reflects a decline of 195 basis points compared to Q2 last year. Operating expenses to range from 52 to 54 million due to the reasons mentioned previously. Adjusted EBITDA to range from 0.8 million to 5.8 million versus a loss of $2.8 million in Q2 last year. EPS to range from a loss of $0.03 to a profit of $0.01 per share. An effective tax rate of 10%, a weighted average valued share count of approximately $101.2 to $104.2 million. And finally, cash at the end of Q2 is expected to range from $90 to $100 million. Starting this fiscal year, we will be augmenting our segment guidance to include segment gross margin, operating expense, and adjusted EBITDA, corresponding to our existing practice of providing these segment metrics in our reported quarterly results. On slide 12, I will discuss guidance for our video segment for the full year and the second quarter. For the full year 2021, we expect video revenue in the range of 260 to 280 million. At the midpoint of our guidance, this reflects 11% growth year over year, attributable to both rebounding broadcast market demand and growth in streaming. Growth margins in the range of 55% to 57%. At the midpoint of our guidance, this represents a 150 basis point improvement over last year, mainly due to improved product mix. Operating expenses are expected to be between $138 to $143 million, an increase of 7% versus last year. Most of the increase is due to increased sales expenses tied to our higher projected revenue. Adjusted EB die in the range of $13.5 million to $25.1 million, an increase of 135% over last year at the midpoint. For Q2, we expect video revenue in the range of 57 to 62 million. At the midpoint of our guidance, this represents approximately 25% growth over Q2 last year. We expect video gross margin in the range of 54 to 56%, which at the midpoint is a 20 basis point improvement from Q2 last year. Operating expenses to range from 34 to 35 million, an increase of 14% over Q2 last year. due primarily to increased sales expenses as mentioned previously. Adjusted EBITDA to range from a negative 1.3 million to a positive 1.6 million. On slide 13, I will give you guidance for our cable segment for full year and the second quarter. For the full year 2021, we currently expect cable access revenue in the range of 175 to 200 million. At the midpoint of our guidance, this reflects a 38% growth year over year. This growth is driven by strong momentum with our existing customers as they accelerate deployment, as well as new customer growth and modest converged fiber to the home revenue. Growth margins in the range of 44 to 45%, a 440 basis point decline versus last year at the midpoint, due primarily to increased costs related to supply chain headwinds and an increased mix of DAA hardware. Operating expenses are expected to be between $71 to $75 million, an increase of 33% versus last year. Most of the increase is due to increased assertion development and sales and marketing expenses. Adjusted EBITDA in the range of $11.6 million to $20.6 million, an increase of 3% over last year at the midpoint. For Q2, we currently expect cable access revenue in the range of 45 to 50 million. At the midpoint of our guidance, this reflects 79% growth for cable over Q2 last year. Gross margin in the range of 42 to 44%. At midpoint of our guidance, this reflects a 270 basis point reduction over Q2 last year for the reasons mentioned previously for the full year gross margin guidance. Operating expenses to range from 18 million to 19 million. At the midpoint of our guidance, this reflects a 42% increase over Q2 last year, primarily due to increased research and development and sales and marketing expenses. Adjusted EBITDA to range from 2.1 million to 4.2 million. In closing, again, we are grateful for our team's continued dedication and strong performance during the first quarter. We continue to execute on our strategic priorities, positioning our cable access and video streaming businesses for long-term success. With that, thank you, everyone. And now I'll turn it back to Patrick for final remarks before we open up the call for questions.

Okay. Thanks, Sanjay. We want to conclude by reviewing our strategic priorities for the year. For our cable access business, our objectives are accelerated expansion of existing Tier 1 deployments, entering new global operators, particularly additional Tier 1s, and expanding our address market through CableOS's new converged DOTSIS plus fiber to premises capabilities. We're pushing forward aggressively despite near-term cost challenges. For our video segment, our objectives are accelerating the growth of our streaming and SaaS customer base and usage. capitalizing on the coming transformation of traditional media and broadcast infrastructure globally, and delivering both top and bottom line growth. Putting it all together, we aim to create value, to deliver industry-leading solutions, and to enable superior subscriber experiences worldwide. And finally, we're pleased to announce that later in May, we will be hosting two special investor events, a deep dive into our cable access business, an associated multi-year outlook, and a similar deep dive and multi-year outlook for our video business, both featuring additional members of our executive management team. We expect the dates to be finalized shortly and hope that you all join us. With that, I would now like to open up the call for questions.

As a reminder, to ask a question, you will need to press star one on your telephone keypad. And your first question comes from Samik Chatterjee from J.P. Morgan.

Hi, this is Joe Cardoso on personal strategy. My first question is on your guide and kind of more of a clarification. You always obviously spent a large portion of the prepared remarks mentioning the supply constraints and implications on the higher cost. I'm just curious if you guys are seeing any implications on the supply constraints on your top line and basically are you being impacted by your ability to supply customers and whether you're baking any of that into your full year guide.

Yeah, in terms of top line and the supply chain, we have factored in any risk we consider in our guidance range. So our guidance range completely entails the risk we consider at this point for this supply chain.

I guess if I could just follow up there, are you seeing any implications on your ability to supply customers currently, or you have not seen that yet today?

We've not dealt with that to date. If I can step in, we've not dealt with that to date. I think the current situation creates a ceiling. It's not to say we're not working to remove that, but it does create a little bit of a ceiling on the upside. What we're talking about today is going beyond our guidance that we gave last quarter. So we're fortunate that we don't see any reduced expectations. But if your question is, you know, is the sky the limit, right now the sky is not the limit. And there is a scenario where demand may outstrip supply. But right now, the supply that we see, we think we can manage and actually manage to deliver a little bit of upside. albeit, as we've said a couple of times, at higher than originally anticipated costs, simply entailed with getting that done. It's a dynamic situation. As Sanjay said, we're confident, we're quite confident that we've got the resources to deliver within the range that we've talked about. Is upside on that possible? It is possible. I think it's probably more likely that the demand is there, then we'll be able to satisfy the demand. But both of those things are a little bit dynamic, and we'll continue to keep you updated as we move through the year.

I really appreciate the color. And then I guess just for my second question, and this is more broader, it looks like there's a bunch of initiatives from governments globally in the pipeline, including RDOF and the infrastructure plan in the U.S. There's the U.K.' 's Project Gigabit and the European Commission's broadband projects. Just curious to hear your overall thoughts on these government projects in terms of when do you expect them to materialize and how is Harmonic positioned to benefit from these investments globally? Thank you.

Yeah, well, I very much appreciate the question. As your question implied, the world is a big place, and there's a lot of different initiatives with different timing happening all over the place. But I think we can agree the headline is that broadband and access to broadband is it's a priority issue from every country, from the United States to the UK to Bhutan, right? And so being a participant and being a key supplier of broadband enabled technology is a great place to be. We think we have an extremely strong position within cable, and as you know, we're working to expand that position to also address fiber. Our first port of call, if you will, is those cable operators who are expanding into fiber or have hybrid cable and fiber infrastructures. We think that that opportunity substantially expands our dressed market. And as we've discussed before, once we've kind of got that in play, we think we can expand beyond that. So we think it's a very attractive environment. We think we're well positioned. We're not targeting the totality of the market today, but we're targeting a growing subset of the broadband market where we can not only participate, but we really can differentiate ourselves. So we think that the future is pretty exciting, and it's one of the reasons why we're leaning in now, and we're continuing to lean into investing in both the current and our coming technologies to strengthen our position, not just for 2021, but for the next several years. And I guess just one last thing. As I mentioned a moment ago, we do plan an investor event to really go into this topic from both a market and a technology perspective in more detail later on in the month. And I think that your question really hits on one of the reasons we want to have a slightly more in-depth conversation to talk about what we're doing and the market opportunity that we see.

Thank you. Appreciate the question, and congrats on the results.

Thank you.

Thank you.

And our next question comes from Tim Long from Barclays.

Thank you. Two questions, if I could. First, on the CBAN side, it sounds like it's starting to broaden out a little bit more from a customer base, so could you kind of just give us an overview, Patrick, on kind of level of activity there and maybe update us as this moves along, any changes to the competitive environment, and then On the cable side, it sounds like a really big pipeline outside of the backlog, so maybe if you could kind of give us a sense as to why you're seeing that growth. Is it a lot of new deployment? Is it traffic growth? What's driving that, or competitive wins, and maybe a little bit on the slope of the curve to turn that stuff into revenues? Thank you.

Okay. Thanks for the question. You know, on the C-band stuff, indeed, we're seeing more opportunity. In particular, we see a couple of substantial new opportunities that really come into focus. And we see that as beginning to materialize in the second half of the year, and we also see it as high probability for 2022. So I would say that that next wave of opportunity is domestic. Beyond that, we still see and we're engaged in a number of conversations around related international opportunities, but I would call those still as not quite in focus and therefore not yet factored in any way into the guidance that we've given. From a broader trend, I think that it continues to be promising from our perspective, not only because the government is looking to recover bandwidth, but because the market is waking up to the fact that actually there's a lot of benefits to moving video traffic over a terrestrial fiber network, personalization, customization, targeted ads, et cetera. So it's a dynamic, in a positive way, it's a dynamic evolving opportunity. that is leading to broader conversations with a number of customers, both domestically and internationally. There's not really been any change, the last part of that question, Tim, there's not really any change to the competitive environment. We're certainly not the only one. We've seen some deals go to competitors, but we think we're pretty uniquely positioned and we're really leaned into a couple of very significant additional opportunities. You know, on the cable front, Look, it's a little bit all of the above in your comments. I think that, as we touched on the last question, broadband is a must-do, whether it's from a consumer perspective or from a government perspective. It's only becoming more important. I think we all see that. And so there's consumer demand. I think there's strong, and we're seeing strong demand from both our existing customers to go faster, and from new customers. In particular, new customers, as we continue to get success in the market with deployments, there's a virtuous circle. We think we're getting more and more credibility, perhaps slightly more conservative operators or ones who had a little bit more questions about the technology. They're getting more and more comfortable with the deployment volume, the success of the quality of service that we're seeing. And so I think both of those things are factoring into a strengthening pipeline. That being said, at the risk of rambling on here, we've also learned that depending on the environment, this is not necessarily snap the finger and deploy it overnight. There is a process. And to the comments here, we're carefully managing our supply chain, and that also modestly impacts, I would say, the pace of of which we can move. So strong demand, competitive position is, I would say, yes, stronger, stronger than ever. And I'd say the translation of all that into volume deployment is okay. It's not quite as fast as we'd like to see. Supply chain inhibits that a little bit, but it's going okay. And I think if you look at our guidance range, you know, the top end where year over year it's a respectable number, getting close to 50%. And given everything that's going on in the market and the fact that we're still in many places dealing with, you know, some pandemic-related issues, et cetera, I think that that growth and our view that we want to discuss with you all later in the month of multi-year growth, all of that from our perspective is quite possible. Okay, thank you, Patrick. All right, thank you.

And your next question comes from Simon Leopold from Raymond James.

Hey, thanks for taking the question. I wanted to ask maybe if you could help folks understand the metric you've been offering on the past several calls regarding the cable modem served. I guess this quarter you're up to 3 million, and you talked about 6% or better than 6%, which would imply that the customers have a total of about 50 million. Could you help us understand how you measure that, that metric and what stands between, uh, basically serving 3 million and 50 million is there, what needs to happen for that number to grow is really what I'm looking for.

Um, okay. Um, indeed you've got it in round numbers. You've got it about right. Uh, the people who are actively deploying cable OS, uh, today, um, They have, they serve about 50 million, over 50 million cable modem subscribers. They are, you know, I don't know the right analogy assignment. You know, they're kind of rebuilding the house, if you will, or repainting the house, you know, room by room. And, and, And it isn't a flip of the switch kind of thing. There is, at a minimum, in centralized architecture, so there is rewiring and re-architecting of the main head end. And where DAA is used, actually, there is deployment of DAA nodes out in the neighborhoods, which means a truck needs to roll, someone needs to go up in a bucket truck or go down into the ground and replace an old node with an existing node. And very often that involves pulling fiber deeper into a neighborhood. So that's the part of the process that is time consuming. It's not so much our technology itself, but it's making the architectural, the wiring, the infrastructure, the rest of the infrastructure changes both in the central office where, you know, you're running our software, core software on commercial off the shelf servers. You're moving to that server infrastructure, that data center kind of infrastructure. off of old legacy chassis and very often you're replacing, pulling fiber deeper into the network. So that's a time consuming process that also takes capital money as well. And it's that process, Simon, that for any given operator limits the speed. And even the most well-heeled operators with a lot of budget, they're not throwing infinite amount of money at this simultaneously. And, frankly, in many markets, work crews are somewhat tough to come by, et cetera. So there is a process of rolling out. That's why we've always said that even with those customers who we expect to roll out our solution to 100% of their plant, and most of our key customers, we do expect that to be the case, but we expect it to be a several-year process, a three- to four-year process. And so we're on that curve. As experience becomes better, we expect the pace to quicken. We expect our largest customers to be picking up the pace, and that's the biggest part of the growth that we're projecting of this coming year, to be clear. But even at a quicker pace, we still expect a several-year process for our larger operators to roll out the technology across the entirety of their footprints.

Thanks. And then as a follow-up, I wanted to see if maybe we could unpack the gross margin pressure on the cable access segment. And certainly I appreciate you don't have some crystal ball that tells you when the supply chains open up necessarily. But what I'd like to try to understand is what's the impact of supply chain versus product mix? For example, nodes dilute your gross margin versus your software. We understand that. So I guess what I'm trying to understand here is what would you expect the gross margin in that business unit should be in a sort of more normalized, non-supply-constrained market, and do you have a view on when we should get back to those levels?

So, Simon, I appreciate the question. I think, as I pointed out in my prepared remarks, there are both pieces to the gross margin. decline we are seeing now marginally is substantially due to the supply chain related costs. At the same time, we are also seeing increased growth in the DAA hardware. So both pieces are there. It's hard to quantify what is the piece of each, but substantially it's the supply chain costs. That said, you know, once the supply chain challenges are behind us, we should return back definitely in better margins than where we are expecting for this year. And I think not going in the outer years, I think when we talk about the multi-year in our IER event, which Patrick mentioned, I think we can cover the expectation at that time. At this point, we are not going into the 22 margins. But directionally, we should see improvement from where we are this year.

Is there, I guess, a level that should we look at fiscal 20 as kind of a normalized value, or is that misleading for any reason?

You know, if I could step in, I mean, our target is to do better than 2020, so I don't think it's a normalized value. I mean, maybe if I could, not from the CEO perspective – Look, there's a software component and there's a hardware component. The software component is going to be very high margin, right? It's 90 plus percent. Then we've got hardware. And we've always said, or we've said previously, that the hardware has been in the, let's say, mid-30s on average. But that is, we expect that to be going up with volume, as well as design enhancements, et cetera. And long-term, that's still our expectation. I think, yeah, we've gone the other way short-term on the hardware, but that is not a fundamental reset. We're paying a lot more. To unpack it a little bit, as you asked, we're paying a lot more for key components. We're also paying higher assembly and transport costs. So we're kind of getting hit from a number of perspectives. We see none of those hits, though, to be fundamental impairments that go forward indefinitely. We don't have a crystal ball on this supply chain thing. I mean, right now, I think we expect it to kind of carry over somewhat into 2022. But we would expect, again, this is a very plentiful expectation, but we expect some recovery later in 2022. But we certainly hope it's sooner. We don't have a good crystal ball. But what this guidance assumes is that it will be with us through 2021. And again, I want to emphasize the fact that we could probably have higher margins if we were willing to take, you know, lower, deal with lower volumes. But, you know, we see a land grab opportunity. We've got real momentum with our solution. So we are leaning into every opportunity we have to deploy DAA hardware out there, which means we are scouring the planet right now for the materials we need. And we're paying top dollar in many cases for that. I think that's the right thing to do strategically. I think capturing real estate is absolutely the right thing in terms of our multi-year growth opportunity, our market leadership opportunity. Yeah, it's costing us the gross margin short term, but I think the right way to look at it is that we're picking up significant market share, and that's going to be a durable strategic benefit to the business for many years after this near-term cost headwind is behind us.

Great. That's helpful. Thank you. That's what I was looking for. Appreciate it.

And you have a question from George Nodder from Jefferies.

Hi, guys. Thanks very much. I guess I wanted to come back to the C-band discussion from earlier. I think you said you're seeing a broadening out of opportunities. I guess the clarification here – Are you seeing then some of the 2023 opportunities coming forward then? I guess there's, of course, a deadline, December 5th, I think, 2023. So when you talk about a broadening of opportunities, are those the deals that you're seeing now kind of coming forward, or are there some other pieces of business that are coming forward that –

No, we're referring to something a little bit different, George. You know, just taking a back up, I know you know this, but others listening may not. I mean, still around the world, a huge amount of video is moved around over satellite networks. And I think in many ways the philosophy, our philosophy has been out there, if it ain't broke, don't fix it. even though intellectually the question has been out there, wait a minute, why not be using fiber-based to transport? And I think what we're seeing is through the success in what's happening to date with the CBAN project, that is causing some of the, let's call it, it ain't broke, don't fix it folks, to stop and pause. So even in the absence of a government conversion plan or pressure, the success of this initiative is opening the door to a different kind of discussion, saying, wait a minute, even if the government isn't bearing down on us and requiring us to abandon satellite, maybe moving more of that traffic to fiber is gonna save money on one hand, and on the other hand, maybe it's going to allow a more innovative service delivery offering. So it's the latter that we're referring to, not a pull-in of government-driven programs, but rather a growing industry dialogue around you know, whether to leverage this technology more broadly. Does that make sense? Got it.

That's very helpful. I guess I also wanted to ask about maybe one on RDOF. So, you know, obviously the list of awardees is out there for Phase 1. You know, are there specific operators or customers that you see on that list that are harmonic customers that create new revenue opportunity for you? You know, are there specific guys you can identify?

Yes, is the short answer. I don't want to suggest that we've got a seat right in the front and center of the auditorium, but the short answer is yes. There are people who are existing customers, and there are people who are in our sales pipeline. Now, to be clear, as we've stated, today we're focusing on a subset, Those are the subset of those folks who own some cable infrastructure as well, so who would be kind of hybrid cable and fiber to the premises operators. But for anyone who is in that category, they're absolutely, which is a subset of the RDOF awardees, they're absolutely part of our go-to-market focus.

Got it. Thanks very much, guys.

All right. Thank you.

And you have a question from Steven Frankel from Colliers. Mr. Frankel, check to see if your line is muted.

There we go. Patrick, thank you for the opportunity. To what extent is this acceleration in R&D reflecting kind of new projects that you think you need to get to market faster

uh versus kind of just accelerating the pace around existing things you'd already targeted i i wish it was one of the other it is a mix of both um um we we do have um but to be frank i think we've said it before every tier one has their own unique stuff and part of the success formula is kind of adapting before them and uh We announced a significant tier one last quarter. We've added another one this quarter, and we've got several more tier ones in our pipeline. And we're planning for success with the ones we've recently signed and with the ones that are coming. So there's part of it. But the second part of it is us looking at what we're learning in existing deployments, what we're seeing, the fiber to the home opportunity we've talked about a couple of times, and the overall momentum. And we're You know, we're envisioning where the puck is headed, and we see the puck really moving down the ice, if I can stick with that analogy. And so we think now is the time to really lean in. I mean, let's face it, if we spend on R&D in that regard now, you know, it shows up as benefit later in 2022 or in 2023, and we've got real growth aspirations for those years. And so we think now is the time. Sorry, go ahead.

No, no, it's fine. And then one follow-up. I think I heard you say before that DAA is increasing in mix and it's coming from the Tier 1s. So is it fair to say that those Tier 1 customers that were kind of dipping their toe and doing fits and starts over the last 18 months, are now far enough into it that they can kind of put their foot on the accelerator in terms of deployments?

Yes, the pace of employment is definitely increasing. I think that's one thing. I think the other thing is that a couple of those operators initially started off with several different DAA sources, and we think we're getting a little bit higher market share because of the strength of our particular solution. And again, Even at short-term higher cost, we think the right thing to do is to lead into that, let's call it incremental market share opportunity. We view putting a DAA note out there as gaining valuable real estate and not just a short-term revenue opportunity, but a real presence in the network opportunity that is well worth leaning into.

And you have a question from Tim Seveno from Northland Capital.

Good afternoon. I'll try and be quick here. Got a couple questions. First, on the overall topic of deployment accelerating in cable, in trying to bridge the gap between 3 million cable modems and 50, I think you commented at a recent industry event that you thought that number would be 9 million. or so by the end of this year, which is a pretty market acceleration. In that context, interesting to see the guidance increase. I mean, understanding there may not be a linear relationship between that type of acceleration and cable modem served and harmonics revenue. You know, sounds like we should be thinking more about the high end of the range where you mentioned 50% growth or even that's conservative in light of those targets. And then I have a follow-up on a completely separate topic.

Well, thanks for the question, Tim. I think you're referring to comments that I made at a recent industry event, which is really targeted at the cable operator community. And I was not talking specifically about harmonic, but the industry writ large. And as I think you know, while we think we're ahead of the class on DAA, there are a couple of others who are doing DAA solutions, including DAA solutions that are not tied to virtualized CMTSs, et cetera. So the estimate that I provided there was not a harmonic number, but it was an overall industry number, domestic as well as international. and certainly therefore included a competitor of DAA solutions that are out there. So, yeah, there's a couple of different variables floating around. And further, I will also concede that discussing, you know, growth forecasts with the industry is somewhat different than offering financial guidance. So you've got a couple of different things going on. I think the good news is we are seeing the industry get more and more comfortable with DAA as a technology. And I think the important thing that came out of that live reading conference is increased industry conviction that DAA is not only viable, but it actually increasingly is the way to go. But yes, one can therefore not draw a straight line between those industry projections and and our revenue for a couple of reasons that you highlighted as well as what I've just said in terms of overall industry numbers versus harmonic numbers.

Okay. You did say you thought you were gaining share, but I'll just leave that one there. The second one is I think there was a brief reference made maybe in the incentive comp discussion about part of the driver of that being the new kind of cooperation agreement or the board changes that you've seen. And, you know, I wonder if you might comment a little more expansively on that. You know, we've also, you know, I'm going to guess that the more detailed segment guidance and investor days, you know, might be a function of that as well. And I guess at a high level, you know, should we be thinking about these segments increasingly separately for harmonics? video and cable access, both tactically and strategically. And if that were the case, it might make for a shorter press release, at least, or possibly a shorter call. But, you know, your choice for how to approach it, whether we should be thinking more about strategic activity at Harmonic as a result of that agreement and what has been the impact to date besides what you mentioned on the call.

So, Tim, let me start with the first one. Let me clarify. This change of incentive form from stock to cash has nothing to do with the corporation agreement. This is purely an internal decision. As the board... looked at our plan for the year. We are generating very good cash, and the operating profit level we are reaching, we took a decision to convert a piece of our stock comp to cash comp, and it helps marginally reduce the valuation of the company as well. So let me clarify, it has nothing to do with that agreement. Secondly, in terms of the two segments being distinct, we have always reported the two segments right from the revenue to the operating profit in actual reported results. But while giving the guidance, we have not given the guidance in that transparency. Starting this quarter, we felt the need to do it based on the continuous regular questions during the investor interactions we've had. So we thought it's more transparent and it provides more visibility of what each segment is doing. And again, this has also nothing to do with any other agreement. So this is more on transparency.

And Tim, just maybe to follow on from my perspective, it truly is a cooperation agreement. We value the relationship with Scopia. They've been in the stock for several years, and that's all very good. And so that's a full statement, full stock. Definitely, I think along the lines that Sanjay just said, we've been quite clear over the past several years about how we think about the different pieces of our business and how we're trying to create value in the company. And there really is no strategic change. And it wouldn't be a mistake to conclude anything strategically from anything that we've discussed today. Both of our businesses, we think, have exciting futures and opportunities. You can see that we're investing in both. I think we've been quite transparent. We've received the question numerous times over the past several years, you know, what's the level of synergy between the two? We've been quite transparent to say, you know, there's modest synergy. It's not overwhelming. We, the company, the management team, as well as our board, will work to create value whatever way we can. Maybe with the two business units staying together, maybe with a part. There's no change in that answer, nor in our thinking that has – over the past several years. We will continue to move forward looking to create as much value as we can in the overall enterprise, which really means creating as much value as we can in the two business segments. And I'm very pleased coming into this call that we see actually good strategic progress on both sides of the business. I think there's a lot of reason to be encouraged on both sides and to see good futures on both sides of the business.

And there are no further questions at this time. I'm going to turn the call back over to management for closing remarks.

All right. Well, thank you very much all for joining us. We've got a lot of challenges, but a lot of opportunities ahead of us. We look forward to staying in touch with all of you. And in particular, as mentioned, keep an eye out for our planned investor dates next in a month or so time until then take care and we look forward to speaking with you all again soon bye bye ladies and gentlemen this concludes today's conference call thank you for participating you may now disconnect