Q3 2019 Earnings Call
Denims Christian all of your operator for today's call.
As Tom all participants are in listen only mode. Later, we'll conduct a question and answer session.
Please note that this conference is being recorded.
I'd like to turn the call over to cool new sheet News <unk>.
Investor Relations Nicole you may begin.
Thank you, Chris Hello, everyone and thank you for joining us today for harmonics third quarter 2019 earnings conference call.
They are Patrick harshman, or CEO , and Sunday, Colorado, our CFO before I begin I'll, let you point out that addition to the audio portion of the webcast vault provided slides to some cash which you can see by going on or webcast on our IR website.
During this call you 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.
I refer you to document harmonics filed with the FCC, including our most recent 10-Q and 10-K report and the forward looking statements section of today's preliminary results press release.
These documents identify important risk factors, which can cause actual results could differ materially from does contain projections or forward looking statements.
Please note that unless otherwise indicated that financial metrics revive view on this call are determined on a non-GAAP basis. These items together with corresponding GAAP numbers and a reconciliation of GAAP or he did contained in today's press release, which we posted on our website and filed with it could be on form eight.
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 information will be available on the recorded version of this call around or web site.
Now I'll like to turn the call over <unk> CEO Patrick Harshman.
Patrick.
Thanks, Nicole and welcome everyone to our third quarter call.
Harmonic delivered a strong quarter, both financially and strategically.
The financial headlines or revenue of $115.7 million up 14% year over year.
Gross margin of 67% and record non-GAAP EPS of 20 function.
Our virtualize cable or west solution was the primary driver of this growth.
Demonstrating the operating leverage achievable as we scale or software based solutions.
Scale is where we're headed as we saw during the quarter a clear tipping point of industry consensus. The virtualization is the future of cable access worldwide.
And the harmonics cable or what is the industry leading platform driving this transformation.
And the video side of our business were similarly, seeing positive momentum from our transformation to a lot over the top.
As we launch powerful new streaming capabilities and as new cloud based customer deployments accelerated.
We also refinanced approximately two thirds of our convertible debt during the quarter, taking advantage of favorable terms.
Firming or confidence and paying down the remaining sort of the original debt principle.
Cash by the end of 2020.
Taking a closer look at our cable access segment, let's start with the financial headlines.
Revenue in the quarter was $55.7 million of which 42.9 million was gross profit that's virtualized cable or software dominated the revenue mix.
We also anticipate a solid fourth quarter set of correspondingly raised for full year segment revenue and corporate operating profit guidance.
Well, the Comcast relationship serving as a strong foundation.
We're making good progress expanding our customer base.
At the end of the third quarter cable the west have been commercially deployed by 19 cable operators globally.
And the associated number of served modems had grown to over 935000.
20% from the end of the second quarter.
It's important I understand that these early deployments are generally still in the first phase of adoption.
He took will grow in 2020 and beyond as deployment footprints expand.
The network traffic skills.
Not yet included in these numbers for the two international tier one distributed access architecture deployments, we've discussed previously.
But both customers progress is good and our confidence is high.
That's one of these customers, we expect deployment in revenue to begin to ramp in the fourth quarter.
Well the other deployments in revenue is expected to begin in the first half of next year.
As we've learned both in the U.S. and overseas.
Working with large operators to fundamentally transform their access architectures is a complex process required painstaking work.
And as evidence in the third quarter once the transformation begins rolling.
Such design win engagement can be very rewarding.
Well launching in scaling early customers and securing new design wins has been a primary focus.
We've also continue to aggressively extend our technology leadership position.
During the quarter, we announced new cable the west cloud native capabilities.
Luck significant new real time analytics.
Operations automation and quality of service benefits far beyond traditional solutions.
Additionally, leveraging or cloud native containerized architecture, we've announced groundbreaking converged fiber to the home and data over cable service capability.
For unified cable or west core software kind of converged IP over fiber delivery network serve both remote phy for cable and remote all t. for fiber to the home edge devices.
We think this is a big deal.
As a multiplies the benefits of our Virtualized access network core and expands our addressable market.
For the majority of our cable customers, who operate hybrid broadband access networks were both data over cable is complemented by fiber to the premises for new housing developments large residential buildings and business services.
Having a unified core access platform will be a further game changer in terms of operational efficiency.
In service flexibility.
And really customer response to this announcement has been very positive.
Those of you attended the recent cable Tec Expo in New Orleans, the cable industry signature annual event.
Confirm that Virtualized cable access has moved to center stage of industry his vision for the future.
And that harmonic is recognized as the technology company, leading this transformation.
This recognition is being amplified by strong public validation from early customers.
I want to share with you some of the powerful operational data or cable less customers presented publicly but this event.
70% power savings.
20 to one physical space reduction.
The drop in meantime to detect yep network issues from 30 minutes to 15 seconds.
And an improvement in targeted software upgrade precision from 20000 to 70 home households passed.
This all translates to very significant improvement to quality of service.
Equally significant operational savings relative to conventional see MTS and HFC network technology.
This is an extremely powerful message the broader industry is now starting to understand and embrace.
Correspondingly the Delaware group forecasts of 50% compounded growth rate toward a $1.2 billion virtualized cable access market by 2023.
With this market growth chart as a backdrop, let me be clear.
This is a market category that harmonic largely event.
And there were now uniquely positioned to lead.
And with a fiber to the home opportunity mentioned previously and other converged access services on the horizon and that you've factored into such market size estimates.
Opportunity is only going to get larger.
Considering this telo or forecasts I want to make a couple of additional important points.
First the central do understand that this market is comprised of two distinct product categories.
Virtualized Corsi, MTS software, which we expect to delivered approximately 90% gross margin.
And remote Phy hardware, which we estimate will settle out at around 40% gross margin.
Although we're targeting and leaving the market in both categories. It's important to understand that the associated revenue dollars or not equally valuable.
For example, when we say we've signed a $175 million software license agreement.
You should understand that such a deal represents approximately the same gross profit.
As $400 million of remote Phy sales.
And second here I want to take this opportunity to remind you of several key attributes of the previously announced a software license deal with Comcast.
The deal is 175 million dollar for your software license, which according to this data from delauro represents about 15% the Virtualized software market over the next four years.
With the required remote phy products being incremental business opportunity that we're actively pursuing.
So to be clear $175 million is the minimum cash we'll see through this deal.
Additional sales associated remote phy equipment, or any other technology or services to Comcast.
The incremental to our top and bottom lines.
And finally this unique software license covers Comcast direct service footprint.
A little less adoption by any other cable operator in North America, or elsewhere, where they're sold directly by harmonic for through any other channel.
I'll also be incremental to our business.
And of course, our focus is on winning as much of this additional cable operator business as we can and 2020 and beyond.
We've got a great start with Comcast and a couple of other tier one operators.
And we see momentum building every day.
Cable awareness and the visionaries and our team have really traded a tremendous new market opportunity.
One that we are determined to take full advantage of.
Okay, turning now to our video segment here also execution of our strategic transformation.
Showing real progress.
As a reminder, our video business transformation is about moving from our historically broadcast centric appliance business to a more efficient future proof and profitable over the top streaming business.
We provide our technology as either software running on cuts servers.
Our software as a service running a public private or hybrid cloud.
As has been the trend over the past several quarters Q3 was again characterized by expansion of over the top streaming engagements.
Both traditional and new customers.
And the corresponding decline a traditional broadcast hardware sales.
Specifically video segment revenue was $60 million and associated gross margin was 57.7%.
Strong margin result reflects our continued software transition.
A couple of video deals originally expected to be closed in September where instead closed in October and consequently, the Q3 topline was softer than anticipated.
Fourth quarter guidance has been correspondingly increased.
The fourth quarter video deal pipeline is quite strong.
Our total second half video segment outlook is unchanged center full year segment profit plan remains on track.
The positive strategic news of the quarter is that we see our like over the top streaming platform continuing to be adopted by more customers.
With existing and new customers domestically and internationally.
Breaking into new non traditional streaming accounts is core to our video segment growth strategy.
During the quarter, we added eight new live streaming SaaS customers, bringing our total the 36, which is up 29% sequentially and 140% year over year.
Our strongest quarter, yet of new SaaS customer additions.
The other important strategic development of the quarter with the introduction of a very innovative new CDN optimization solution.
But as an extension of our live streaming platform.
Reliably scaling live streaming video, particularly live sports broadcast with mass appeal to millions of simultaneous viewers without compromising quality. We're introducing latency is a key unsolved challenge for the streaming industry.
For mining is uniquely qualified to take this problem on during the quarter, we both announced our entry into the space and achieved very positive results with an initial scale deployment for large mobile operator.
Moving into this live streaming delivery optimization area significantly increases the size of our addressable market.
And further differentiates our lunch driven platform.
The highlighting the expansion of our traditionally address market.
Let's review some of our recent publicly announced over the top streaming wins.
Telecom so is the incumbents mobile operator in Indonesia with over 200 million mobile subscribers and a strategy of delivering live streaming sports at scale over their mobile network.
But there was a new virtual MPPD here in the U.S. with a creative business model that includes harmonic enabled targeted advertising.
With Indycar harmonic is enabling a compelling life from the cockpit streaming experience the depends on critically and real time quality of user experience.
Sky Italia is a very innovative operator, taking advantage of our latest AI enabled video compression to minimize bandwidth consumption and maximize video quality for their new over the top streaming service.
The shop LC is a great example, the fundamentally new kind of live video application to realize critically on our industry, leading low latency streaming solution.
Big picture the second wave of over the top which is live streaming a scale. This now beginning to play out and harmonic is uniquely positioned to take advantage of this opportunity.
Well, we must contend with the decline of the traditional broadcast business in the near term.
Our expanded streaming solution portfolio now addressing both origination and scalable CDN delivery.
Together with an expanding customer base.
Position us for profitable growth.
In both our cable access and video business segments.
We've invested for the future transforming our businesses with powerful cloud native technologies and services that are now helping to redefine where the market is headed.
The success, we're beginning to see in the marketplace and the financial success, we delivered this quarter.
Caused us to continue to be confident in our ability to drive sustained profitable growth and value creation.
Through this year into 2020 and beyond.
With that I'll now turn the call overdue 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 all are quarterly results and outlook I would like to remind you that the financial results I'll be referring to are providing them a non-GAAP basis.
For the third quarter of 2019, we delivered solid results.
Revenue was a record 115.7 million on gross margin was a record 67%.
Looking at 25 cents CBS .
We improved our balance sheet with the material improvement in working capital.
Boarding gash of 66.7 million.
And we refinanced our convertible debt with significantly improved terms positioning the company for reduced interest expense and reduced potential dilution.
Turning to slide 11.
You will see revenue 115.7 million compared to 84.9 million in Q2 19 at 101.4 million in Q3 at June .
Is there anything in a 36% quarter over quarter growth.
And a 14% year over year note.
This growth was driven by our cable access segment.
Global access revenue was 55.7 million compared to 13.3 million in Q2, and 28.1 million in the Uniglow period.
Of note.
In Q3, we recorded 37.5 million off the 175 million cable Louis software license agreement, which we closed the Comcast in July .
In our video segment reported revenue of 60 million compared to 71.6 million in Q2, and 73.3 million in the yet it will be the.
As a reminder, Q3 is typically a week quarter seasonally due to summer vacations.
And specifically relative to the third quarter of few anticipated. These were booked in early Q4 instead of Q3.
This resulted in lower acuity video revenue and commensurately higher video guidance for Q4 victory with Golar shortly.
In Q3, Comcast was our only greater than 10% customer contributing 44% of quarter revenue.
Gross margin was 67% in Q3 compared to 53.6% in Q2 and 52.1% in Q3 of them.
Gave a lot sales gross margin was 77.1% in Q3 compared to 30.8% in Q2 and 38.7% in completing.
A result of gave a Louis software revenue recognized during the quarter.
Video segment gross margin remained strong at 57.7% in Q3 compared to 57.9% in Q2 and 57.2% in Q3 getting.
Although recurring revenue base has continued to drill.
Through expanded support services photo tradition appliance based solutions.
Andrew Cloud based SaaS offerings.
During the third quarter reckoning fab and services revenue represented 28.2% awful lot order revenue.
Compared to 35.9% in Q2, 19, and 28.3% and creating.
Fat and service revenue was 32.6 million in Q3 compared to 30.4 million in Q2 and 28.7 million in humiliating.
This increasing recurring revenue category continues to have higher gross margins than our appliance and integration category.
And as a key component of our long term margin expansion strategy.
Total SaaS and services gross margin was 60.6% in Q3 19, 62.6% in Q2, 19, and 60.9% in Q3 rating.
We also made good progress expanding our video SaaS customer base, delivering growth of 29% quarter over quarter and 140% year over year.
In Q3, 19, although SaaS customer going both 36.
Compared to 28 in Q2, 19, and 15 in Q3 getting.
Delivering expanded services photo growing fast customer base is a key element of our video growth strategy.
As you look at our income statement on slide 12.
We maintain strong expense control during the quarter.
Q3, operating expenses are 47.7 million compared to 48.3 million and 47.2 million in Q2, 90, and Q3 getting respectively.
We reported record profitability in the quarter.
Our Q3 operating income was 29.9 million, which comprised of 31.6 million of our operating income from cable access segment and an operating loss of 1.7 million from all our video segment.
Our Q3 operating income of 29.9 million compares to an operating loss of 2.8 million in Q2, and 5.7 million operating income and completing.
We ended with a diluted share count of 97.6 million compared to 88.9 million in Q2 entity 7.8 million in Q3 at team.
They increasing share count reflected diluted effect.
All 3.5 million convertible notes shares.
2.3 million shares of Comcast motor.
And 1.9 million shares of employees related audits using options.
Please note. This calculation considers our average trading stock price of approximately 6.9 per share for the quarter end user the treasury method of convertible note and modern calculations.
During Q3, these refinanced approximately 65% to hold convertible notes doing 2020 .
At favorable terms for the company.
The new notes carry a coupon rate of 2%.
The conversion price of 8.66 compared to the original north, which carry a 4% coupon and that conversion price off 575.
We plan to pay down approximately 35% of the original principal amount of north in cash in December 2020.
Using and if converted metric.
As it is out of this refinancing the have immediately reviews, the potential dilution by 5% and annual interest expense by 19%.
Once the remaining 35% of the reason I noticed that paid off in cash, although refinancing will effectively reduce the potential dilution by 40% and annual interest expense by 55%.
We reported strong EPS of 25 cents compared to Q2 loss of four cents and the profit of four cents in creating.
Q3 bookings of a strong add 126.5 million compared to 92.6 million in Q2, and 79.5 million in Q3 ending.
Resulting in a book to Bill ratio of 1.1 in Q3, 1.1 in Q2 and due to 0.8, including.
Please note that alert year to date book to Bill ratio is 1.1.
We will now move to all our strengthen liquidity position and balance sheet on slide 13.
We ended Q3 with gash of 66.7 million.
This compares to 58.1 million out then took you do.
61.7 million at end of Q3 getting.
This cash increase of 8.6 million reflects 6 million Gaslog limited from operations.
And 5 million generated from financing activities.
Primarily stock option exercises in years to be purchases.
Net of gas using capital investment activities of 2 million, primarily due to the party has a fixed assets.
Please note that the net cash impact as another dollar convertible debt refinancing was less than $1 million.
Our days sales outstanding at the end of Q3 was 78 these compared to 75 days in Q2, and 70 to that end up using.
Although our days inventory on hand go 68 day that end of Q3 compared to 63 to that end of Q2 and 43 days at the end of Q3 getting.
The increase in inventory days is primarily due to increasing nodes inventory for our Diva Louis segment.
At the end of Q3 backlog and deferred revenue was 192.5 million.
This compares to 194.7 million in Q2, and 207.6 million in Q, leading.
Please note that not yet included in this backlog metric is over 200 million of contracted gave a little less demand associated with three tier one cable as customer contract, which we have previously discussed.
Including our agreement with Comcast, which we have begun to recognize into backlog and revenue.
Regarding the Columbia gas software license agreement.
Let me provide the remainder of what we explained last quarter about the GAAP and non-GAAP accounting treatment.
One of the 175 million gone guest gave a Louis software license agreement that daughter license revenue to be recorded will be net of water investing charge of approximately 20 million.
Another thing in a net GAAP and non-GAAP revenue of approximately 155 million or would it be to 40 years.
[laughter].
Now, let's turn to slide 14 for other non-GAAP Q4 90 megawatts.
For Q4 19, we expect revenue in the range of 108 218 million with video revenue in the range of 70 to 83 million and cable access revenue in the range of 30 to 35 million.
This reflects an increase of 8 million to the Q4 video revenue range communicated in July .
Gross margin in the range of 51% to 52.5%.
Operating expenses to range from 40 to 50 million.
Operating income to range from 5 million to 14 million.
This reflects an increase of 4 million to the previously communicated Q4 guidance.
Primarily due to increased video revenue expectations.
As to range from a profit of three cents to a profit of 11 cents.
And the effective tax rate of 12%.
We get average unit don't have 95.8 million.
This year dollars reflects a decrease from Q3 of approximately 2.4 million shares primarily due to decrease dilution as it is our dollar convertible note refinancing.
And finally cash at the end of Q4 is expected to range from 90 200 million.
Moving to slide 15.
We provide the corresponding updated full year non-GAAP legacy 19 guidance.
Specifically for the full year, we now expect revenue in the range of 389 million to 399 million.
Video revenue in the range of 270 782 million.
And cable access revenue in the range of 112 270 million.
This topline guidance is higher than our initial full year expectations of our table at the segment.
And photo where video segment, we have raised the low end that we had initially provided by 5 million.
Gross margin in the range of 57% to 57.5%.
An improvement from old brand guidance of 56% to 57.5%.
Operating expenses to range from 191.5 to 193.5 million.
Improved oil prior guidance of 190 due to 196 with you.
Operating income to range from 28.5 million to 37.5 million significantly improved from our prior guidance of operating income of 15 million to 35 million.
As to range from a profit of Plenti sense, we'll probably 29 cents.
Materially improved from our prior guidance.
Tropical seven cents to a profit of going to be six cents.
And effective tax rate of 12%.
A video diluted share count of approximately 93.8 million shares.
Ian cash to range from 90 200 million.
Regarding 2020 expectation.
We have recently kicked off the planning process.
And we'll be able to share more detailed guidance at over next earnings call.
At this time.
We expect to be profitable in both segments into any duty and continue over progress towards becoming the market share leader for both gave Alexis and I video streaming.
In summary, the strategy of the company is working effectively in both segments and we remain very focused on continued execution.
With that thank you and that do metric.
Okay. Thanks Sanjay.
Speaking of execution, we want to wrap it up by highlighting our strategic priorities for the remainder of the yearend as we head into 2020.
For cable access business, we're focused on successfully executing on our existing tier one customer engagements.
Securing new design wins with additional global cable operators.
And leveraging our market leading position to scale the business.
For video segment or objectives are to continue to expand our base of over the top streaming customers.
To drive new growth through our expanded live streaming and network delivery solutions.
And to deliver segment profitability as we're on track to do this year.
We're confident in our business and we're looking forward to a strong fourth quarter and we want to thank you all for your continuing support.
So with that let's now open up the call for some questions.
Thank you we will now begin the question and answer session give a question. Please press Star then one key wonder Touchtone phone.
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John Marchetti.
From Stifel.
You are now open.
Thanks very much.
I just wanted to touch real quickly on the the cable access business here you know obviously, a very strong 40 here driven by a lot of the software and I know, you're not giving guidance for 20, but as we start to look out at some of these additional deals coming on and the mix shift changing a little bit just thinking about gross margin here.
So how do we sort of account for a lot of the variability in there between the two different pieces. This is where this was obviously primarily a big software quarter, but just thinking about how the remainder of that Comcast deal flows through as well as some of those other deals that you've mentioned coming on how we should think about maybe that mix either being more a lot.
Or do we see a a series of of hardware shipments first and then expect a follow through software just trying to think about that as we're looking out over the intermediate term here.
Yes, John Thanks for the question. So yes, the innocuous lead definitely at a very strong quarter reflective of a very strong mix of software as you see above 70% margin.
Q4 or guidance and Dale.
The little bit less than 70, because it's more of a hardware of.
Mix is a little higher than what we saw in Q3, but at the same time.
Do.
We do need a little bit more experience to understand how the proportion of software sales and hardware sales growth will evolve over time.
We'll get to a very precise measurement however.
Overall, you know if you look at the chart because earlier displayed today on the call.
Oh, the mix all hardware and software over a longer period of time should should result in a margin of.
60% plus.
You will see variability as you have already experienced like you'd see in more than 70% as I said in the past you should also be them seem 50. So you know it needs to settle down but believe overall, 60% plus is reasonable.
And then if I could just follow up there for a second thought when I go back to the announcement or when you talked about the announcement last quarter and then you mentioned the two international deals you know those deals if I understood. If I remember correctly anyway, we're much more sort of when did that 50 was not or that the numbers that you quoted for those deals.
Software specific just curious if that's still the case and when you talk about that the 200 million or so that's not yet included backlog. If that's primarily software if that's a mix of software and hardware just trying to get a sense for maybe the magnitude of this because you showed that del Oro charge that you spoke to Eric and the presentation.
Just trying to get a sense for as we're looking out into 2021, just how big of an opportunity you know it really is for for cable or last year.
John maybe I'll as Patrick I'll step in so in terms of those three deals to International's that we spoken about and Comcast Comcast of course is 100% software so.
We do think hardware there isn't as an additional opportunity, but thats not part of the quote unquote. The deal in contrast, the two international deals that we spoke about our indeed as your question suggests our we're blended deals where.
The contrast covered both the Virtualized software as well as the remote phy elements. So indeed those.
Those two deals we we see as blended margin deals combination of lower margin hardware and high margin software Where's the Comcast one in terms of whats contracted.
Is exclusively software.
And then just one last quick one and I'll jump back into the queue, but when you talk about the size of these deals and obviously being multiyear and all that is the sense that these are when when all said and done that these represent.
50% of the debt work Youll build when all said done days at the full build I'm trying to I guess to get a sense for for if theres follow on opportunities even with these existing contracts that you announced or if those really do essentially cover the entire footprint. If you will that they're looking to to change over to da thanks very much.
Oh.
The short answer is that this follow on expansion opportunities in all three contracts that we've talked about publicly.
And in particular with international ones.
Only covering a portion of the of the potential opportunity or footprint.
Thank you.
Alright, thank you.
Thank you Richard layer from Needham and company.
He is online with the question.
Thank you another question on the cable business, just wondering what drove the upside relative to your prior guidance for the year I noticed you're not expecting sounds like any Rev. Rec from the at the second international. So just curious if you could give any color on what what drove the higher expectations for this year for cable.
Yeah. They saw you know Andy presented the initial expectation there was a 34 million kind of soft expectation, but that was at midpoint of a range of plus minus 10% and the game little bit higher dollars or high end of 37.5 million.
That was the primary reason for margin increase there.
Got it.
And then into video business nice to see some stability at least in the annual guidance there unless it was hoping to get a little color on sort of what's going on under the covers.
Patrick you talked about having some sort of teething pains as you shifted the a the sales force from your traditional kind of hardware process to Hsas and said you are kind of having to educate them on that I wonder if you'd give us an update sort of on where they are in that process.
And then this new product you're talking about the CDN capability for for live streaming capacity is that having any near term impact on the numbers or is that more of a 2020 contributor do you think.
I'll start the last question first we think it's more of a 2020 contributor I mentioned that we have a very successful.
Kind of advanced field trial, that's ongoing I think we'll we'll probably see a little bit of revenue associated with that.
The backend of this year, but the the opportunity really starts to grow for us in 2020.
So the first part so your question look the whole company is in a little bit of a learning mode and frankly, I think if you look at the industry at large.
Ill go to some of the earnings calls of some of our customers over the past several days, we're all in a in a big transition from a traditional broadcast based services too.
Streaming platforms in our case, indeed, others are not only new technology, but as you said some amount of that business is it's fairly modest we're still in the five plus percent of total bookings being SaaS, but that's a learning curve for for organization and our Salesforce in particular on and as I highlighted.
A couple of moments ago. We're also building I think very exciting relationships with new customers, but also for the company and and the Salesforce in particular.
Getting out and discovering new up and coming streaming businesses that are not our historic customers is is as part of the challenge but of course part of the opportunity here. So I I'd say work in progress a a rich.
Definitely have made improvement over the course of the year.
But our plan is to is to really lean and more to these growth opportunities in 2020 and to do that.
Our whole company, including our sales force needs to continue to.
To evolve.
In much the way as I said that we see the rest of the industry having to pivot.
And one more if I could it looks like based on your percentage of revenue from Comcast that you didn't do you have some hardware sales to them this quarter.
I'm wondering if you could characterize kind of how that piece of the opportunity is going I mean, youve I think been on record, saying that you expect it to share the no part of the Comcast deployment with other vendors.
Can you give any color on how you feel like that's going for you in terms of.
Maintaining or keeping assure that that you feel is kind of what.
What you want.
Yeah I appreciate the question I'm a bit because it is important for us it's not as high margin, but nonetheless, we think that can be a very profitable business and in fact, we've we've worked extremely hard and invested quite a bit and as we highlighted on our last call. We've actually been fortunate enough to a file and have some approvals of.
Some some patents granted in that space. So we we feel very strongly about our competitive position there and indeed, we like what we're seeing so far in the deployments I won't.
The specific about Comcast or any other customer, but let me say and whats deployed so far we believe that we have though the lions share of the FDA nodes that had been deployed worldwide and we think that the performance as well as the operational advantages of our products are a really distinguishing themselves in the marketplace. So we're we're excited about our ability.
To lead not only in the software piece of these new architectures, but also in the the hardware remote phy piece.
Thank you and a nice nice job on the quarter gentlemen.
Thank you.
Simon Leopold from Raymond James is online with the question.
Hi, guys. This is Victor Chiu for Simon you touched on this during the prepared remarks, a little but could you help clarify how the margins and profitability differ if another cable operator adoption virtually got through some other channel as you suggested versus making directly with harmonic and.
How might that.
At the strategy.
You know play out I guess practically speaking.
You know we have a history of of doing a lot of our international business through sales channel sub Victor.
And you know historically or the sales channel provides summit some value add value added resellers.
And so we may give up a sliver of margin, but at the same time the end price maybe higher in and if we think about to cable or less going through an alternative channel.
Or being offered by his service by an alternate channel we see it largely the same.
So we're pretty bullish on on both our direct sales opportunities with cable Lois as well as a variety of strategic partnerships that can bring that technology to market. All of it frankly is as additive to the top as well as the bottom line and if we can use those kind of channels to too.
Celebrate market share so much the better is our view.
Okay. That's helpful and at the cable trade show last month, we got the impression that cable operators a fragmented.
To a certain degree in terms of specific strategies that are pursuing.
Regarding network upgrades Comcast is really the only major operator, and its pivoting hard towards virtual and some of the others are making more gradual transition. So can you just help us.
I understand your perspective on this this dynamic and how that impacts harmonic.
Well I candidly, we have a somewhat different view as we've mentioned share we're working with at least one other top five operator, who we believe is pivoted hard to to virtual so by no means to we think Comcast as alone and in fact it.
Data shared by them as well as other operators, we think at that event was quite eye opening for the broader community.
So we see a.
Another bump in terms of momentum coming out of that show that's for sure.
Now look not every operator is ready to go upgrade the upgrade their plant next year. So I think part of the dialogue that we heard at the cable show was.
What does the architecture looked like four years from now and there is this whole DOCSIS Ford auto discussion.
We are right in the middle of.
But the silicon for those kind of technologies that those kind of that still several years away and and when those technologies are there in fact with a software based platform. We think we're going to be there before the rest of the market.
But in the meantime, our view is that if an operator is feeling competitive pressure for has any other reason to be upgrading their network.
A virtualized solution is increasingly clearly a a winning strategy does mean every is cut customer's going to pivot that way.
No.
But we think that the momentum is clearly swinging in the and the direction of virtualization.
And I guess during the last thing I've got a candidly Victor is as you know where no strangers to kind of the naysayers and the the positioning on the reasons why this market transition won't happen and I think if you step back and look at the progress that spend made in the pivot made by the market over the last six to 12 months, it's pretty astounding and our view.
As we're going to continue to see that kind of a pivot in and broader market perception.
And adoption over the coming 12 months.
Okay.
That's helpful and just really quickly some of the discussions we've had.
Raise questions about cisco's commitment to the cable TV sector. So do you have any opinions or thoughts on the on that.
No.
Yeah.
We have a couple of good competitors and they're doing their thing we're doing our thing our customers continue to tell us. They see US is substantially ahead and our heads is down and the heads are down and where we're doing all we can bring our solution to market.
We we take a nothing for granted and.
We believe that we compete with some good companies that that are capable of doing good things if they so shoes.
Thank you.
Well, thank you Steven Frankel from Dougherty.
Seasonal along with the question.
Afternoon, Patrick maybe if you could start by giving me some color on what the pipeline looks like in cable low asked now that.
Comcast is made its commitment you've had a couple other tier one companies make commitments of what's next what should it looked like in whats the tenor of those discussions and maybe how they've changed since the Comcast announcement.
I think.
Starting with the last piece of the question how is changing that is real time.
We've been talking about the advantages and I think having good residents with some customers, but the fact that now you've got multiple credible customers themselves talking about real tangible financial benefits out having deploy the solution. This is changing the conversation in the market and that's kind of real time.
So.
I think that the dialogue and the the credibility and the understanding is changing real time in the market in a positive way from our perspective.
That being said, where you kind of you got to take it.
Operator by operator.
We're investing in expanding our go to market capability. We're now involved in one way or another with more large and small operators than ever before that being said I'll be honest and tell you. We still have work to do to fully cover the market, but domestically as well as internationally the number of conversations going on a significant the number of a lab and field.
Trials has also significant so we've kind of got all the full for the full gamut of engagements underway and.
And look our objective in 2020 is to push as much of that over the finish line as we can and so our discussion Sanjay earlier alluded to 2020 planning.
It's just as much about our go to market.
Activity here as it is the financial bottoms up we think we've got the industry leading solution. We think we've got some wind at our back.
We just need to get out there and and have the conversations find the customers who are motivated to invest.
And and get on with it and that's that's increasingly happening.
Cross the cable landscape domestically and internationally.
And see I would I would just add that my list by this question is for pipeline, but I wanted to remind that we have over 200 million of demand associated with over three tier one customers of cable less which is not yet included in our reported backlog and deferred revenue number.
So that helps CNC the full picture of.
Drilling business expectations you have.
Yeah, that's it and that's really that's really helpful. In in on this international D.A. customer that you thought maybe you would get a little bit in Q3 sounds like now its Q4 could you maybe give us some insight as to why they're timetable has stretched out a bit because you've got that order a while ago and.
What what needs to change to to get that to revenue.
If I roll the clock back we were kind of their with Comcast three or six months ago. So from some perspective at a higher level I think we're just figuring out tier ones big tier ones are complicated bees than they have processes organizations et cetera. There is nothing fundamental of standing in the.
Away. So we are extremely confident in the in the rollout I think we're we're becoming a little bit more experienced with the the challenges.
And the read the on the ground realities and just getting it across the finish line, so taking a little bit longer we thought no particular.
Singular issue stands out to Steve.
It's just kind of painstaking work.
With punch list kind of items across complex organizations.
So I think as we think about our business going forward on one hand, we're more confident never we can we can land. These tier ones, we've got the credibility and we're going to win them.
The timeframe for deployment and so little bit challenging.
So question I think we're going to get better and better execution wise.
I think we're already seeing that in this case.
And and we're doing our best to accelerate.
But particularly this first wave of them.
So it's going a little bit slower.
But nothing fundamental and we.
Why I say before and I'll say it again, we're confident in what we're seeing and we're confident in this these engagements.
Okay, and then just quickly switching gears to the video business do you feel like you have a line of sight on the bottom.
In that.
In that segment with this transition to sasson, new OTI t. product in the other things that you talked about or do you think you're still trying to figure out where this business bottoms and starts to grow again.
We think of it as having two distinct components.
We try to not to hide the fact that we've got to broadcast component that is defining that being said, we don't think at least for the foreseeable future. It's declining the zero broadcast, particularly internationally is and will continue to be a very important means of getting live video to two large numbers of subscribers. So.
Minus continuing.
Decline, there, but but perhaps not as acute now that kind of the.
The a lot of a pain in the U.S. has been kind of work through on the other hand. The streaming thing is is going to continue to grow and again going back to the recent earnings calls of several prominent video service providers I think on one hand, they acknowledge their challenges with initial the existing model on the other hand, I think you.
I heard from them a commitment to continuing to build to invest in video, particularly in streaming to stay relevant.
And keep that is irrelevant part of that are there a combined.
Offering.
So it's a balancing act for us.
It's hard exactly to say when there is a crossover point, but we're gaining momentum on the streaming side and with particularly with some of our new technology.
Developments, we think the addressable market on the streaming side is getting larger and as we look out.
Over a multiyear period of time in fact.
We see net net a and expanding addressable market.
Combining the two and that's some.
That's very positive and.
Yes, it's challenging to forecast exactly in the in the short term, but theres no doubt in our mind that this is ultimately a very interesting strategically important and profitable business for us and for our customers.
And so we're continuing to innovate and we see good growth opportunities that will continue to pursue.
Great Patrick Thank you so much.
Thank you.
Tim Savageaux from Northland capital markets is online with the question.
Hi, good afternoon, and congrats on the result.
A couple of questions here.
Yes, I think I wouldn't know I know, how I want to approach.
The first is with regard to gross margin guidance for Q4.
And given the.
Magnitude of the rebound.
That you are forecasting.
For the video side.
And also the increasing.
Our mix you've noted around.
Recurring revenues software.
Is it fair to assume that you would expect.
Video gross margin.
The increase in Q4 or are there maybe some other mix factors involved with big deals there that might.
James that expectation.
So Dave in terms of the gross margins for Q4, we've.
This year, you had 57.5% approximately in every quarter and based on how you're seeing the mix.
On the software to use as well as alert.
SaaS deals and how videos overall, we are ending up 57, 57, and outflows and Thats a reasonable.
Margin to Presumable Q4, we believe is gonna be very similar guidance and deals a range of 55 to 57.
And that's what have you seen and I think thats going to continue.
Okay. So in the same.
Ballpark.
Well in even at a flat level it does imply.
Cable.
Access gross margins coming back down to levels you would see.
Previously.
And assuming that.
During the Comcast software contribution goes back down to the run rate that you described in the past.
Your that I think implies a pretty material step up on them on the hardware side in Q4.
And I guess, if you look at the.
Just to eliminate the Comcast software revenue recognition from Q3, you've got the overall revenue going from.
Close to 19 million sidra low to mid Thirtys.
I Wonder if you might be able to describe it any more detail kind of what's going on there from our.
If I'm right to think that.
Very hardware centric.
In Q4, and maybe balance that against your comments about and I know you don't want to mentioned Comcast, specifically, Patrick but you seem to be discussing the hardware elevated as a potential future opportunity.
Although it does superior that's happening now so I guess the overall question is.
We expect material Comcast hardware shipments in Q4 or do you expect.
Assuming that you know done hardware uptick is what I'm seeing there or do you expect that to me more broad based.
So let them I'll I'll start in terms of Q4 cable segment margins, our expectation is approximately 40% and thats, what we bid in the guidance and you're absolutely right. The mix in Q4 is more hardware centric versus off essentially guys. You saw in Q3.
And.
The other tier one as we briefly discussed earlier is going to start contributing revenue from Q4 and as we experienced in the gone guess deal.
Hardware follows and then leader on Sofia follow so that is more elfa up hardware mix in Q4, and hence you see 40% but.
But just drop from Q3, but that reflect and full year gross margin of 55 to 57 for that give us segment.
I'm Karen.
Well I'm moving parts there.
Charles figured out.
Let me move there was or competitive question before and I'd like to expand on.
And not not include watching to include both of your largest competitors.
To the extent.
I don't know if it's too much to say cisco's exiting the business, but it may not be.
And.
I think it's fair to assume integration challenges.
On the part of Commscope and air as soon as well.
Can you comment it any more detail on whether you think either or both of those.
Event or situation.
Could result in your material share gain opportunities for harmonic not tomorrow may be but overtime.
Tim I think our biggest opportunity is really just to leverage the technology that we have and the lead the we have as I mentioned a couple of moments ago.
We and I personally continue to receive feedback from from a a healthy cross section of of customers, who who are exposed to what's going on in the market that we have a substantially and and this isn't just on kind of our product, but the the operationalization of the product and.
Really leveraging the kept cloud native attributes et cetera.
So.
I hear your question, but are the way we're thinking about it as look is to continue to invest to continue to innovate and to leverage our leadership position to to drive success.
And.
Frankly it would.
Well, we don't want to do is.
It is lean back for a second to assuming that our competitors may be taking the foot off the gas. We don't know, we really don't know what's going on.
In either of those shops, both shops have a history of executing overtime and we have a lot of respect for them.
But but really we think we're in a position we put ourselves in the driver's seat.
You've seen that the growth that we think that none we think that outside analysts think is associated with this new virtualization and remote phy opportunity. We think we're well ahead.
It's just an comment on us to take advantage of the opportunity and.
You know whether or not competitor decisions somehow clear the way, even more or or not I don't know.
But the main thing here is that we've created a lead and we think it's incumbent on us and we're determined to to take full advantage of.
Got it thanks, and last Curcumin for me would be.
On the year bookings for the quarter and again assuming that there.
Comcast software element is a good of awash netroots would seem like your book, keeping a lot, but not so not even a little bit higher.
And again given your guidance.
For video bouncing back because that degree I would assume at first blush. You had you saw from strong bookings there, but you also did mention.
A couple of big deals moving out into October so without in mind I Wonder if you could characterize the strength in bookings.
In the quarter kind of ex that.
And can kind of software revenue recognition I'm looking at cable or video corporate was here I'm biased in any particular.
Crashing.
Yes, the bookings for Q3 were strong in a 106.5 million.
In Q4 also I mean, the unexpectedly strong bookings in Q4 Q4 generally is.
Historically has been a very strong quarter seasonally and hensler video expectation has increased for Q4 and the same dying for cable the are in terms of the plan. The originally anticipated.
In terms of guidance you see is the same would be discos earlier, but Q4 Fourk video we have increased our bookings expectation is strong and we believe that one expectation as the have continued to book to Bill initial 1.1 year to date, we expect that to continue exiting this again as well.
Thank you and George Notter from Jefferies is online with the question.
Hi, guys is Kyle on for George Thanks for the question on and could jump on the results.
Well I'm wondering if there's anything you can add and this question may have been asked in a different way earlier, but I'll ask it here in a different way with regard to how many of your initial cable oh, its customers are deploying and significant portions of their footprint as opposed to test markets and smaller areas. I know you haven't mix of all but is there there's.
Something you can add in terms of how many of your initial customers have big parts of their footprint, yeah, moving in the direction of being deployed.
Look we reported 935000, so thats actually a pretty modest number compared to the footprint subs have a of some of the customers working with so so.
Clearly what has been deployed to date is.
There's a small fraction.
We believe based on what we're told as well as the success that is being achieved out there.
We believe that the the solution is not going to be used is a niche solution by any of our customers, but in fact is going to be.
Deployed broadly.
Now all of that I guess remains to be seen.
But we are we're working towards a broad deployments with.
With all of our key customers and particularly as some of the operational and financial advantage data starts to flow in we think that theres more than ever there's compelling reasons to be deploying our technology is as broadly as.
As possible.
Thank you, ladies and gentlemen, and that concludes today's conference. Thank you for participating you may now disconnect.
Alright, well. Thank you everybody some goodbye and look forward to talking with you next time.