Q1 2020 Earnings Call
Ladies and gentleman your conference call scheduled to begin shortly please continue standby and thank you for many patients.
[music].
Welcome to the first quarter 2020 harmonic earnings conference call. My name is Libya and I'll be offer you put today's call at this time all participants on the listen only mode.
We will conduct a question answer session. Please note that this conference is being recorded I'll now turn the call, but to Michael Smiley Investor Relations, Michael you may begin.
The Columbia.
Hello, everyone. Thank you for joining us today for harmonics first quarter 2020 financial results Conference call with me today are Patrick Harshman, President and Chief Executive Officer, and Sanjay cholera Chief Financial Officer before we begin I'd like to point out that in addition to the audio portion of this webcast. We also provided slides, which you can see bike.
Turning to our webcast for our Investor Relations website now turning to slide to.
During this call will provide projections and other forward looking statements regarding future events for future financial performance as a company such statements are only current expectations and actual events or results may differ materially. We refer you to documents harmonic filed with the FCC, including our most recent 10-Q and 10-K reports and the four.
<unk> looking statements section of today's preliminary results press release. These documents identify important risk factors, which can cause actual results to material differ materially from those contained in our projections or forward looking statements. Please note that unless otherwise indicated the financial metrics. We provide you on this call are determined on a non.
GAAP basis.
These metrics together with corresponding GAAP numbers and a reconciliation to GAAP are contained in today's press release, which we posted on our website and filed with the FCC on form 8-K.
We'll also discuss historical financial and other statistical information regarding our business in operation and some of this information is included in the press release.
Remainder of the information will be will be available on a recorded version of this call. We're on our website.
Now I'll turn the call over to our CEO Patrick Harshman Patrick.
Well, thanks, Michael and welcome everyone for first quarter call.
Before delving into our recent business results and outlook.
To briefly address the extraordinary situation, we'll find ourselves.
Harmonic is people first business and we're deeply grateful for their support our employees and their families have received from a central service providers and local governments around the globe.
And our sympathies are with those who has been most impacted by the crisis.
Try to get role, we play in enabling vital broadband and video streaming services worldwide.
Appreciative of the continuing strong partnerships with our many customers and suppliers.
I, particularly thankful for the extraordinary efforts being made by our employees to continue to support our customers a driver business forward.
As most of you know several years ago harmonic embark in a journey to reinvent our company through new cloud Native technology and services.
Can be a transformative for our customers a shorter on business.
Well, it's taken 19 crisis has presented unexpected challenges.
Walter Shining a light <unk> power to virtualize cable or less and cloud based video streaming solutions, which have held up extremely well under increased operational pressures.
Providing customers unprecedented real time, agility and scalability that they respond to heavy network utilization and expansion opportunities.
Although we have real nurturing near term challenges to overcome.
Key customers are fundamentally healthy.
Our technology position as both powerful and unique it, particularly our cable access and video solutions.
Our objective is to emerge from this crisis stronger and even better position.
Turning now to the first quarter results Cobot 19 impacted our global business during the final three weeks at March.
Business in Asia Pacific throughout the entire core.
There's olson revenue was $78.4 million.
2.1% year over year, non-GAAP EPS was negative 10 cents.
Nonetheless between the solid balance sheet.
Okay, well actually segment performed relatively well despite the late quarter disruption with both revenue and key deployment metrics up strongly year over year.
Our video segment performance was more heavily intact.
Several video plane shipments and integration projects planned for March were delayed.
On the other hand or recurring revenue video Hsas and support services performed quite well.
But taking a closer look now at our cable access segment, we did have a solid quarter.
Revenue was $24 million over 85% year over year.
We're now commercially deployed with 27 cable operators up 17% sequentially.
In cable West is actively serving over 1.3 million cable modems up 30% sequentially.
These are good results record is typically seasonally slow.
Both shipments and deployments were somewhat impacted by cobot 19.
Specifically in March we saw several ongoing cable less deployments initially pause restarts and net proceed at a somewhat slower pace following the implementation of appropriate safety precautions.
Looking ahead, the mid and long term outlook remains positive evidenced by a strong project pipeline. What do we do expect continued modest impact and deployment to new design wins velocity in the second quarter.
Cable broadband is a healthy end markets. We're fortunate to have several cable industry leaders has foundational cable less customers.
Considering only the 27 operators, who have already qualified and deployed Kid little less.
Our addressable service footprint opportunity is now over 45 million modem served.
Hitting a clear line of sight for significant expansion was already onboard customers.
The fact that we saw only modest disruption the cable less rolled out activities in March she is a testament to the commitment to both our and our customers teams ended the core software advantages of cable or west, which can be remotely configure operated and supported.
And we this industry has never seen before.
Elaborating on this and this is important in terms of competitive differentiation.
We see accelerating demand for further broadband network segmentation to address significantly increased upstream traffic from applications such as though.
The latest data from the Ensiki eight.
Indicates that U.S. cable Upspring peak traffic is up over 35%.
Centrally March nearly doubled the downstream peak rose 19%.
Unlike downstream gigabit expansion upstream expansion requires different tools and techniques and historically much more costly and complex.
And this is where cable less really Sean.
Our new centralize shell and the industry is only two bucks for remote phy node when coupled with our scalable virtualize core absolute game changers for cable operators planning upstream expansion.
Putting a traditional centralized cmcs architectures.
It's no coincidence that during the first quarter. We've received a first material purchase orders for new centralize shelf product from one of our tier one customers.
A significant milestone on the road to expansion across the entire deployment from.
Our customers.
Based on extensive customer conversations or current expectation is that existing cable less accounts will continue with modestly slowed rolled out walk through second quarter re accelerating the second half of the.
Driven impart by even more aggressive upstream bandwidth investment.
The near term outlook is somewhat more variable when it comes to new accounts were still working too.
Well, we have seen qualification activity slowed a couple of these accounts as they typically respond Georgia operational challenges.
We've also seen excellent progress continues to be made several other targeting customers in particular larger prospects were well equipped to manage technical challenges will also executing on the strategic broadband initiatives.
Again, the unique software foundation of cable West as a game changer in terms of being able to advance these technology qualifications and trials remotely.
We anticipate continuing to bring new customers on board in the second quarter.
Well likely with a slower initial rollout pace than originally planned with deployment acceleration that happening in the second half and do you.
So summarizing this cable access update we delivered a strong first quarter.
Our strategic growth plan continues to be executed as well.
And walk over 19 creates near term headwinds in risk the fundamentals in midterm outlook for cable access business are clearly positive.
But the trend to virtualization likely nail accelerated even more favorably for solutions.
Turning now to work video segment.
Yeah, we saw a greater cobot 19 impact.
Net revenue was $54.4 million down 19% year over year.
Our video appliances, and integration sales fell well below our original expectations.
Typically during March we saw several high confidence deals get delayed.
We encountered situations, where deals we signed but customers warehouses and close to the shipments where possible.
We were unable to complete some field deployment projects is that just a customer facilities became close.
And I'm, a supply chain well, we contended with server constraints and a significant jump in shipments costs.
Okay. Just segment does business with a broad range of customer types, all over the world, including traditional broadcasters traditional pay TV players media companies.
And just streaming first customers.
Among these sales of our higher margin broadcaster Russell broadcasters immediate companies.
As well as business across all customer categories in Asia.
Artist hit.
But do not believe we lost anticipated deals for competitive reasons, nor do we believe these deals will permanently disappear.
Can do so far in April we've seen a couple of deals that were delayed subsequently booked.
Nothing appliance activity begin to pick back up and parts of Asia.
As we look ahead.
Considering all of these facts together with extensive customer channel partner conversations.
Current expectations that second quarter planned sales activity will continue at a depressed level before rebounding the second half of the or let's customer facilities Lockdown solution.
No in contrast to appliances and associated onsite integration activity.
Current revenue component of our video business remains solid throughout the quarter.
That is our SaaS offerings that run on public and private clouds and our support services.
In fact, we're seeing an acceleration of demand for SAS for video streaming services.
During the quarter, we had nine new screaming SaaS customers up 19% sequentially and 80% year over year.
Among these new wins were to near to student to new tier one players want a prominent international telecommunications company.
And the other prominent domestic broadcast and media company.
Remarkably the international Tier one deal was signed in March and the service is already on air.
Running on much Microsoft Azure and streaming to consumers.
This rollout speed and efficiency highlights why we're seeing growing interest in cloud based platforms for premium video services.
Well, we now anticipate the current prices will further accelerate industry transformation to SaaS models.
Turning celebrating a core video segment strategy.
Well SaaS deals come without the up truck revenue and profit of our traditional appliance sales, which exacerbates near term rather than headwinds.
The long term recurring revenue model, we're building is ultimately more profitable stable and value enhancing.
Harmonic is uniquely positioned to lead the premium video streaming sounds markets.
We're leaning into the opportunity more aggressively than ever.
At quarter end, we had over 7300 cloud based linear channels deployed globally.
56% sequentially.
I want to share a couple of additional data points that underpin this video SAS momentum.
During the quarter, we screened on average over 38 had a bunch of money from various cloud platforms, which is up over 200% year over year strong statement of growth and scale.
We continue to leverage our unique multi cloud capability and partnerships with Microsoft Azure.
Cloud platform and our deployment expertise on E.W. S.
No we're leveraging the scale gains a strategic relationships together with increasing customer word of mouth.
As part of a revamped outbound marketing push.
I encourage you to check out our recently redesigned website highlighting both video streaming in cable access.
In summary for video segment over 19 impacted the traditional appliance as part of our business in the first quarter and based on extensive customer dialogue. We expect more of the same in the second quarter, followed by a rebound to catch up pent up demand.
In parallel we're seeing a pickup in streaming SAS demand and we now see an opportunity to further accelerate execution of our video value creation strategy.
We are determined and confident that we will successfully navigate through the current challenging conditions.
They've come out the other side than even stronger business.
With that I'll now turn the call it reduce on Chegg for more detailed discussion about financial results.
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Thank you all for joining other called helping them.
Before I shared with you on a quarterly results and outlook.
I would like to remind you that the financial results I do not seem to have provided on a non-GAAP basis.
Well the most schools real plenty plenty, we had mixed financially.
Impacted by the effects of call they might be.
The bookings revenue of 78.4 million and that Downs Npbs lost.
While we are disappointed by the overall in back of good health pandemic on all the financial results.
There were some you got a bright spots.
The improved almost recurring SaaS and services revenue by 10.5% year over year.
Maybe being reasonable gross margins at 48.9%.
Strong backlog and deferred revenue of 207.9 million.
So there will be maintained a solid balance sheet the cash at 71.7 million.
And unused availability of credit of 25 million.
Reflecting a total available cash of 96.7 million.
Well listening as well for the challenging endemic and vitamin B on them.
Turning to slide eight.
Let's take a closer look at although Q1 revenue and gross margin.
Revenue was 78.4 million compared to 122.2 million in Q4 90.
And 80.1 million in Q1 90.
The revenue declined a flexible.
Typical seasonality handling battlefield 19, because every color momentarily.
He will access I've been driven was 24 million compared to 43 million in Q4, 19 and broke one 9 million in the years ago period.
Reflecting significant progress ramping give a little less over the past year.
We expect a sequential decline after a very strong fourth quarter.
You know where video segment beautiful deferred revenues of 54.4 million.
Yeah. It was 79.2 million in Q4, and 67.2 million in the Utica period.
Well, good though the typical seasonality or video business was more strongly in Papua but cooling maybe as we experienced reduced supply and demand in March.
Additionally, as anticipated.
The ongoing transition from BD up lines to sad resulted in year over year top line and backlog and back.
As a reminder, we had been successfully instead will be transitioning all of video segment.
More profitable recurring SaaS and services business.
In this regard you one was another go out real solid said music education.
We again had do greater than 10% revenue customers during the quarter.
Golf guests contributed 17% and Vodafone contributed 12% of go to ready.
Gross margin goes 48.9% in Q1 20 compared to 52.3% in Q4, 90 and 54.5% in Q1 they do.
Yeah, well access gross margin came in at 43.3% in Q1, compared with 38.2% in Q4, nine Dean and 39.3% in the year ago PDL.
Reflecting improved software mix.
Video segment gross margin was 51.3% can do one compared to 60% in Q4, and 57.5 person, but you had over a period.
The degrees in video margins is primarily due to the back of gold igniting.
We experienced boats, but what contribution from high margin appliance and integration services.
And higher operating costs.
Are you gonna be significantly increased freight charges during March.
Although banqueting revenue base continues to be a highly.
Going to gave a little I support services for them on expanding able to whats customer support.
And to cloud based video assets.
During the first quarter recurring SaaS and services revenue was 39.1% off on a go to revenue up from 29.7% in Q4 90.
And 34.6% in Q1 idea.
Saddened services revenue was 30.7 million in Q1, compared with 36.3 million Q4, 19, and 27.7 million in Q1 might be.
That's a glimpse of degrees reflects seasonality in television Neil was up year over year growth was driven by boats.
Media Fas and gave US a board.
SaaS and services gross margins were 51.3% in Q1 Brady.
The 3.7% in Q4 90.
61.3% into one line deep.
The decline driven principally by the increasing mix of cable access support services.
Associated ramp of cable Louis aboard expenses.
Anticipation of significant further drilled.
Oh the video subordinate of as margins were also impacted by incremental costs, including freight incurred during March.
You made substantial progress in expanding a leading OSAT customer base in the quarter.
It's been seed further growth, although vectoring, good movies and important element of strong backlog and deferred revenue position.
I would just because momentarily.
That is deployments increased to 57 customers up from 48 in Q4 90.
That's up from 25 customers in Q1 lending grew 19% gorder look water and 120% year over year.
As you look at the rest of all income statement on slide nine.
We maintained good expense control during the quarter.
Do you want to 20 operating expenses were 47.9 million.
Compared to 49.2 million in Q4 90.
And 47.5 million in Q1 night deep.
That's a bunch of degrees is primarily due to continued expense management.
Coupled with modest levels extensive things.
Most something do mental Bossier, Olivia on attributable to additional go to market expenses portal or cable access segment.
To drive future growth.
The negative topline on cost impacts from Goldman deemed resulted in an operating loss in the quarter.
Well look you on operating loss was 9.5 million.
Comprised of 3.2 million from overcame Alexa segment, as it's going to remove them from a video segment.
This Q1 operating loss of 9.5 billion.
Commencement operating profit of 14.8 million in Q4 19.
3.8 million operating loss into 190.
This translated to Q1 bps of 10 cents loss per share compared to Q4 EPS of one cents profit and you'd be a five cents loss into wondering do.
We ended the quarter with a weighted average share download of 95.6 million compared to 97.5 million in Q4.
And 88.2 million in Q1 90.
The year over year ingredients, you do the issuance of 3.2 million shares to Comcast or exercise of warrants.
And 3.7 billion shares for employee stock purchase plan and performance based compensation during the year.
Do you want bookings were 76.3 million compared to 140.1 million in Q4 90.
Maybe 1 million in Q1 night.
Resulting in a book to bill ratio of 0.97 into one.
Sequentially bookings were lower due to seasonality and the 5.8% year over year decline was <unk>.
But the biggest product impacts on our video appliances and the largest in bags in APAC and EMEA behavior.
Even though moved through our liquidity position and balance you don't like that.
We ended Q1, the cash of 71.7 million.
This compares with 93.1 million at the end up you for.
69.9 million at the end of Q1 90.
This guy's degrees of 21.4 million is comprised of 11 million views in operations.
And as a 11.2 million used for capital budget is primarily the parts you didn't have picked up at approximately 10 million of this was the lead to do over Neal Silicon Valley headwaters bigger under construction.
No 1.7 billion God's when they get from financing activities, primarily stock option exercises and you have to be purchases.
Our current sandals, you have got as we've been satisfied and happy to anybody.
Because of Cooley lighting, the feeling the process of making things after the additions and leasehold improvements for the new headquarters facility.
And consequently.
We have entered a month to month extension, although we're currently.
Well the new facility. After you Miss It is knows we assigned a penny of need and we expect doing good golden Capex of $20 million.
At least 3 million William Girding Bloody 90.
$10 million login going in Q1 study.
The remaining 7 million expected to be incurred in Q2 two anybody.
Once we move the new leads does indeed, even reduce our annual cash outflow for event by 5 million daughters, and annual fleet appreciation opex by $2 million.
So this had gotten relocation continues to be strongly agree to move for us.
Our days sales outstanding at the end up you on both something seven days compared to 65 days in Q4.
And 66, neither then they'll do you want to Andy.
The significant sequential increase reflects timing differences like almost as you look from customers.
We expect returned to normal deals will deleverage in the next quarter.
Our days inventory on hand go 70 idea that end of Q1 compared to 45 days at the end of Q4 and something to do they end up you won 90.
At the end of Q1, although total backlog and deferred revenue was 207.9 million compared to 210.2 million at the end of Q4 90.
And 187.2 million at the end up to 190.
If lifting a modest decline of 1.1% sequentially and a strong 11.1% increase year over year.
Historically, approximately 90% of all our backlog and deferred revenue gets converted to revenue within a rolling one year period.
Please note that over deferred revenue represents 27% order backlog and deferred revenue at the end of Q1.
Compared to 21% at the end of Q4, 19, and 28% at the end of Q1 90.
Indicating that the revenue conversion is happening at the base expected.
I would also like to remind you that not yet included in this backlog matrix.
He was approximately 199 million of contracted give a louis business.
We'll see a good would see deal one give a little less customer contracts, which we have previously discussed.
If you look at the complete picture, including backlog deferred revenue and these cable Louis contracts.
In aggregate, we have future contracted revenues of 406.9 million in had.
A much stronger bullish and then be have had in recent history.
Growing 19 undoubtedly impacted over Q1 results.
And looking forward.
Significant those are gonna do remain regarding dependent Megan holding them back a little business, primarily video appliances and integration that means.
Now, let me turn to over non-GAAP guidance for second quarter on slide 11.
Why wouldn't you want to be had.
Backed primarily for the month of March.
But didn't you do we expect going back a floating 19 places to be says well then dive water.
The other thing in the glittering back down in Q1.
Based on this assumption.
We are providing the falling died revenue in the range of 60 to 77 million video revenue in the range of 40 to 50 million.
Well, that's just revenue in the range of 20 to 27 million.
We unfortunately, we have a strong because of recurring revenues.
And as of today, we have visibility into approximately 40% of total revenue heading into the quarter.
Real smart isn't going to 47% to 48%.
Operating expenses doing some 45 to 47 million.
Operating loss Marine from 80 million to 8 million.
Adjusted EBITDA to range from 15.5 million loss to 5.5 million loss.
Yes, the links on the laws of 18 cents to a loss of nine cents.
And effective passing up 10%.
We did average your dog of 96.8 million.
And finally cash at the end up your do is expected to be in the range of 60 to 70 million.
The second quarter old look activity and lose payments of approximately 7 million reliving do all their new headquarters needs.
As Patrick discussed over mid to long term drivers remain intact.
And we believe me a belt position in both the whole business segments.
However, due to the near term normally going so then it either rising from the holding 19 prices harmonic is the drawing its previously issued full year to anybody guidance.
We've been reassess discipline, there shouldn't be as on the clarity or Macroeconomically company at the end of the second quarter.
That said.
Since all or give a little less activities concentrated among a relatively small group of customers, whose rollout plans we have good insights into.
We are able to delight and a bit <unk> cable access revenue outlook for the second half of commodity.
Beyond the <unk> Q2 guidance I've just provided we now expect dollar cable access revenues in the second half of bloodied ready to be in the range of 65 to 85 million.
Finally in summary, I will highlight that both the lucky about axis Nvidia segments, Yeah Bell position bid a strong global customer base strategic relationships with healthier <unk>.
Historically strong backlog.
Deferred revenue and customer contracts.
A healthy cash and working capital position.
And a growing reckoning readiness thing.
The idea of we're confident in our ability to remain financially healthy and Buddha during two solid girls and profitable Oh operations across our entire business.
As of August emerge from the current depth of this crisis.
With that thank you all that do better.
Okay. Thanks Sanjay.
We want to finished by emphasizing the fact that despite the near term challenges Sanjay just set our core growth drivers remain intact.
And therefore, a strategic priorities for the are unchanged.
For cable access business, we remain very focused on scaling our tier one customer deployments across their entire footprints.
Securing new design wins with additional global operators.
And launching new solutions that expand into our dressed markets.
For a video segment, our objectives continue to be accelerating the growth of our live streaming business, especially through cloud based tests.
Expanding or address markets to include new non traditional streaming customers also to our SAS platform.
Got it returned a consistent profitability.
And finally I want to again recognize extraordinary efforts are employees to support our customers at our company growing just trying times.
Together, we're confident that we want to get through this and come out the other side, even stronger and better position.
Let's now open the call it for your questions. Thank you.
Thank you we will now begin to question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the Q. Please press the pound Shine order hash key if you are using a speaker phone you may need to pick up the handset first before matching the numbers.
Once again, if you have a questions. Please press star then one on you touched on call.
My first question comes from.
On machete with Stifel.
Thanks, very much Patrick I was wondering if you just spend a minute and go through some of that that weakness in the videojet. Just so we can better understand what's kind of going on there.
You don't particularly on the apply inside of me.
Do you worry about as as we look through this that baby with with the focus more on the SAS Disney instead that maybe this last one little bit longer as you're working through this transition just curious to get your takeaways or your thoughts kind of how we should think about you know where that video business really see.
And right now.
Well.
Oh.
Oh, sorry, So you know video business John was a few already in Papua back will be magazine.
You know these holding back primarily in appliances in that as as it up are doing well were 19 and bats arose primarily due to the reasons I think as mentioned there was seven high confidence deal but delayed.
I'll be of younger situations, where he is verisign because some of their houses had workloads. So shipments are not possible.
That said, we do not believe are these these are lost for competitive reasons, nor do we believe these deals with some of them to disappear you know so bought in April we have seen couple of easy is coming back and subsequently getting booked.
So all relative door guidance, it must be already covered by being.
And back at the same time do you have seen significant growth in our pipeline for sad.
Business.
A lot of traction isn't it up a SaaS business and we expect those can be converted into orders in Moscow gum, and we expect a London subs.
And then maybe sounds you're just as a follow up to that you know with that growth expected you still to come for size and and things like now how do we think about the margins in that.
Sasson software business as we progress through the year, assuming a more normalized what sort of contribution to revenue just curious given the big drop this quarter in those gross margins, how we should think about that piece of it.
As we look out through the remainder of 20.
So John that it's held a sad video margins, we don't disclose separately aside is there a growing growing part of our sad and services business I was here the as of now they've got sad and services together as over the coming seem over the mill and says definitely the good piece of that but sadly.
So this is the margins, which we talked in the bottom of when it comes out.
But as we expand and as we scale, particularly south are doing.
Our gross margins should improve and do you have seen that improvement happening over the period of time.
This quarter, we saw good bookings of that actually all book in 2002 under the higher than the plan.
Although there are still less than 10% a and B has we don't disclose that separately, but we are seeing significant drop in booking I had a bit that.
In total you know sad and services, there's basically the combination of south together with sort of misses on video and so this is some cable.
We have seen have there been gables services as well.
And that those margins I think breathing.
Let me go up year over year of a margins are higher in terms of daughters. A you know the ended at 30 million. It was less than 30 million. The you Gotta go period.
Thank you.
Next question is from Simon Leopold.
Raymond James.
Thanks for taking the question. So I missed the beginning prepared remarks, Oh jeez, if I'm I'm really asking something you clarified, but two things I I want to try to get a better understanding on one is around.
The disruption to a valuation so when we think about the cable or less being a new product being in evaluations and the pipeline you I saw you've got 27 awards now so that's nicely up just trying to understand where.
Disrupted or the mechanics of of disruption of evaluations certifications trials et cetera.
Oh sure just beside that its just Patrick it was a mixed picture.
We we did see a couple of evaluations, particularly with smaller come or customers really slow down.
Really just say operationally scrambled to deal up a with with kind of the urgent tactics at the moment.
By generalized we actually saw after a momentary pause we've seen our evaluation qualification process cities with larger customers continue.
Well continue well or <unk> or observation is that a larger emmis shows our are ours are capable were actually impressed with their ability to ah to both attend to a tactical operational focus issues as well as keep keep pushing forward on the strategic.
Initiatives I guess two additional comments I think what are important color here. So I mean is number one all of that a significantly aided by the fact that a good core software.
I think one of the strong.
Attributes of cable or west as our remote tax that can be always connected like any other software based service and so our ability to to support a testing configurations all of that stuff on the software core.
We have completed ability to do that in a row remote capacity. So that's that's that's a that's.
That's been quite significant I think the other thing dimension is that a this architecture one to one of the attractive things about it is the agility as we've talked about repeatedly particularly in the context of now a surge of anticipated work around upstream I I think the importance of that agility or the value of.
That agility is it's really come into even sharper focus, particularly for larger unless those who have you know what let me say sophisticated engineering teams.
So we think that the of the competitive or.
Differentiation the rationale for wanting to move to this architecture.
It is even more highlighted in this in this current in its current situation and we think that has helped keep if you will the pressure on.
Keeping evaluation process qualification process going.
So that that was actually set me up nicely for the follow up was trying to understand maybe the mechanics.
What happens when an operator wants to add upstream capacity, what what do they buy from harmonic what what happens to your business.
Sure.
Typically there's two pieces, there's additional bandwidth that needs to be provision through the core in our case. That's a it's just a software license so running on the saying you know server infrastructure and it typically is something that happens at the high level either in the centralized architecture right there art.
Case, Oh licensing another a piece of the shelf or in fact, adding more upstream capacity don't segmentation deepen the network.
And and so for us it's a combination of additional hardware appliance sales.
As well as additional licensing and do the the key is is that.
Relative to historic or let's say traditional solutions, there's a lot of rewiring, particularly on the head end as you kind of breakout that new upstream I think the beauty of our solution is there's no such requiring it is all completely software driven.
A process on the upstream and that's where [noise].
The risk getting into too much detail. We think that's really came to the differentiation of the flexibility be agility of being able to manage these upstream transitions Ah when you have a truly oh virtualized or core.
Running on off the shelf.
Server farms.
That's helpful and that's sort of what I, what I thought thought so I'm I appreciate the clarification. One just last one on on the video business, you've got such a mixture of customer types in there and and I presume that one aspect or customers that sell video content and those customers maybe dependent on advertising for there.
Business to what extent is their business, helping challenge and therefore that affects your business in the in the video segment. Thank you.
Yeah, I think that's a great question.
The answer is short term, we've not seen any such impact.
Indeed, principally with lots of sports I think the data it's clear that the effort advertising revenue is a is down.
That being said, we don't have any relationships with the broadcasters thinks that they were kind of down for the count there was a belief that a it's just a question of what when not if sports comes back et cetera, and in the meantime.
Streaming a a content, including linear streaming content has been through the Roche or more generally like video.
Viewing.
So all of the customers were talking to a believes that or they may have some of you know bumps themselves from the in the in the near term business, but we don't see any when talking about a fundamental change in the way there you know the consumer facing part of the business or the advertising model. This.
We do think that little bit more and more customers or something to think we'll wait a minute you know, perhaps say a a more software and cloud based.
Scale upscale down solution may make sense, I think thats going to drive.
Equator mid and long term demand around cloud based solutions for let me call them once traditional broadcast and media companies, although as we mentioned in the prepared remarks, we're already seeing some pretty substantial growth of the of the pipeline there.
No. Okay. So are we seeing.
A direct line between and AD revenue softness in demand softness frankly, the stuff that was in our pipeline needs to get done and that's why we're quite confident particularly after a follow up conversations with customers around the globe.
That a that they're going to get back and catch up on pent up demand. It's really just a question of how quickly they can.
Hey, we're talking about a lot of small or medium sized broadcast and media companies all across the globe. How quickly they can kind of get their operations spawn backup to be able to what to do the work together.
Seems to be at the timing question not a fundamental shift question in terms of viability of these businesses.
So then just to maybe finish up on that point, my and to clarify and then I'll yield the floor. So if it's not that the health of their business. What what was the major factor that softened. The video segment sales this quarter and the guidance for video in the next quarter.
Operational disruption.
Remember well over half of our video businesses outside of the U.S. and and Asia is is almost exclusively so far away a a video market force for example.
So sooner than the U.S., we saw a lot of country starting to take more severe action of of of shutting down and that included.
The spending people to work from home shutting down lapse, so, particularly for appliances, where you're you're shipping into a into an operational center you're doing some onsite integration.
For the customers engineers is doing some onsite integration we saw all of that we saw all of that slow.
More pronounced outside the U.S. that inside of the S or the U.S. It in the last week, so mark so.
Really just operational adjustments to the new model.
And not any fundamental all strategic for business retrenching.
That's very helpful. Thank you for taking the questions.
Yeah. Thank you.
Next question Rich Valera from Needham and company now in line with a question.
Thank you.
Taking your the mid point, if your cable guidance for Twoq, you and then the second half.
It looks like you're now at the mid points around a low 120 million level versus about 140 million mid point would your previous guidance wondering if you could kind of give a little color on what's what's baked into that is this mainly around just not having the tiny to do to physically deploying hardware, you're assuming that's just going to kind of push.
Into next year.
Any lost business there.
You say the any color you can add to why that should have been been taken down on an annual basis.
Richard.
They are there's a lot of moving parts, but this is the the simplest answer is slower rollout than originally anticipated among new customers, we're bringing on this year.
The customers that are already rolling out with us although they are delayed in the first half we think are largely going to catch up or they're going to work hard to catch up so kind of only minimal impact there was a current view.
Trust, we think that I.
I think there's just no way around that we think we have lost a little bit of Todd in the first half of the year with brand new customers.
Don't fit in any way, we're losing those deals we just think that the.
The qualification processes is gonna proceed a little bit more slowly and and the initial ramp is going to proceed a little bit more shortly.
What were quite we remain quite confident and and our ability to pick up a those customers. We plan on doing so this year.
Is that simply a question of the pace of the new customers.
[noise] Henrik I live here that you know.
I I would like glad that though.
And the whole guidance, we gave a lot of big items. They gave for second half.
It does bring the midpoint for the whole year close to 123 million, but that's still 29% up year over year, if we exclude the one thing bombastic up.
Got it and then do you do you read do you need it when many new customers to make that I mean, you you said you have 27 customers today.
It sounds like everything even talking about is really just deployments with those customers. So.
It's safe to say that you're kind of the midpoint of your guidance doesn't really need to involve a lot of new customer wins.
That was really it's up modest modest new car.
Modest and more modest contribution from new customers on the original guidance cabbage.
And please don't mistake that by saying were stopped trying or we're not seeing the same opportunity.
Simply we think we've lost a little bit of time, but yes on a relative basis, a mix now looks much more heavily tilted towards.
Oh rollout or expansion of existing wins and relatively less.
Contribution.
Because of time delays, some time delay with newer accounts.
Got it and just one more if I could on the video business I guess, that's actually on the Hsas and service revenue, which I guess the combination of both now so that was down $5 million roughly quarter over quarter and I think Sanjay use you attributed that to volatility in service renewals, just hoping you could probably a little more color there.
Is that business, that's lost or is it just a timing issue and was any of that co. Good related. Thank you.
Well, we believe is primarily due to the colder delivery delays we experience a if I do think it's the order timing Oh, we have seen the April stuff coming in or out of it.
But it's the only dining related.
That's very is that professional service or those kind of maintenance renewals.
Oh, it's still a little bit of books.
Got it okay. Thank you.
Next question coming from some me should Turkey with JP Morgan.
So thanks for taking the question I just wanted to do all kind of run through this.
On the cable access segment Oh, My working assumption here was that given custom was would have capacity are you looking to manage kind of the higher bandwidth needs a capacity needs from Oh, I'm going to pull from home and.
The kind of Im sorry could you are seeing some kind of fits and starts on keeping Louis to crime and does that Jim indicated that someone to spending is now going back to the incumbents and because of the disruption as either don't do more numbers. He that's when you expect to kind of resumed gaining share again is that fair we've got crazy.
No. We don't believe in this process, where we're losing any a share and nor do we believe we're going to kind of seed expected share going forward.
What we do she is a is is a slightly slower pace simply because of the you know just social distancing et cetera that customers repeating in a safe way.
As we discussed a moment ago Ah probably the biggest piece probably the biggest piece of our cable or Wes.
Yes, and ramp this year was associated with more volume rollouts of existing customers and already won a couch and and all of those cases frankly, they were leaning into it really as hard as they could show a simple.
I'll make it up but for sake of example, 20% loss of Oh, a throughput efficiency doesn't mean that they're doing other things would that time. It means they're simply oh accommodating the operational realities of the current situation and we think that's particularly going to continue to be prevalent in the yet and the second quarter and and are experts.
Patient is that that loosens your approach and the back half of the year, it's simply a slower pace of what already was a pretty healthy pace with existing customers.
And second is up it's also mentioned, but perhaps.
Not clearly enough.
Layered on top of that is wins with new accounts, we're seeing in general those qualifications continue to go well, although again, we see a little bit of a slowdown in terms of the pace of how quickly that's happening in the and the labs and therefore, we've taken I would say you're somewhat conservative view on how quickly those those those design wins once.
Qualification is confirmed how quickly that will translate into you know field launch and deployment.
Through the rest of the year.
So it's a little bit a slightly lower case, but we are relative to what was planned which frankly was already fairly aggressive.
No we do see a long term more upstream bandwidth being needed et cetera, we think for us that that really underpins the the mid to long term opportunity and indeed, even with some of our established accounts, we think that can positively impact demand and and installation a in the later in the year.
Ah, but I I consider that little bit more upside at this point chanda enough failing to prominently into our into the full year revenue guidance, we've given for cable.
Got it and if I can just follow up and maybe I missed this are you exclude expecting any incremental or higher operating costs because of the supply chain issues that can now be keeping going into gotten into twoq.
Well, we do expect additional free target this year theaters in Q1, as well and do you have factored that into our Q2 guidance has no then became for gross margins.
But other than the addition of franchises you're not expecting another incremental costs at this point.
Okay, great. Thank you thanks for taking the questions.
Thank you.
[noise] next online wouldn't question, Tom Steven Frankel from Dougherty Your line is open.
Good afternoon. Thank you Patrick I Wonder if you might spend a couple of minutes talking about the shelf opportunity maybe help size us size that for us of how big is that relative to the overall opportunity for key blow out then.
And is that included in the 48 million modems that you're addressing today, where does that create a new incremental opportunity.
Oh, sorry, yeah.
We said 45 and a it's included in that you know essentially the point is look even without an additional design wins. The people have already selected and started to deploy a cable wasn't part of their network collectively they serve over 45 million modems. We're only at one point Threemillion modem, so theres a lot of headroom there.
One of the question shore or concerns has been well.
If I paraphrase that to us it's been hey, that's that's great, but isn't cable or west only about D.A. and isn't da only going to be used for a subset of that footprint.
And it really remains to be seen exactly how much of our customers footprint ultimately will be deep fiber distribute access and how much will be centralized for the point with the shelf is is that together with our deep fiber solution and now with our shelf we've got the whole thing covered.
And so it's not a question of cable or less being young relevant for just a subset of the solution.
We think that were extremely well positioned for the entire.
The entirety of the footprint and so I think that's the key takeaway is that with his with his addition to our Oh our offerings.
We don't see ourselves occupying and they sure a subset, but rather a a oh solution integrated solution for the entirety of our customers for coach.
Okay, great and and maybe an update on the notion that you might have incremental software products to sell back into the installed base gonna when would those modules might be ready to start generating revenue and and what's the timing on the fiber to the home product.
Well. Thank you for those questions I'm sure you're definitely paying close attention I didnt mention it either of those from the scrip enough because they're not important but just sort of context of everything else going on so indeed.
We are growth strategy is multi pronged here and the additional software capability is.
[noise] is definitely coming onboard from a revenue bearing a point of view.
The second half of this year and our we expect by the end of this quarter to be well into field trials with our fiber to the whole product you know all that being said the guidance that we've given I'd say, it's taken a.
A fairly conservative view on the Oh on the incremental contribution from both of those new areas.
Frankly, the I just not to be overly conservative, but we do have a lot of moving parts.
Here.
And and we thought was quoted just to not get ahead of ourselves.
Those areas.
From a modeling or projection point of view that being said, we continue to be quite bullish about about the specific features software features we have coming in in jet, specifically and and in general the opportunity to continue to come back with additional software based functionality for additional license capability onto our cable the west platform and.
On top of that to to complement what we're doing on but to DOCSIS.
Cable access with the fiber to the whole, particularly charge.
As a target to that a cable operator so.
Both of those are continued to be quite active very active.
Not only discussions, but now testing and trialing with customers are underway expecting to see some things in the second half, but are not yet a modeling that.
At a significant way until we.
Until we make a couple more steps.
Great and and the.
Stand the cobot 19 impact on video business, but this has been a frustrating business for the last couple of years through function different reasons.
Is there anything you can do do try to accelerate the move away from appliances, and two SAS any financial incentives or end of wiping products anything to try to kind of forced this business to the new world and get out of the hardware business.
Yeah, I think it's a good question I mentioned in the prepared remarks that we have a a revamp to go to market and indeed, we are a challenging ourselves as much as were challenged customers.
You know, there's aspects or frankly of the broadcast media landscape that are little bit of if it isn't broke don't fix it and I think it as much as us kind of coming with new viewpoints and perspectives I think that this crisis is definitely changing some of that a that mindset. So this is forcing on us and our cut.
<unk> as I think a the opportunity to really rethink how aggressively a transition can happen.
Who to cloud infrastructure, both for streaming as well as some core broadcast functions so without.
Revealing our tire playbook here indeed, we're thinking.
Hard and aggressively along the lines that you've suggested I'd like to see us have a little bit more progress and results to reports, but but as both high as Sanjay mentioned earlier the pipeline.
That has been developed recently is is quite impressive. It's ahead of our internal plan and we do think that there is a oh.
That's just hyperbole real acceleration of Oh activity, that's going to be.
Quite promising for this business over the mid to long term.
And any insight into what's happening with deal sizes on the SAS side of that business or are they still relatively small today or are you getting more significant.
Deals as you've gotten a more presence in the marketplace.
We're seeing both I mentioned didn't they have prepared remarks that we had to what I call tier one wins, one large international telecom operator won a large name a broadcast and media player and both of those are definitely a large by historical standards that being said amongst the nine new ones that we brought on board and of course.
Were also a number of new more insurgent Tam expansion.
End of accounts, so we're seeing boat and Oh and both are important expanding the Tam even with small accounts that will build up a very sizeable long tail. We think is very important part at the same time getting large tier ones domestically and internationally the tip to this world. It is also vitally important.
And I'm very encouraged that we're seeing success on both sides.
Great. Thank you.
Thanks.
Next question is from Tim Savageaux with Northland capital markets.
Good afternoon concurrent squeezing me in here.
I want to follow back up on kind of your major customers respond to increase network traffic on the the cable side I.
I guess first question either.
In the March quarter, as you look into Q2 here.
Did you in fact see any kind of increases or extra kind of an expedited and interest in incremental capacity.
From your current footprint of Trueblue Es business, that's one question.
And then secondly, I guess route.
Trying to discern to what degree.
The operators and I've heard you referenced Cummins here I'm sort of tactical.
We need the network in terms of capacity, whether its downstream or upstream.
Whether you know the nature of your footprint today can really help them.
You know address those issues given that it's still relatively small.
Or does it indeed kind of pull in.
Especially as you referenced the upstream.
Plans to increase bandwidth or your cannot be done in a timely in a fashion to meet.
These relatively short term demands for for increased traffic I.
I guess, it's along the lines or.
Whether they turned to more.
Established technologies.
Pincer, if you will in three large mode or.
Accelerate the deployment of you know kind of new paradigms. So that's a bigger question first went on weather.
You did see any increase capacity demand.
And here in the first time today.
In the short answer is a is yes Tim.
So what can generally I think just to set the context. The cable networks are absorbed in general they have absorbed kind of hit but what happened is they lost a lot of the headroom and its capacity.
It's.
It's not so it's our understanding it's not that new capacity needs to be added with the next 48 hours. It's just that they lost their headroom and now, particularly if you contemplate that you know work from home and video conferencing behavior may actually become part of the landscape and definitely going forward.
There's a long term readjustment of what the what the ceiling needs to be.
And so we think from that perspective, we think we're extremely well positioned it doesn't require a kind of an urgent bandaid or maybe there's some situations any of the ban data.
And given our small market share today, that's probably not us, but we think that the real interesting opportunities the fundamental we scaling.
Oh, the network and in particular, the upstream and there we think we're extremely well position and absolutely there was heavy conversations about that during the quarter one of things.
That's the we're excited about is our first fail a first order.
This new shelf product from one of our large tier one customers and that's really all about accelerating use of cable or west across the entire footprint and a large part accelerating or being able to use cable or west for expanding the upstream.
<unk>.
[noise] [noise], Okay, and just to follow up her and I guess it sounds like you see outside of the real slower pace or new customer evaluations and wins and cable awareness that what you're seeing out of your kind of larger established customers is.
Relatively unchanged or inside of three or whatever kind of short term.
Logistical delays you might have seen as you know that's the first half your.
That's correct.
Thanks very much.
All right. Thank you.
Your next question is from George Notter from Jefferies. Your line is open.
Hey, Thanks for question this is Kyle and for George.
So I was wondering about the video business regarding the the business with broadcasters that you mentioned the higher margin appliance sales to broadcasters I can you give us a sense for how much of the video business revenues tied to that type of activity is it looks like 90% that's not fast.
Or is it something much smaller than that I guess I would expect and then regarding that activity can you give us a sense for whether customers are pushing out versus you know the orders maybe lost for you I'm is there anything that you can get in terms of your conversations with customers or anything that they've said to you.
Maybe up to the timelines that they given to you that would would that would help us understand that.
[noise] for kind the bus part of the question you know broadcast and media represents approximately 40% or business and the balance is most other providers.
So and mix we saw this this quarter.
Makes me Patrick mentioned Interims, all about gas immediately is getting delayed.
You saw that although you have seen a bargain will pick up now after her can you do have just kicked off.
But that's the piece I think has been shifting a little bit.
And I'm not in and you got on the second part for the question, we don't feel as though field.
We don't believe said we've lost any of these deals for competitive reasons, nor have we been told in a single case have we've been told by a customer the deals being taken off the table.
It in every case and we have done an exhaustive scrub as you might imagine a a worldwide. It really is a question of timing now we're really talking about hundreds of customers in this area around the globe.
ER and across a lot of different countries, such as I've mentioned earlier over half of this business is is outside of the U.S. So really the question for us and for our customers in chart partners about timing and about really getting Oh labs in operation centers reopened two to reintegrate.
Got it and Oh, we believe it's simply a question of Oh.
When not if.
It is.
Really across the board the message that we have received and.
And it makes sense to us because in general these projects are not to.
There really driven in general the driven out of necessity.
And and we don't think that he can you the fundamental need has gone away.
Okay, Great that's helpful.
And is that you know that 90% of a bit of the video business is it less than half is there anything you can get.
Just as a general sense for how large that is as a component of video.
Well Sanjay said, we published for the full company, a broadcast and media business, which is exclusively video with about 40% for the whole company. So just if you had to do the math backwards.
It says broadcast and media is about 60, 65%, it's about two thirds of or video business and and so as the overall category. It's pretty significant. So you can see that you know what happened was twist subset of that it wasn't across the board. It was to a subset of broadcast and media players, particularly smaller and medium sized ones.
And the where where we saw this for this kind of push out.
Andy, particularly small or medium sized companies, we have seen struggled to a re adapt to work from home and and perhaps don't have the same kind of sophisticated I T systems or whatever in some cases, we had a couple of my customers who.
Struggle to execute purchase orders from what you know.
Eric will people or what have you working from home. So this there's kind of myriad logistical challenges and and in general what we see is logistical challenges that are have to be overcome Uh huh.
From the point of view these companies internal operations as well as their own countries.
Regulations on you'd on being able to work et cetera. So our belief is that as these logistical challenges.
Become overcomes as the situation to become a lot if you will.
One way or another.
Believes that these these deals will begin to flow again, and our current expectation is that happens in earnest in the second half of the year.
Despite the continuing.
Slow down in the second quarter.
Okay, Great. That's very helpful. That's it for me.
I'm not showing any further questions at this time I would like just on the call back over to Mr., Patrick Harshman closing remarks.
Okay, well, thank you very much.
The West Chester time, we appreciate very much all the questions and feedback.
Fundamental drivers of the business are healthy we continue to push forward you continue to believe everything we're doing and we are very much appreciate your support and we look forward to we're talking to all again. So thank you that's a good day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect good day.
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