Q3 2021 Harmonic Inc Earnings Call

Yeah.

Yeah.

Welcome to the Q3 2021 harmonic earnings conference call.

My name is to Wanda and I will be your operator for today's call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

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I would now like to turn the call over to David Hanover Investor Relations, David You may begin.

Thank you operator, Hello, everyone and thank you for joining us today for harmonics third quarter 2021.

Actual results conference call.

With me today are Patrick Harshman.

Chief Executive Officer, and Sanjay Kalra, Chief Financial Officer.

Before we begin.

Like to point out that in addition to our audio portion of the webcast. We've also provided slides to this webcast, which you may see by going to our webcast on our Investor Relations website.

Now turning to slide two.

During this call we will provide projections and other forward looking statements regarding future events or future financial performance of the company.

Such statements are only current expectations and actual events or results may differ materially.

We refer you to documents harmonic filed with the SEC, including our most recent 10-Q and 10-K reports and the forward looking statements section of today's preliminary results press release.

These documents identify important risk factors, which can cause actual results to differ materially from those contained in our projections or forward looking statements.

And please note that unless otherwise indicated the financial metrics. We provide you on this call are determined on a non-GAAP basis.

These metrics together with corresponding GAAP numbers and a reconciliation to GAAP are contained in today's press release, which we posted on our website and filed with the SEC on form 8-K.

We will also discuss historical financial and other statistical information regarding our business and operation and some of this information is included in the press release.

The remainder of the information will be available on a recorded version of this call or on our website.

And now I'll turn the call over to our CEO Patrick Harshman Patrick.

Alright, Thank you, David and welcome everyone to our third quarter call.

Harmonic delivered another quarter of strong financial and strategic results.

With 33% year over year revenue growth of nine cents EPS.

Both our cable access and video segments again contributed materially each with double digit revenue growth positive operating income and important strategic progress.

Cable access business delivered 43% topline growth in the number of customers deploying cable OS grew 79% year over year.

Our video business was up 26% year over year, the streaming SaaS revenue up 69% year over year.

These results demonstrate continuing strong market momentum for our company.

Driven by our newest products and services.

Combination of this momentum our near record backlog and deferred revenue.

And increasingly robust cash position provide a strong foundation for continued growth through the balance of this year and.

And into 2022.

Looking now more closely at our cable access segment it was another record quarter.

Segment revenue was $57 $6 million up 43% from a year ago. A 68 operators were deploying our cable <unk> cable and fiber solution worldwide up 79% from the third quarter of 2020.

This updated end of quarter customer count includes one new international tier one operator.

At quarter end. These ongoing deployments had scaled to serve over $3 9 million cable modems up 77% year over year.

Sanjay will address in more detail the quarter was also characterized by continuing higher supply chain costs, particularly for industry, leading DAA nodes.

It's a very tough environment and we're proud of the job our supply chain team is doing to keep our node platforms flowing and our customers programs on track.

As most of you know, we established our market leading position in Virtualized cable broadband by investing in R&D, and innovating and collaborating with like minded customers.

Commitment to continuing to invest and innovate was on full display during the third quarter.

And the fiber to the home arena, we introduced significant new enhancement to our fiber to the home solution targeted specifically at the rural market.

We also closed several new fiber to the home wins and made encouraging progress getting our fiber to the home solution qualified by a couple of targeted larger operators.

Back in the broadband over cable realm, we leveraged our unique software foundation to introduce a new solution, we call Mac anywhere further extending and solidifying our leadership position in distributed access networks.

We also work closely with an innovative customer to demonstrate groundbreaking progress and that's a sport idose solution. That's way ahead of the rest of the market.

With our converged software core again being the key to our agility and time to market advantage.

And finally again, leveraging our cloud native core platform, we announced really innovative work done with Google.

Integrate their Google cloud marketplace with our cable OS this solution enables operators to leverage cable or west to deploy new revenue generating cloud services at the cable network edge truly unique advantage harmonic has in the marketplace.

Opportunity, we aimed to exploit further is the cloud edge market develops.

Summarizing for our cable access business I want to remind you that in June we laid out our three year vision for the strategic evolution and financial growth of this business we.

We identified a greater than $2 billion addressable market.

And a path for us to leverage our cloud native and DAA technology leadership to drive a greater than 40% annual growth rate for the next several years.

The technology marketplace and financial progress we've since achieved.

Our strong sales pipeline of tier one and smaller operator engagements.

Q4 guidance, which implies approximately 59% year over year growth in 2021, all demonstrate that we remain firmly on track to deliver on our growth vision.

Turning now to our video segment here also we delivered another very solid quarter.

Third quarter segment revenue was $68 $7 million up 26% year over year and segment gross margin was 61, 9% a new record for this business and further evidence of our transformation to a more software and services centric business model.

Recurring streaming SaaS revenue grew 69% year over year, driven principally by expanding existing customer usage and aided by new customer additions.

As with our cable access business in June we laid out our multiyear video business strategic plan.

This plan has two core elements.

A leading position in the growing $1 billion streaming infrastructure market.

And maximizing revenue and profit from the larger but slowly declining video broadcast market.

I'm, assuming SaaS side of things, 69% revenue growth reflects good progress both domestically and internationally.

Overseas during the third quarter and early in the third and fourth quarter, we secured new streaming sales design wins with several tier one media companies.

Important new wins are still in the process of launching creating a healthy pipeline for continued revenue growth.

Domestically in addition to scaling our SaaS business with several larger media customers.

It's a new partnership with Jackson Energy authority to provide a fully hosted video streaming solution branded E plus premier for smaller and rural cable broadband telecommunications providers.

This solution supports a host of advanced capabilities, including targeted AD delivery, enabling smaller operators to stay competitive.

We already have several operators on the platform and see this as an important expansion of our addressed market.

Regarding the second element of our video strategic plan, we continue to see a resurgence in broadcast project activity globally, including growing momentum for an investment cycle and moving video transport from satellite to terrestrial IP networks.

We recently won our first multimillion dollar North America satellite to IP fiber fiber transformation project that was driven by operating efficiency and not by FCC mandates and funding.

We believe this kind of transformation will be a growing trend globally.

We're well positioned to capitalize on through our new software based <unk> platform.

In summary for our video business, we delivered another strong quarter characterized by solid revenue growth gross margin expansion operating profit and new wins.

The video sales pipeline and outlook for the remainder of the year remained positive and looking further ahead, we continue to be confident in our ability to deliver on our multi year strategy.

With that I'll now turn the call over to you Sanjay for a closer look at our financial results and outlook.

Thanks, Patrick.

Thank you all for joining us today.

Before I discuss our quarterly results and outlook.

I'd like to remind everyone that the financial results I'll be referring to are provided on a non-GAAP basis.

As David mentioned earlier, our Q3 press release and earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP.

Net or discussed on this call.

Both of these are available on our website.

Turning to slide seven.

Let's start with an overview of our third quarter.

We delivered solid results ahead of our guidance.

<unk> revenue of $196 3 million.

Up 33, 1% year over year.

Gross margin of 52, 8%, a 60 basis point improvement year over year.

Adjusted EBITDA of $14 8 million or 17, or 11, 7% of revenue.

<unk> hundred and 6% year over year.

And EPS up nine cents.

200% year over year.

We ended Q3 with a strong backlog in deferred revenue of $333 3 million.

Up 54, 1% year over year.

Cash was $128 4 million at quarter end.

81% year over year positioning us well for the remainder of this year and into 2022.

Now, let's review, our third quarter financials in more detail turning to slide eight as mentioned earlier total company Q3 revenue was $126 3 million.

11, 4% sequentially and up 33, 1% year over year.

Looking first to go to work cable access business segment.

Revenue for the quarter was $57 6 million up 15% sequentially and up 42, 9% year over year, reflecting both the continued ramp of existing customers and new customer wins.

In our video segment, we reported Q3 revenue of $68 7 million up eight 5% sequentially and up 25, 8% year over year.

This year over ear video gorilla reflect solid broadcast demand and strong SaaS revenue growth.

During the third quarter, our SaaS revenues grew 69% year over year due to increased usage from existing customers and activation of new customers.

We ended Q3, 'twenty, one with 101, SaaS customers, 36% year over year growth.

In the quarter, we added eight new <unk> customers, including several new tier one international streaming customers and saw a churn of nine small deployments.

We had one customer representing greater than 10% of total revenue during the quarter Comcast contributed 23% of total revenue compared to 31% in 'twenty, one and 20% in Q3 'twenty.

As mentioned earlier total company gross margin improved by 60 basis points to 52, 8% in Q2 'twenty one.

Compared to 52, 2% in Q3 'twenty.

Cable access gross margin, you'll see 'twenty, one met our expectations at 42% compared to 47% in Q2, 'twenty, one and 48, 9% in Q3 'twenty.

Extraordinary supply chain costs have depressed margins for both Q2 and you'll see this year relative to last year.

The sequential decline, primarily reflecting a higher DAA hardware mix in Q3.

Video segment gross margin was a record 61, 9% in Q3 21.

Compared to 59, 3% in Q2, 'twenty, one and 54, 6% in the year ago period.

Reflecting both an improved software mix within an hour.

Appliance category and expanding SaaS business.

Moving down the income statement on slide nine you.

Q3, 21 operating expenses were $54 9 million.

Compared to $54 6 million in Q2, 'twenty, one and $45 3 million in Q3 'twenty.

The year over year increase is primarily due to increased cable access to research and development.

Sales and marketing for both segments.

As we continue to invest in our growth initiatives.

Operating expenses represented 43, 5% of revenue in Q1 compared to 48, 1% and 47, 8% of revenue in Q2, 'twenty, one and you'd see Duane D respectively.

Reflecting all of our businesses inherent operating leverage as revenues ramp.

On a sequential basis Youll see 'twenty, one reflects flat operating expenses.

Quarterly revenue Rose 11, 4%.

Adjusted EBITDA for Q1 was 11, 7% of revenue at $14 $8 million.

Okay.

The $5 1 million from cable access and $9 7 million from video.

This compares to an adjusted EBITDA of eight 4% of revenue at $9 5 million in Q2, 'twenty, one and seven 6% of revenue and $7 2 million in Q3 'twenty.

This all translates to Q3, 'twenty, one EPS up nine cents per share.

Compared to five cents per share in Q2, 'twenty, one and three things for Q3 'twenty.

We ended the quarter with a diluted weighted average share count of $106 4 million.

$203 8 million in Q2, 'twenty, one and 98, formerly <unk> hundred 20.

The sequential decrease is primarily due to convertible debt dilution of one 2 million shares.

And the dilutive effect of outstanding obviously was an options, but <unk> 5 million shares both of those things from an increase in our average stock price in the quarter.

And you'd have one 9 million shares due the weighted effect of stock issued to employees and ESP B shares.

The year over year increase reflects the dilution of our convertible debt by $2 8 million shares.

And the dilutive effect of outstanding options by 0.7 million shares.

Both resulting from an increase in our average stock price during the quarter.

And four 5 million shares due to the video the effect of stock issued to employees and ESP B shares.

Q3 bookings were $114 3 million compared to $186 9 million in Q2 'twenty one at one.

$100 7 million in Q3 'twenty.

Following a record second quarter bookings, we are pleased to report another strong quarter of new bookings demonstrating robust demand for our solutions.

Our book to Bill ratio was <unk> 90 in Q3 21.

One six in Q2, 'twenty, one and 1.06 in Q3 'twenty.

Our strong bookings momentum during the past three quarters has generated year to date book to Bill ratio of one one.

The year to date book to Bill exceeds one for both segments.

Turning to slide 10, we allow discuss our liquidity position and balance sheet.

We ended Q3 with cash of $128 4 million compared to $115 2 million at the end of Q2, 'twenty, one and $70 8 million last year.

The $13 2 million sequential cash in Greece.

It's comprised of $15 2 million of cash generated from operations.

Primarily attributable to both cable access and video segment operating profit.

And strong collections in the quarter.

Net of $2 9 million cash used for purchases of fixed assets and 1.3 million received primarily from stock option exercises.

Our days sales outstanding at the end of Q3 was 54 days compared to 80 days at the end of Q2, 'twenty, one and 77 days in Q3 'twenty.

The sequential and year over year degrees reflects strong collections in the quarter.

Our days inventory on hand was 78 days at the end of Q3.

Compared to 74 days at the end of Q2, 'twenty, one and 73 days at the end of Q3 'twenty.

Reflecting increasing inventory at the end of the quarter as you prepare for heavy fourth quarter and 2022 shipments.

We're also stocking up on constrained inventory at more than normal levels as the many of the supply chain landscape.

At the end of Q3 totaled.

Total backlog and deferred revenue was $333 3 million.

Up 54, 1% year over year from $216 2 million at Q3 'twenty.

And a slight degrees of 4% sequentially from $347 2 million at Q2 'twenty one.

This near record Q3 backlog in deferred revenue reflects increasing commitments from our large cable customers.

Growing demand for new broadcast edge appliances, including five <unk> bandwidth reclamation projects and growing video streaming.

<unk> volume commitments.

Note that historically about 80% to 90% of our backlog and deferred revenue.

<unk> converted to revenue within a rolling one year period.

As mentioned on previous calls not included in our backlog is additional contractually agreed cable <unk> business with three of our initial tier one cable customers.

At the end of Q3 'twenty one this incremental amount was approximately $136 7 million.

Down from 145 million last quarter as approximately $8 3 million went through the Virginia order process and therefore moved into bookings.

Taking these cable Louis contracts into account, we have total future contracted revenues of approximately $470 million.

This continues to provide us with a very solid foundation for the remainder of 2021 and into 2022.

Now I'll turn to our non-GAAP guidance for 2020, one beginning on slide 11.

I will now review guidance for our cable segment for Q4 and the full year.

For our cable access segment in Q4, we expect revenue in the range of $65 million to $70 million.

At the midpoint. This reflects an increase of $12 5 million compared to prior Q4 guidance.

This increase is driven primarily by accelerating deployment momentum with our tier one customers.

Gross margin in the range of 40% to 41%.

At midpoint. This reflects a decline of 550 basis points versus prior guidance.

This is mainly due to increased hardware mix, resulting from incremental hardware revenues based on growing demand from our customers Brookfield at higher than the standard cost.

Adjusted EBITDA to range from seven four to $9 1 million.

At midpoint. This reflects an increase of $2 million versus prior guidance, primarily due to additional gross profit on increased revenues.

For the full year 2021 based on our progress to date.

Expect for cable access revenue in the range of $214 million to $219 million.

At the midpoint of our guidance this reflects a $17 million increase versus prior full year guidance.

At midpoint. It also reflects 59% revenue growth for the full year indicated they will hold our business building momentum worldwide.

Gross margin in the range of 42, 6% to 42, 9%.

175 basis point decline versus prior guidance at the midpoint.

This is due to increased hardware mix, resulting from incremental hardware revenues as discussed.

And associated higher supply chain related costs as we have discussed.

Supply chain costs increase.

Has been significant this year and make a tough year over year comparison.

Actually as we have prioritized market share gains.

Absent supply chain impact.

Our blended gross margins for the full year.

Unexpected to be nearly flat with 2020.

Despite a much heavier mix of hardware.

In other words absent supply chain impact both software and service and hardware margins are expected to improve in 2021 year over year.

Which is encouraging indications that we are on the right track.

Achieving our long term margin expansion target.

Adjusted EBITDA in the range of 31, six to $23 3 million, an increase of $2 $2 million versus prior guidance at the midpoint.

Now I will discuss video segment guidance.

Portable video segment in Q4, we expect revenue in the range of $82 million to $87 million.

As we guided previously.

Gross margin in the range of 54, 5% to 55, 5%.

Ahmed point this is consistent with our previous guidance.

Adjusted EBITDA to range from nine six to $12 7 million.

At midpoint. This reflects a decline of $1 9 million from prior guidance, primarily due to timing of delayed hiring for sales and marketing.

Originally planned in the third quarter getting pushed out to the fourth quarter.

For the full year 2020. One video segment results. We now expect revenue in the range of $285 million to $290 million.

At the midpoint of our guidance. This reflects a $4 5 million increase versus prior guidance.

Attributable to both a continued rebound in broadcast market demand.

And growth in streaming says.

Gross margins in the range of 57, 3% to 57, 7%.

At the midpoint of our guidance. This represents a 125 basis point increase over prior guidance.

Mainly due to product mix.

Adjusted EBITDA in the range of $48 $9 million to $32 million, an increase of $4 9 million compared to prior guidance at the midpoint.

Slide 12 presents the consolidated total company guidance for Q4 and full year 2021.

Calculated as the sum of the two segment charges to be just reviewed.

Leading our desalination for Q4, we expect revenue in the range of $147 million to $157 million.

At midpoint of our guidance. This reflects an increase of $11 5 billion versus prior guidance.

Gross margin in the range of 47, 8% to 49%.

At the midpoint of our guidance. This represents a 270 basis point decline over prior guidance, mainly due to product mix and associated higher supply chain costs.

Adjusted EBITDA to range from 17 million to $21 8 million.

At midpoint of guidance. This reflects an increase of <unk> 2 million versus prior guidance.

EPS to range from 10 to 14.

At mid point, there is no impact on what we guided previously.

Our weighted average diluted share count of approximately $106 9 million.

And at the end of Q4 cash is expected to range from $125 million to $175 million.

At midpoint. This reflects a decline of $5 million, primarily due to increased investment in inventories as the ramp up for 2022 shipments.

For the full year, we now expect total company revenue in the range of $499 million to $509 million.

Reflecting recent expectations at both the low and high end of the range due to strong demand we saw in the third quarter and our updated Q4 expectations for both segments.

Gross margin in the range of 51% to 51, 3%.

At midpoint of our guidance.

This represents a decrease of 25 basis points versus prior guidance at midpoint.

Adjusted EBITDA to range from $50 5 million to $55 3 million.

An increase of $7 million versus prior guidance at the midpoint.

EPS to range from 28 to 32 cents per share.

A 6% or 25% increase compared to the midpoint of prior guidance.

And effective tax rate of 10%.

Average diluted share count of approximately $105 1 million.

And finally cash at the end of the year expect is expected to come in between 125.

And $135 million.

In summary, during the third quarter, we continued to execute on our long term strategic priorities and goals.

Our performance and outlook continue to be in line with the multi year revenue and operating models. We shared with you during our video and cable access segment investor events Meteor.

We appreciate your attention today and look forward to updating you on our continued progress.

With that thank you, everyone and now I'll turn it back to Patrick for final remarks, before we open up the call for questions.

Hey, Thanks, Sanjay so let's pick up on your closing comments, there and review our strategic priorities as we conclude the year and head into 2022.

For cable access business, our objectives remain supporting volume deployments with a growing list of tier one customers.

Winning in scaling with new global operators and expanding our addressed market through a converged software core DOCSIS and fiber to the premises capabilities.

For video segment, our objectives continue to be accelerating the growth of our streaming SaaS customer base and per customers usage cap.

Capitalizing on the coming transformation of traditional media and broadcast infrastructure.

Particularly the new edge processing opportunity that we've talked about.

And delivering consistent margin expansion with current revenue growth and profitability.

As you've seen in the third quarter, we continued to deliver industry leading solutions.

Superior subscriber experiences.

Does it create value for our customers and our shareholders.

We thank you all for your continuing support.

And with that we'd like to open up the call for questions.

Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone.

To withdraw your question press the pound key.

Again, its star one to ask the question.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Steven Frankel.

Your line is open.

Hey, good afternoon, Thank you for the opportunity Patrick.

Spend a couple of minutes talking about these tier one deployments in cable access could you characterize your visibility into.

Into their deployment plans and as that.

Improving.

As we go through these ramps.

Yes in short it is.

Where.

We're developing increasingly close and collaborative relationships with both existing and new tier one operators.

Steven.

And through that process, we are gaining better visibility and understanding of at the same time, they're developing better understanding of the capabilities of our technology and how to best.

Handle it operationally all of that is.

It's work in progress, but visibility continues to improve.

And while back you throughout this 50 million node number I wonder if you might update us on.

What that universe of even just the tier one customers you have now how many nodes that might be.

The addressable market.

Yeah, I think it's not nodes, but but.

But.

And Im sorry.

Oh, yes.

Sure.

I don't have a specific number for you, but I think since we put out on it has definitely gone up.

Well better for me not to hazard a guess here.

I think since that time, we've added.

We've talked about we've talked about nine global tier ones that is top 10 customer and their respective geographies.

As well as just shy of 70 total customers.

So indeed, the number has has gone up I would say materially since 50, but I don't have a specific number to give you here today and.

I'll have to get back to all of you with an updated and.

An updated count.

Okay, but to use the world series analogy or we like them all.

The second inning kind of where are we in this rollout.

Well, we'll certainly wish we believe so I mean, although we're pleased on one hand with the growth of the.

The models, we've rolled out to it's we're still as of the end of the third quarter. We were just below four.

So, let's just assume that the total addressable market of customers. We've won is somewhere between 50 and 60 million modems.

That says where.

Something.

On the order of 7%.

Seven percentage up 7% of of being rolled out across just those customers that have already started rolling out.

Cable OS not to mention customers, we're still in our sales pipeline. So I think by any measure that says where we're really still.

Very early innings or in a.

In terms of the.

The rollout potential in front of us.

Great and then you mentioned.

Your first.

Non FCC mandated.

When in video distribution could you give us some hints in terms of timing.

Timing and scale and what the pipeline from other operators might look like.

Well yeah.

Yes. It is.

A several million dollar project I want to I don't want to go further than that.

The project is was one in the third quarter. It has not been deployed there is no revenue yet so that is still ahead of us.

But we think it's noteworthy this is a.

Let me say, a household name and kind of operator out there and and it's meaningful that they are who has historically used satellite to move it around.

And the fact that on their own nickel, they see enough operating flexibility.

Efficiency.

Hum.

And in fact, new service delivery opportunities.

They are themselves are funding moving off of our satellite and getting on to terrestrial networks and as we've commented before while the FCC and the <unk> may have been kind of the.

The.

The catalyst for some of this activity in the market. We think it's an architecture that makes a ton of sense.

From a strategic flexibility point of view.

As well as from an economic point of view and so we think it's simply going to be growing trend worldwide. We're still again speak to just the previous analogy very early innings on this thing.

But we continue to be optimistic about it both in terms of the trends in the market that's going to drive overall spending and in terms of our competitive positioning by virtue of our software based edge platform.

Thank you and one last quick one and you've mentioned this number before how many of those 101 SaaS customers have not launched yet.

On the video side.

I believe they will be around.

15% to 20%.

Thank you Sanjay I'll jump back in the queue.

Alright, thank you.

Thank you.

Our next question comes from the line of Simon Leopold with Raymond James Your line is open.

Thanks for taking the question I wanted to see if you could give us a little bit of help in terms of how to think about the.

Gross margin for 2022, because what you've highlighted in the prepared remarks, it looks like some elements of supply chain, but a lot of a lot of what's pressuring gross margin in the fourth quarter it sounds like.

Hardware mix.

Aspect. So I just wanted to see if maybe you could bridge to some of the commentary you had offered us back in June to how to think about the the overall gross margin trend in 2022.

As you see it today.

Thanks for the question Simon.

Let me first address.

When we say mix and specifically I don't want you or anyone else to think Oh, well, it's more hardware and less software and Thats. What it is it's simply more hardware when we projected presented our three year model, we actually assumed by 2024, our global share of DAA hardware would be around 30% from a market share perspective.

And indeed, even from the beginning of this so we've spoken publicly about it we expected.

Sure.

And most of our initial or many of our initial cable less deployments, our core software with several hours as well as our competitors hardware kind of hanging off of our software. If you will are being fed by our software and what we're seeing right now is a trend where we're getting much larger market share we're seeing our hardware used for.

We think we're way above 30% in short and.

And that is driving.

Both revenue upside gross profit upside as well as a relative mix differences, but but by no means any less software than was originally anticipated. So now coming back to your specific question I think maybe just slightly reframe. The question becomes well in 2022, well harmonic continue to win more.

<unk> are much more than its fair share of hardware revenue and I think that that's something we're still trying to assess is.

<unk> is the durability of customers' preference for our hardware versus versus competitors.

Hi.

And I think that will be manifest in.

Our guidance for 2022, both at the topline and corresponding to that too.

The gross margin line, but I think it is important to understand that even in a scenario, where we see ourselves for longer period of time, capturing a much greater market share of hardware.

That doesn't imply lower gross profit.

It's kind of the original business, we talked about in our three year plan, plus some incremental hardware, albeit at low margin.

That's not too much of a long or complicated answer Simon so I'll pause there and see if that makes sense to you.

No no. It makes sense. So the gross margin percent may be lower but the profitability. The EBITDA earnings Youre coming away with on higher revenue is.

Basically a tailwind.

Right.

So okay great.

And of course, the elephant in the room, that's kind of what's happening strategically apart from anything to do with supply chain.

And everyone else probably on this call is hurt more than you care to hear about supply chain. So I don't want to belabor all of it but that continues to be.

Somewhat dynamic headwind as we go into next year, and I think that Thats.

We don't think that Thats, a permanent fixture in our business, but it's <unk>.

Certainly it will be a headwind for most if not all of next year and that also will weigh into the guidance that will eventually provide for 2022.

That all makes sense and then if you could give us any updates you have on your participation in the art off related projects whether youre.

Contributing in the fourth quarter in your longer term outlook for art off as that opportunity.

Yes, we envision modest contribution in the fourth quarter, but growing contribution in 2022.

To be clear.

Our point of entry or there are areas of go to market focus is on those.

Yes.

Cable operators, who are doing hard off work or hybrid operators, who kind of operate both.

Fiber or historically twisted pair as well as cable infrastructure.

We're not going for the entirety of the RF space, but we're going through what I think is a growing subset of it which are those.

The RF opportunity being addressed by people, who have some play in cable and there. The main the main thrust is qualification of our of our fiber to the home solution.

Alongside DOCSIS and as I mentioned in the prepared remarks, where we're pretty encouraged with the progress we're making.

We're by virtue of the wins that we have so far we're gaining credibility a lot of perspectives.

Prospective customers, who are looking to see how well the early rollout of the technology is going and.

And we're working with a couple of larger customers, who put out with the potential to do quite a bit in art off in there.

It's a kind of a different dynamic or process, but we're working on getting our fiber to the home solution qualified there and.

I'd call it cautious optimism that we will be part of that they will be rolling out to <unk>.

<unk> vintage of art off in 2022, and then it will be part of their solution.

But certainly more to come on that.

Great and then one last one.

Not looking for the tutorial right now in cable architecture, but.

Last week, we did here.

One of the larger operators talk to you about high split.

And that stimulated a lot of questions could you help folks understand what does that mean in terms of an opportunity for harmonic if an operator chooses to upgrade through high splits. Thank you.

Well before I get to the specifics of your question I understand that may be confusing.

There is a tool bag right now of options that cable operators are looking at long and short term and and and so there's just multiple directions that they can go and.

And I'll tell you I think that our software core is really coming into focus as a very big strategic advantage because of what it means is without kind of having to wait for new hardware develop new hardware, we can kind of pivot or expand to two to.

Addressed or basically program.

Reprogram the functionality of our solution.

Handle these use cases and when you come to know specifically high splits in mid split before that in fact, I think in prepared remarks, a couple of quarters ago, we talked about.

We've talked about early work, we did there with a large customer and we jumped on that when we think ahead of the rest of the market. So in short we think we have a great solution for high split it dovetails perfectly into what cable the west is all about.

And.

And we see that as a.

As a specific competitive advantage or a specific instance of the broader competitive advantage, we have with the flexibility of our cable edge platform.

Thank you very much alright.

Alright, thank you.

Thank you.

Our next question comes from the line of Ryan <unk> with Needham <unk> Company. Your line is open.

Thanks for the question and great quarter guys.

First one are you seeing any customers all expressed interest in going with a multi source cmt's core software or is it primarily single source.

Dominantly primarily single source.

Okay. Good.

And then a more complex question as we kind of go.

Good luck.

Gross margin recovery here.

How much of this is transitory versus permanent change and do you look at pricing adjustments to account for your full.

Permanent cost changes where are you in that cycle right now in terms of thinking about that.

I think we see Ryan.

What's going on now is is primarily transitory.

But.

Next thing I would say as well.

But what we've learned is that we don't know, what we don't know and and.

<unk>.

We don't have a time limit on it.

I think one of the advantages of our position or this market is that we're not dealing with thousands of customers. We have strong strategic relationships with large customers, they're well aware of what's going on and.

And that.

It creates the opportunity to have open.

Transparent discussions about how to how to ensure.

Sure.

The health of.

Their deployment plans in their pipelines.

So as part of that absolutely.

Our pricing adjustments or <unk>.

We're absolutely on the table.

And.

Whether those pricing adjustments become permanent or not I think is very much related to how this whole thing plays out.

But that's hopefully that gives you a little bit of a flavor of the way we're thinking about it.

Addressing it.

Okay great.

On the competitive front with regards to the hardware side of Rpgs and such any.

Any changes in competitive environment there.

It sounds like you are winning more share than you thought so.

It sounds like Youre more confident in your competitive position.

Yes, I think that's right.

In a nutshell.

That is correct.

Okay. That's helpful. Thank you alright, thank you.

Thank you.

Our next question comes from the line of Tim <unk> with Northland Capital markets. Your line is open.

Hi, good afternoon.

I'll add my.

Congratulations I actually did want to start with the supply question.

And while recognizing youre seeing some cost pressures from a topline standpoint, you've arguably manage this about us as well as anybody has in.

I wanted to try and dig into that a little bit more.

In terms of.

To what do we attribute there.

Your ability to.

To ship pretty significantly going to see your inventories are up and for ones. That's a good thing right.

But.

The fact that the heart.

The hardware products are based on standardized platforms or just overall kind of supply chain execution any comment on the node side is too.

Yeah.

Putting aside the cost pressures for a moment, how you're able to.

To do such a good job managing the supply chain.

Very much appreciate it appreciate the question.

I think we have done a pretty good job, but we're not sitting here pounding our chest.

It has come at the expense really of.

Heavy heavier expenses I think maybe one advantage that we had Tim as we went into the year with an aggressive posture.

We werent, 100% sure, but we felt that there was upside on the year and we were ready to put money behind that hypothesis really before this whole supply chain and blew up. So we were already kind of leaning into our supply chain. We were looking at how we can pull in our components et cetera that that was the mode that we're in and so we as the situation.

<unk> got tougher and we had to pull in hard and get even more aggressive we weren't starting from zero. If you will the car was already.

The lean and was already pretty significant I would say.

I think that's one that's one fact.

And.

And associated with that we as I communicated a quarter or two ago or Sanjay did.

We had no qualms at all we wasted no time thinking about optimizing to the nth degree.

Cost versus.

Versus getting it done we've been very clear.

<unk> and strategically that our number one priority is is accelerating deployments accelerated market share gains et cetera. So when confronted with let's say an opportunity to bring more things in or accelerate at a cost.

I don't want to say, we've been indifferent to cost, but we've we've we've leaned into.

Two <unk>.

Spending more when when necessary.

And the third thing I would say, though is just that.

Just have to give kudos to our team.

We have a we have a supply chain team that has.

Same thing with our peers and competitors, but I can tell you from firsthand experience our supply chain team has just been excellent this year.

This team has worked around the clock.

Feverishly I mean, we have people who have literally during the middle of Covid have spent months and other parts of the world.

Under very different difficult.

Quarantine conditions et cetera.

Whatever it takes to get it done and so I will take the opportunity to really acknowledge the tremendous effort.

Of our team and the conviction and the commitments to two.

To deliver good results.

And I think that that is.

As you pointed out I think that's really come through.

None of that is to say we won't have further challenges ahead.

We're out of the woods everyday almost it seems brings another.

Challenge is we play whack a mole here, but.

But to date I think we've done very well and it's a combination of those three things that I mentioned.

Great Thanks for that and.

Hey, guys I guess, a couple of questions on the cable access business and that'll be it for me one.

Yes.

Appear to be diversifying a bit obviously, you saw a nice growth sequentially in cable access and a lower contribution from Comcast.

Always good to see it in that context.

Talk about your nine tier ones I think now nine.

I think you'd commented last quarter that maybe half of.

Those customers were kind of.

Meaningfully year, if not fully up and running.

Do we see more of that in terms of providing that diversification.

The business broadly in cable access.

And then maybe.

Maybe in the quarter as you look forward.

The PON opportunity.

Starting to contribute or do you expect it to sometime soon and any comments on the size of that pipeline.

Yes.

Well in short, yes, we think that the.

As additional tier ones come online more broadly is the total number of customers grows you will see continued diversification of the.

The revenue.

I mean that being said the big guys are big.

And as long as they're rolling.

That that will represent a good part of the business, which is which is not bad news at all.

So I think I think the cable industry or for better worse is inherently concentrated.

And hence our intense focus strategically on tier ones from day one.

As we get a bigger basket of tier ones, which we aim to continue to do I think youll see.

Some diversification amongst them.

But no doubt about it the top the top 10 or 15 customers. We have will will will command an outside position in our market and you can see.

The power of what it means when there are when they are accelerating.

Regarding a upon FERC, we are very encouraged by what's happening there.

That being said.

We're still very much on the on ramp that business and comparing that business is.

Think ahead to 2022.

Comparing that business, which I think will begin to grow in 2022 more substantially but then the question is as a percentage does it takes the growth of cable I'm not sure.

Long term, there's no doubt about it having a strong position in fiber is great strategically great financially and that's absolutely where we're headed.

As both things kind of scale and ramp, though I think.

It will take a little bit more time for <unk>.

Financially for the fiber to home to kind of get it set above the parapet so to speak.

But we remain incredibly strategically focused on it then and continue to see fiber as a very important.

Not only diversification, but additional growth lever for our business.

Okay. Thanks very much.

Alright, Thank you Tim.

Thank you our.

Our next question comes from the line of Kyle Mcnealy with Jefferies. Your line is open.

Hi, Thanks, very much for the question.

Great job with the results, particularly for cable access I'm wondering if you could parse out for us.

The budget position looks like a crusher your cable customers. The extent that you can have visibility into it.

It looks like you're entering Q4, and how much of the increased Q4 outlook might be coming from any kind of budget flush versus general increased momentum our share gain in your cable business and.

And were there any specific larger customers that you've seen that uptick in Q4 orders that you would consider to be some type of budget flush.

I think it's still early in Q4 to characterize what's what's happening is as budget flush or not frankly as Sanjay outlined we came into the quarter with strong backlog and deferred revenue.

The majority of the orders that will take this quarter, we actually we anticipate to be for for 2022, it's not quite that black and white, but particularly.

Particularly in the context of the supply chain issues. The whole industry has been working with we've been.

We are encouraging our customers too.

<unk> be looking and working ahead now that being said, it's true that Q4 on both sides of our business, but Q4 is historically strong.

And indeed, whether you call it budget flush or catch up some amount of that activity is.

I think as part of the.

The historically seasonal strong seasonality in Q4.

But relative to any other year right now.

Sanjay chime in if you see it any differently, but I don't think we see any.

Difference.

And the historic seasonality pattern, but theres nothing I mean, what we saw last year or the year before.

Similar to what we're seeing this time in Q4.

Very similar okay. So coming back I guess part of your question as well, whereas the uptick.

We think it has more to do with just.

Growing a deployment.

Mento.

Kind of regardless of the of the quarter, So maybe a modest impact for us.

Seasonality.

But more than that it's just a continuing momentum with a broader base cable customers.

Okay, that's great to hear I'm, just one follow up.

Is there any way for you to quantify at all how much revenue you think you werent able to ship this quarter due to the supply chain issues and constraints that you would've otherwise been able to ship in the quarter.

Well, we cant quantify that I think as Patrick mentioned, we are trying to address all of our customer demands and we have we have done that in all the quarters and especially Q4 as we are raising the guidance further to what we said earlier three months ago. It yourself.

As well I think the marching on the path to address all of our customer demands.

Okay fair enough. Thanks, so much.

Alright, Thank you alright.

I'm not showing any further questions in the queue I would now like to turn the call back over to management for closing remarks.

Alright, well. Thank you very much for your time today and more generally your support we remain excited about our business excited about the progress, we're making and we look forward to updating you again soon with that we will say a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Okay.

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Yes.

Okay.

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Welcome to the Q3 2021 harmonic earnings conference call.

My name is to Wanda and I will be your operator for today's call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question. During this session you will need to press Star then one on your telephone.

Please note that today's conference is being recorded.

If you require any further assistance. Please press star then zero.

I would now like to turn the call over to David Hanover Investor Relations, David You may begin.

Thank you operator, Hello, everyone and thank you for joining us today for harmonics third quarter 2021 financial results Conference call.

With me today are Patrick Harshman.

President and Chief Executive Officer, and Sanjay Kalra, Chief Financial Officer.

Before we begin I'd like to point out that in addition to our audio portion of the webcast. We've also provided slides to this webcast, which you may see by going to our webcast on our Investor Relations website.

Now turning to slide two.

During this call we will provide projections and other forward looking statements regarding future events or future financial performance of the company.

Such statements are only current expectations and actual events or results may differ materially.

We refer you to documents harmonic files with the SEC, including our most recent 10-Q and 10-K reports and the forward looking statements section of today's preliminary results press release.

These documents identify important risk factors, which can cause actual results to differ materially from those contained in our projections or forward looking statements.

And please note that unless otherwise indicated the financial metrics. We provide you on this call are determined on a non-GAAP basis.

These metrics together with corresponding GAAP numbers and a reconciliation to GAAP are contained in today's press release, which we posted on our website and filed with the SEC on form 8-K.

We will also discuss historical financial and other statistical information regarding our business and operation and some of this information is included in the press release.

The remainder of the information will be available on a recorded version of this call or on our website.

And now I'll turn the call over to our CEO Patrick Harshman Patrick.

Alright, Thank you, David and welcome everyone to our third quarter call.

Harmonic delivered another quarter of strong financial and strategic results with 33% year over year revenue growth of nine cents EPS.

Both our cable access and video segments again contributed materially each with double digit revenue growth positive operating income and important strategic progress for.

For cable access business delivered 43% topline growth in the number of customers deploying cable OS grew 79% year over year.

Our video business was up 26% year over year.

Streaming SaaS revenue up 69% year over year.

These results demonstrate continuing strong market momentum for our company.

Driven by our newest products and services.

The combination of this momentum our near record backlog and deferred revenue.

In an increasingly robust cash position provide a strong foundation for continued growth through the balance of this year.

Into 2022.

Looking now more closely at our cable access segment, there was another record quarter.

Revenue was $57 $6 million up 43% from a year ago, a 68 operators were deploying our cable lowest cable and fiber solution worldwide.

79% from the third quarter of 2020.

This updated end of quarter customer count includes one new international tier one operator.

At quarter end. These ongoing deployments had scaled to serve over $3 9 million cable modems up 77% year over year.

Okay.

Sanjay will address in more detail the quarter was also characterized by continuing higher supply chain costs, particularly for our industry, leading DAA nodes.

It's a very tough environment and we're proud of the job our supply chain team is doing to keep our node platforms flowing and our customers programs on track.

As most of you know, we established our market leading position in Virtualized cable broadband by investing in R&D, and innovating and collaborating with like minded customers.

Our commitment to continuing to invest and innovate was on full display during the third quarter.

And the fiber to the home arena, we introduced significant new enhancement to our fiber to the home solution targeted specifically at the rural market.

We also closed several new fiber to the home wins and made encouraging progress getting our fiber to the home solution qualified by a couple of targeted larger operators.

Back on the broadband over cable realm, we leveraged our unique software foundation to introduce a new solution, we call back anywhere further extending and solidifying our leadership position in distributed access networks.

We also work closely with an innovative customer to demonstrate groundbreaking progress and I've got to support auto solution. That's way ahead of the rest of the market.

With a converged software core again being the key to our agility and time to market advantage.

And finally again, leveraging our cloud native core platform, we announced really innovative work done with Google.

Integrate their Google cloud marketplace with our cable OS. This solution enables operators to leverage cable OS to deploy new revenue generating cloud services at the cable network edge patrol unique advantage harmonic has in the marketplace.

Opportunity, we aimed to exploit further as the cloud edge market develops.

Summarizing for our cable access business I want to remind you that in June we laid out our three year vision for the strategic evolution and financial growth of this business we.

We identified a greater than $2 billion addressable market.

And a path for us to leverage our cloud native and DAA technology leadership to drive a greater than 40% annual growth rate for the next several years.

The technology marketplace and financial progress with Sensus achieved.

Our strong sales pipeline of tier one and smaller operator engagements.

Our Q4 guidance, which implies approximately 59% year over year growth in 2021, all demonstrate that we remain firmly on track to deliver on our growth vision.

Turning now to our video segment here also we delivered another very solid quarter.

Third quarter segment revenue was $68 7 million up 26% year over year and segment gross margin was 61, 9% a new record for this business and further evidence of our transformation to a more software and services centric business model.

Recurring streaming SaaS revenue grew 69% year over year, driven principally by expanding existing customer usage and aided by new customer additions.

As with our cable access business in June we laid out our multiyear video business strategic plan.

This plant has two core elements.

Our leading position in the growing $1 billion streaming infrastructure market.

And maximizing revenue and profit from the larger but slowly declining video broadcast market.

I'm, assuming SaaS side of things, 69% revenue growth reflects good progress both domestically and internationally.

Overseas during the third quarter and early in the current fourth quarter, we secured new streaming SaaS design wins with several tier one media companies.

It's important new wins are still in the process of launching creating a healthy pipeline for continued SaaS revenue growth.

Domestically in addition to scaling our SaaS business with several larger media customers, we announced a new partnership with Jackson Energy authority to provide a fully hosted video streaming solution branded <unk> premier for smaller and rural cable broadband telecommunications providers.

This solution supports a host of advanced capabilities, including targeted AD delivery, enabling smaller operators to stay competitive.

We already have several operators on the platform and see this as an important expansion of our addressed market.

Regarding the second element of our video strategic plan, we continue to see a resurgence in broadcast project activity globally, including growing momentum for an investment cycle and moving video transport from satellite to terrestrial IP networks.

We recently won our first multimillion dollar North America satellite to IP fiber fiber transformation project that was driven by operating efficiency and not by FCC mandates and funding.

We believe this kind of transformation will be a growing trend globally.

When they were well positioned to capitalize on through our new software based <unk> platform.

In summary for our video business, we delivered another strong quarter characterized by solid revenue growth gross margin expansion operating profit and new wins.

The video sales pipeline and outlook for the remainder of the year remain positive looking further ahead, we continue to be confident in our ability to deliver on our multi year strategy.

With that I'll now turn the call over to you Sanjay for a closer look at our financial results and outlook.

Yeah.

Thanks, Patrick.

And thank you all for joining us today.

Before I discuss our quarterly results and outlook I'd like to remind everyone that the financial results I'll be referring to are provided on a non-GAAP basis.

As David mentioned earlier, our Q3 press release and earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP.

Matters discussed on this call.

Both of these are available on our website.

Turning to slide seven.

Let's start with an overview of our third quarter.

We delivered solid results ahead of our guidance.

<unk> revenue of $126 3 million.

Up 33, 1% year over year.

Gross margin of 52, 8%, a 60 basis point improvement year over year.

Adjusted EBITDA of $14 8 million or 17, or 11, 7% of revenue.

106% year over year.

And EPS of nine.

Up 200% year over year.

We ended Q3 with a strong backlog in deferred revenue of $333 3 million.

Up 54, 1% year over year.

Cash was $128 4 million at quarter end.

81% year over year, while listening as well for the remainder of this year and into 'twenty to 'twenty two.

Now, let's review, our third quarter financials in more detail turning to slide eight as mentioned earlier total company Q3 revenue was $126 3 million.

11, 4% sequentially and up 33, 1% year over year.

Looking first at our cable access business segment.

Revenue for the quarter was $57 6 million up 15% sequentially and up 42, 9% year over year, reflecting both the continued ramp of existing customers and new customer wins.

In our video segment, we reported Q3 revenue of $68 7 million up eight 5% sequentially and up 25, 8% year over year.

This year over ear video gorilla reflect solid broadcast demand and strong SaaS revenue growth.

During the third quarter, our SaaS revenues grew 69% year over year due to increased usage from existing customers and activation of new customers.

We ended Q3, 'twenty, one with 101, SaaS customers, 36% year over year growth.

In the quarter, we added eight new SaaS customers, including several new tier one international streaming customers and saw a churn of nine small deployments.

We had one customer representing greater than 10% of total revenue during the quarter Colm guests contributed 23% of total revenue compared to 31% in Q2, 'twenty, one and 20% in Q3 'twenty.

As mentioned earlier total company gross margin improved by 60 basis points to 52, 8% in Q2 'twenty one.

Compared to 52, 2% in Q3 'twenty.

Cable access gross margin for Q3, 'twenty, one met our expectations at 42% compared to 47% in Q2, 'twenty, one and 48, 9% in Q3 'twenty.

Extra ordinary supply chain costs have depressed margins for both Q2 and you'll see this year relative to last year.

With the sequential decline, primarily reflecting a higher DAA hardware mix in Q3.

Video segment gross margin was a record 61, 9% in Q3 21.

Compared to 59, 3% in Q2, 'twenty, one and 54, 6% in the year ago period.

Reflecting both an improved software mix within our appliance category and expanding SaaS business.

Moving down the income statement on slide nine Q.

<unk> hundred 21 operating expenses were $54 9 million.

Compared to $54 6 million and <unk> 21, and $45 3 million in Q3 'twenty.

The year over year increase is primarily due to increased cable access to research and development.

Sales and marketing for both segments.

As we continue to invest in other growth initiatives.

Operating expenses represented 43, 5% of revenue in Q3, 21, compared to 48, 1% and 47, 8% of revenue in Q2, 'twenty, one and Q3, respectively.

Reflecting all of our businesses inherent operating leverage as revenues ramp.

On a sequential basis, you'll see 'twenty, one reflects flat operating expenses.

While quarterly revenue Rose 11, 4%.

Adjusted EBITDA for Q1 was 11, 7% of revenue at $14 $8 million.

Comprised of $5 1 million from cable access and $9 7 million from video.

This compares to an adjusted EBITDA of eight 4% of revenue at $9 5 million in Q2, 'twenty, one and seven 6% of revenue and $7 2 million in Q3 'twenty.

This all translates to Q3, 'twenty, one EPS of nine cents per share.

Compared to <unk> <unk> per share in Q2, 'twenty, one and three things for Q3 'twenty.

We ended the quarter with a diluted weighted average share count of $106 4 million.

Compared to $103 8 million in Q2, 'twenty, one and $98 4 million in Q3 'twenty.

The sequential decrease is primarily due to convertible debt dilution of one 2 million shares.

And the dilutive effect of outstanding artists using options, but you'd have one 5 million shares both resulting from an increase in our average stock price in the quarter.

And you'd have one 9 million shares do the weighted effect of stock issued to employees and ESP B shares.

The year over year increase reflects the dilution of our convertible debt by $2 8 million shares.

And the dilutive effect of outstanding options by 0.7 million shares.

Both resulting from an increase in our average stock price during the quarter.

And $4 5 million shares due to the weighted effect of stock issued to employees and ESP shares.

Q3 bookings were $114 3 million compared to $186 9 million in Q2, 'twenty, one and $100 7 million in Q3 'twenty.

Following a record second quarter bookings were pleased to report another strong quarter of new bookings demonstrating robust demand for our solutions.

Our book to Bill ratio was <unk> 90 in Q3 21.

One six in Q2, 'twenty, one and 1.06 in Q3 'twenty.

Our strong bookings momentum during the past three quarters has generated year to date book to Bill ratio of one one.

The year to date book to Bill exceeds one for both segments.

Turning to slide 10, we allow discuss our liquidity position and balance sheet.

We ended Q3 with cash of $128 4 million compared to $115 2 million at the end of Q2 'twenty one.

And 78 million last year.

The $13 2 million sequential cash in Greece.

It was comprised of $15 2 million of cash generated from operations.

Primarily attributable to both cable access and video segment operating profit and strong.

In the quarter.

Net of $2 9 million cash used for purchases of fixed assets and $1 3 million received primarily from stock option exercises.

Our days sales outstanding at the end of Q3 was 54 days compared to 80 days at the end of Q2, 'twenty, one and 77 days in Q3 'twenty.

The sequential and year over year degrees reflects strong collections in the quarter, while our days inventory on hand was 78 days at the end of Q3.

Compared to 74 days at the end of Q2, 'twenty, one and 73 days at the end of Q3 'twenty.

Reflecting increasing inventory at the end of the quarter as you prepare for heavy fourth quarter and 2022 shipments.

We're also stocking up on constrained inventory at more than normal levels as the many of the supply chain landscape.

At the end of Q3.

Total backlog and deferred revenue was $333 3 million.

Up 54, 1% year over year from $216 2 million at Q3 'twenty.

And a slight degrees of 4% sequentially from $347 2 million at Q2 'twenty one.

This near record Q3 backlog in deferred revenue reflects increasing commitments from our large cable customers.

Growing demand for new broadcast edge appliances.

<unk> five <unk> bandwidth reclamation projects and growing video streaming.

<unk> volume commitments.

Nowhere is that historically about 80% to 90% of our backlog and deferred revenue.

<unk> converted to revenue within a rolling one year period.

As mentioned on previous calls not included in our backlog is additional contractually agreed cable less business with three of our initial tier one cable customers.

At the end of Q3 'twenty one this incremental amount was approximately $136 7 million.

Down from 145 million last quarter as approximately $8 3 million went through the Virginia order process and therefore moved into bookings.

Taking these cable Louis contracts into account, we have total future contracted revenue of approximately $470 million.

Which continues to provide us with a very solid foundation for the remainder of 2021 and into 2022.

Now I'll turn to our non-GAAP guidance for 2020, one beginning on slide 11.

I will now review guidance, our cable segment for Q4 and the full year.

But our cable access segment in Q4, we expect revenue in the range of $65 million to $70 million.

At the midpoint. This reflects an increase of $12 5 million compared to prior Q4 guidance.

This increase is driven primarily by accelerating deployment momentum with our tier one customers.

Gross margin in the range of 40% to 41%.

At midpoint. This reflects a decline of 550 basis points versus prior guidance.

This is mainly due to increased hardware mix, resulting from incremental hardware revenues based on growing demand from our customers Brookfield at higher than standard cost.

Adjusted EBITDA to range from seven four to $9 1 million.

At midpoint. This reflects an increase of $2 million versus prior guidance.

Primarily due to additional gross profit on increased revenues.

For the full year 2021 based on our progress to date.

Expect for cable access revenue in the range of $214 million to $219 million.

At the midpoint of our guidance does reflect a $17 million increase versus prior full year guidance.

At mid point. It also reflects 59% revenue growth for the full year indicate they have a whole of our business building momentum worldwide.

Gross margin in the range of $42 six to 42, 9%.

A 175 basis point decline versus prior guidance at the midpoint.

This is due to increased hardware mix.

Starting from incremental hardware revenues as discussed.

And associated higher supply chain related costs as we have discussed.

Supply chain costs in Greece.

Has been significant this year and make a tough year over year comparison.

Especially as we have prioritized market share gains.

Absent supply chain impact.

Our blended gross margins for the full year our.

I would expect it to be nearly flat with 2020.

Despite a much heavier mix of hardware.

In other words absent supply chain impact both software and service and hardware margins are expected to improve in 2021 year over year.

Which is encouraging indications that we are on the right track to achieving our long term margin expansion targets.

Adjusted EBITDA in the range of 31, six to $23 3 million, an increase of $2.2 million versus prior guidance at the midpoint.

Now I will discuss video segment guidance.

Portable video segment in Q4, we expect revenue in the range of $82 million to $87 million as we guided previously.

Gross margin in the range of 54, 5% to 55, 5%.

I've made point this is consistent with our previous guidance.

Adjusted EBITDA to range from nine six to $12 7 million.

At midpoint. This reflects a decline of one 9 million from prior guidance, primarily due to timing of delayed hiring for sales and marketing.

Originally planned in the third quarter getting pushed out to the fourth quarter.

For the full year 2021 video segment results. We now expect revenue in the range of $285 million to $290 million.

At the midpoint of our guidance. This reflects a $4 5 million increase versus prior guidance.

Attributable to both a continued rebound in broadcast market demand.

And growth in streaming.

Gross margins in the range of 57, 3% to 57, 7%.

At the midpoint of our guidance. This represents a 125 basis point increase over prior guidance.

Mainly due to product mix.

Adjusted EBITDA in the range of $48 $9 million to $32 million, an increase of $4 9 million compared to prior guidance at the midpoint.

Slide 12 presents our consolidated total company guidance for Q4 and full year 2021.

Calculated as the sum of the two segment charged as we just reviewed.

Leading our desalination for Q4, we expect revenue in the range of $147 million to $157 million.

At mid point of our guidance. This reflects an increase of $11 5 billion versus prior guidance.

Gross margin in the range of 47, 8% to 49%.

At the midpoint of our guidance. This represents a 270 basis point decline over prior guidance, mainly due to product mix and associated higher supply chain costs.

Adjusted EBITDA to range from 17 million to $21 8 million.

At midpoint of guidance. This reflects an increase of <unk> 2 million versus prior guidance.

EPS to range from 10% to 14.

At mid point, there is no impact on what we guided previously.

Our weighted average diluted share count of approximately $106 9 million.

And at the end of Q4 cash is expected to range from $125 million to $175 million.

At midpoint. This reflects a decline of $5 million, primarily due to increased investment in inventories as they ramp up for 2022 shipments.

For the full year, we now expect total company revenue in the range of $499 million to $509 million.

Reflecting raised expectations at both the low and high end of the range due to strong demand we saw in the third quarter and our updated Q4 expectations for both segments.

Gross margin in the range of 51% to 51, 3% at.

At midpoint of our guidance.

This represents a decrease of 25 basis points versus prior guidance at midpoint.

Adjusted EBITDA to range from 55 million to $55 3 million.

And an increase of $7 million versus prior guidance at the midpoint.

EPS to range from 28 to 32 cents per share.

A 6% or 25% increase compared to the midpoint of prior guidance.

And in fact, a tax rate of 10%.

Average diluted share count of approximately $105 1 million.

And finally cash at the end of the year I expect is expected to come in between 125 <unk>.

And $135 million.

In summary, during the third quarter, we continued to execute on our long term strategic priorities and goals.

Our performance and outlook continue to be in line with the multi year revenue and operating model as we shared with you during our video and cable access segment investor events midyear.

We appreciate your attention today and look forward to updating you on our continued progress.

With that thank you, everyone and now I'll turn it back to Patrick for final remarks, before we open up the call for questions.

Thanks, Sanjay so let's pick up on your closing comments there a review our strategic priorities as we conclude the year and head into 2022.

For cable access business, our objectives remain supporting volume deployments with a growing list of tier one customers.

Winning in scaling with new global operators and expanding our addressed market through our converged software core DOCSIS and fiber to the premises capabilities.

Pro video segment, our objectives continue to be accelerating the growth of our streaming SaaS customer base and per customers usage cap.

Capitalizing on the coming transformation of traditional media and broadcast infrastructure.

Particularly the new edge processing opportunity that we've talked about.

And delivering consistent margin expansion recurring revenue growth and profitability.

As you've seen in the third quarter, we continued to deliver industry leading solutions.

Superior subscriber experiences and create value for our customers and our shareholders.

We thank you all for your continuing support.

Now with that wed like to open up the call for questions.

Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press Star then one on your telephone.

To withdraw your question press the pound key.

Again, Thats star one to ask a question.

Please stand by while we compile the Q&A roster.

Our first question comes from the line of Steven Frankel with <unk>.

Your line is open.

Good afternoon, Thank you for the opportunity Patrick.

Spend a couple of minutes talking about these tier one deployments in cable access could you characterize your visibility into.

Into their deployment plans and is that in.

Improving.

As we go through these ramps.

Yes in short it is.

We're.

We are developing increasingly close and collaborative relationships with both existing and new tier one operators.

<unk>.

And through that process, we are gaining better visibility and understanding and at the same time, they're developing better understanding of the capabilities of our technology and how to best.

Handle it operationally all of that is I mean.

It's work in progress, but visibility continues to improve.

And while back you throughout this 50 million node number I wonder if you might update us on.

What that universe of even just the tier one customers you have now how many nodes that might be.

The addressable market.

Yeah, I think it's not nodes, but.

But.

And I'm sorry the.

Oh, yes, I'm sorry.

I don't have a specific number for you, but I think since we throw that audit has definitely gone up.

Yeah.

Well better for me not to hazard a guess here.

I think since that time, we've added.

We've talked about we've talked about nine global tier ones that is top 10 customer and their respective geographies.

As well as just shy of 70 total customers.

So David the number has gone up I would say materially since 50, but I don't have a specific number to give you here today and.

I'll have to get back to all of you with an updated and.

The updated count.

Okay, but to use the world series analogy or we like getting the <unk>.

The second inning kind of where are we in this.

Rollout.

Well, we'll certainly wish we believe so I mean, although we're pleased on one hand with the growth of the.

We rolled out two it's we're still as of the end of the third quarter. We were just below four.

So, let's just assume that the total addressable market of customers. We've won is somewhere between 50 and 60 million modems.

That says where.

Something.

On the order of seven.

Seven percentage up 7% of of being rolled out across just those customers that have already started rolling out.

Cable OS not to mentioned customers, who are still in our sales pipeline. So I think by any measure that says where we're really still.

Very early innings or N a.

In terms of.

The rollout potential in front of us.

Great and then you mentioned.

Your first non FCC mandated.

When in video distribution.

You give us some hints in terms of.

The timing and scale and what the pipeline from other operators might look like.

Well.

Yes.

It's a several million dollar project I want to I don't want to go further than that.

The project is was one in the third quarter. It has not been deployed there is no revenue yet so that is still ahead of us.

But we think it's noteworthy this is a.

Let me say, a household name and kind of operator out there.

<unk>.

And it's meaningful that.

They are who has historically used satellite to move it around.

And the fact that on their own nickel, they see enough operating flexibility.

<unk>.

Hum.

And in fact, new service delivery opportunities that they are themselves are funding moving off of our satellite and getting onto terrestrial networks and as we've commented before the FCC and the <unk> may have been kind of the.

The catalyst for some of this activity in the market. We think it's an architecture that makes a ton of sense.

From a strategic flexibility point of view.

Well as from an economic point of view and so we think it's simply going to be a growing trend worldwide. We're still again trying to use the previous analogy very early innings on this thing.

But we continue to be optimistic about it both in terms of a trend in the market that's going to drive overall spending and in terms of our competitive positioning by virtue of our software based edge platform.

Thank you and one last quick one and you've mentioned this number before how many of those 101 SaaS customers have not launched yet.

On the video side.

I believe they will be around.

15% to 20%.

Yeah.

Okay. Thank you Sanjay I'll jump back in the queue.

Alright, thank you.

Thank you.

Our next question comes from the line of Simon Leopold with Raymond James Your line is open.

Thanks for taking the question I wanted to see if you could give us a little bit of help in terms of how to think about the.

The gross margin for 2022 because.

What you've highlighted in the prepared remarks, it looks like some elements of supply chain, but a lot of a lot of whats pressuring gross margin in the fourth quarter. It sounds like a hardware mix aspect.

I just wanted to see if maybe you could grades to some of the commentary you had offered us back in June to how to think about the the overall gross margin trend in 2022.

As you see it today.

Thanks for the question Simon I mean, let me first address when we say mix and specifically I don't want you or anyone else to think Oh, well, it's more hardware and less software and Thats. What it is it's simply more hardware when we project presented our three year model, we actually assumed by 2024.

For our global share of DAA hardware would be around 30% from a market share perspective, and indeed, even from the beginning of this so.

Polk and publicly about it we expected and our.

And most of our initial cable where many of our initial cable us deployments, our core software with several hours as well as our competitors hardware kind of hanging off of our software. If you will are being fed by our software and what we're seeing right now is a trend where we're getting much larger market share we're seeing our hardware use for.

We think we're way above 30% in short and.

That is driving.

Both revenue upside at gross profit upside as well as a relative mix differences, but but by no means any less software.

It was originally anticipated so now coming back to your specific question I think maybe just slightly reframe. The question becomes well in 2022, well harmonic continue to win more or much more than its fair share of hardware revenue and I think that that's something we're still trying to assess is.

The durability of customers' preference for our hardware versus versus competitors.

Hi.

And I think that will be manifest in.

And our guidance for 2022, both at the topline and corresponding to that to the.

The gross margin line.

But I think it is important to understand that even in a scenario, where we see ourselves for longer period of time, capturing a much greater market share of hardware.

Does it imply lower gross profit.

It's kind of the original business, we talked about in our three year plan, plus some incremental hardware, albeit at low margin.

I hope thats not too much of it along or complicated answer Simon So I'll pause there and see if that makes sense to you.

No no. It makes sense so percent the gross margin percent may be lower but the profitability. The EBITDA earnings Youre coming away with a higher revenue it is.

Basically a tailwind.

That's right.

So okay great.

Of course, the elephant in the room, that's kind of what's happening strategically apart from anything to do with supply chain.

And everyone else probably on this call has heard more than you care to hear about supply chain. So I don't want to belabor all of it but that continues to be.

Somewhat dynamic headwind as we go into next year, and I think that Thats.

We don't think that Thats, a permanent fixture in our business, but it certainly will be a headwind for most if not all of next year and that also will weigh into the guidance that will eventually provide for 2022.

That all makes sense and then if you could give us any updates you have on your participation in our dog related projects whether youre.

Contributing in the fourth quarter in your longer term outlook for art off as that opportunity.

Yes, we envision modest contribution in the fourth quarter, but growing contribution in 2022.

To be clear.

Our point of entry or there are areas of go to market focus is on those.

Our cable operators, who are doing Argos work or hybrid operators, who kind of operate both.

Fiber or historically twisted pair as well as cable infrastructure. So we're not going for the entirety of the RF space, but we're going through what I think is a growing subset of it which are those.

The RF opportunity being addressed by people, who have some play in cable and they are the main the main thrust is qualification of our of our fiber to the home solution.

Hum.

Alongside DOCSIS and as I mentioned in the prepared remarks, where we're pretty encouraged with the progress we're making.

We're by virtue of the wins that we have so far where we're gaining credibility a lot of prospective customers are looking to see how well the early rollout of the technology is going.

And.

And we're working with a couple of larger customers, who could have the potential to do quite a bit of an art off and there are it's a kind of a different dynamic or process, but we're working on getting.

Our fiber to the home solution qualified there and.

I'd call it cautious optimism that we will be part of that they will be rolling out too.

Taking advantage of art off in 2022, and then it will be part of their solution.

But certainly more to come on that.

Great and then one last one.

Not looking for the tutorial right now on cable architecture, but.

Last week, we did here.

One of the larger operators talk to you about high lift.

And that stimulated a lot of questions could you help folks understand what what does that mean in terms of an opportunity for harmonic if an operator chooses to upgrade through high split. Thank you.

Well before I get to the specifics of your question I understand it may be confusing.

There is a tool bag right now of options that cable operators are looking at long and short term and and and so there's just multiple directions that they can go and.

And I'll tell you I think that our software core is really coming into focus as a very big strategic advantage because what it means is without kind of having to wait for new hardware develop new hardware, we can kind of pivot or expand to two to.

Addressed so basically program.

Reprogram the functionality of our solution.

To handle these use cases and when you come to know specifically high splits in mid split before that in fact, I think in prepared remarks, a couple of quarters ago, we talked about.

We talked about early work, we did there with a large customer and we jumped on that we think ahead of the rest of the market. So in short we think we have a great solution for high split it dovetails perfectly into what cable <unk> is all about.

And we see that as a.

As a specific competitive advantage or a specific instance of the broader competitive advantage, we have with the flexibility of our cable edge platform.

Thank you very much.

Alright, thank you.

Thank you.

Our next question comes from the line of Ryan Koontz with Needham <unk> Company. Your line is open.

Thanks for question and great quarter guys.

First one are you seeing any customers all expressed interest in going with a multi source CMT S core software or is it primarily single source.

Dominantly primarily single source.

Okay great.

And then a more complex question as we kind of.

Peel back the onion on the gross margin recovery here.

How much of this is transitory versus permanent change and do you look at pricing adjustments to account for your full.

Permanent cost changes where are you in that cycle right now in terms of thinking about that.

I think we see Ryan.

What's going on now is is primarily transitory.

But.

Next thing I would say as well.

What we've learned is that we don't know, what we don't know and and.

Yes.

We don't have a time limit on it.

I think one of the advantages of our position or are this market is that we're not dealing with thousands of customers. We have strong strategic relationships with large customers, they're well aware of what's going on and.

And Thats the key.

So the opportunity to have open <unk>.

<unk> parent discussions about how to how to ensure.

Yes.

The health of their.

Their deployment plans in their pipelines.

So as part of that absolutely.

Pricing adjustments or <unk>.

We're absolutely on the table.

And.

Whether those pricing adjustments become.

Become permanent or not I think is very much related to how this whole thing plays out.

But that's hopefully that gives you a little bit of a flavor of the way we're thinking about it.

And addressing it.

Okay great.

On the competitive front with regards to the hardware side of Rpgs and such any any change in the competitive environment there.

It sounds like you are winning more share than you thought so.

It sounds like Youre more confident in your competitive position.

Yes, I think thats right.

In a nutshell.

That is correct.

Okay.

Thank you alright, thank you.

Thank you.

Our next question comes from the line of Tim <unk> with Northland Capital markets. Your line is open.

Hi, good afternoon.

And all of that Mike.

Congratulations I actually did want to start with the supply question.

And while recognizing you're seeing some cost pressures from a top line standpoint, you've arguably manage this about us as well as anybody has in.

I want to try and dig into that a little bit more in terms of.

To what do we attribute there.

Your ability to.

To ship pretty significantly going to see your inventories are up and for one that's a good thing right.

But you know.

The fact that their heart.

The hardware products are based on standardized platforms or just overall kind of supply chain execution any comment on the node side is too.

Yeah.

Putting aside the cost pressures for a moment, how you're able to.

To do such a good job managing the supply chain.

And I have a phone call I very much appreciate it appreciate the question.

I think we have done a pretty good job, but we're not sitting here pounding our chest.

It has come at the expense really of a heavy heavier expenses I think maybe one advantage that we had Tim as we went into the year with an aggressive posture.

We werent, 100% sure, but we felt that there was upside on the year and we were ready to put money behind that hypothesis really before this whole supply chain and grew up so we were already kind of leaning into our supply chain. We were looking at how we can pull in our components et cetera that that was the mode that we're in and so we as the situation.

<unk> got tougher and we had to Poland hard and get even more aggressive we weren't starting from zero. If you will the car was already or.

The effort the lean and was already pretty significant I would say.

I think that's one that's one fact.

And.

And associated with that we as I communicated a quarter or two ago or Sanjay did.

We.

We had no qualms at all we wasted no time thinking about optimizing to the Ens degree.

Cost versus.

<unk> getting it done we've been very clear.

Internally and strategically that our number one priority is is accelerating deployments accelerating market share gains et cetera. So when confronted with let's say an opportunity to bring more things and or accelerate at a cost.

I don't want to say, we've been indifferent to cost, but we've we've.

We've leaned into.

Two.

Just spending more when when necessary.

And the third thing I would say, though is that I just have to give kudos to our team.

We have a we have a supply chain team that has.

Maybe same thing with our peers and competitors, but I can tell you from firsthand experience our supply chain team has just been excellent this year.

This team has worked around the clock.

Feverishly and when we have people who have literally during the middle of Covid have spent months and other parts of the world.

Under very different difficult.

Quarantine conditions et cetera, doing whatever it takes to get it done and so I'll take the opportunity to really acknowledge the tremendous effort.

Of our team and the conviction and the commitments to.

To deliver good results.

And I think that that is.

As you pointed out I think that's really come through.

None of that is to say we won't have further challenges ahead.

Think we're out of the woods everyday almost it seems brings another.

<unk> as we play whack a mole here, but.

But to date I think we have done very well and it's a combination of those three things that I mentioned.

Great Thanks for that and.

I guess I guess, a couple of questions on the cable access business and that'll be it for me one.

Yes, you are.

We appear to be diversifying a bit and obviously you saw a nice growth sequentially in cable access and a lower contribution from Comcast.

Always good to see in that context.

Talk about your nine tier ones I think now nine.

I think you'd commented last quarter that maybe half of.

Those customers were kind of.

Meaningfully or if not fully up and running.

Do we see more of that in terms of providing that diversification.

The business broadly in cable access.

And then.

Maybe in the quarter as you look forward.

The PON opportunity.

Starting to contribute or do you expect it to sometime soon and any comments on the size of that pipeline.

Yes.

Well in short, yes, we think that the.

As additional tier ones come online and then more broadly as the total number of customers grows you will see the continued diversification of the.

Of the revenue.

I mean that being said the big guys are baked in.

And as long as they're rolling.

That will represent a good part of the business, which is which is not bad news at all so I think yes, I think the cable industry or for better worse is inherently concentrated.

And hence our intense focus strategically on tier ones from day one.

As we get a bigger basket of tier ones, which we aim to continue to do I think youll see.

Some diversification amongst them.

But no doubt about it the top 10.

10, or 15 customers, we have will will will span an outside position in our market and you can see.

The power of what it means when there are when they are accelerating.

Guarding upon FERC, we are very encouraged by what's happening there.

That being said.

We're still very much on the on ramp that business and comparing that business is.

As I think ahead to 2022.

Comparing that business, which I think will begin to grow in 2022 more substantially but then the question is as a percentage does it takes the growth of cable I'm not sure.

Yeah.

Long term, there's no doubt about it having a strong position in fiber is great strategically great financially and that's absolutely where we're headed.

As both things kind of scale and ramp though.

I think.

It will take a little bit more time for.

Financially for the fiber to home to kind of get it set above the parapet so to speak.

But we remain incredibly strategically focused on it and continue to see fiber as a very important.

Not only diversification, but additional growth lever for our business.

Okay. Thanks very much.

Alright, Thank you Tim.

Thank you.

Our next question comes from the line of Kyle Mcnealy with Jefferies. Your line is open.

Hi, Thanks, very much for the question.

Great job with the results, particularly for cable access I'm wondering if you could parse out for us what the budget position looks like a crusher your cable customers. The extent that you can have visibility into it.

It looked like entering Q4, and how much of the increased Q4 outlook might be coming from any kind of budget flush versus general increased momentum of our share gains in your cable business.

And were there any specific larger customers that you've seen that uptick in Q4 orders that you would consider to be some type of budget flush.

I think it's still early in Q4 to characterize what's what's happening is.

As a budget flush or not frankly as Sanjay outlined we came into the quarter with strong backlog and deferred revenue.

The majority of the orders that will take this quarter, we actually we anticipate to be for for 2022, it's not quite that black and white, but particularly.

Particularly in the context of the supply chain issues. The whole industry has been working with we've been.

We are encouraging our customers too.

<unk> be looking and working ahead now that being said, it's true that Q4 on both sides of our business, but Q4 is historically strong.

And indeed, whether you call it budget flush or catch up some amount of that activity is.

I think as part of the.

Historically, Susan that the restructures analogy in Q4.

But relative to any other year right now.

Sanjay chime in if you see it any differently, but I don't think we see any.

Difference in the historic seasonality pattern, but theres nothing I mean, what we saw last year or the year before.

Similar to what we are seeing this time in Q4.

Very similar okay. So coming back I guess part of your question is where is the uptick.

We think it has more to do with just.

Growing a deployment.

Mento.

Kind of regardless of the.

The quarter, so maybe a modest impact for us.

Seasonality, but more than that it's just a continuing momentum with a broader array cable customers.

Okay, that's great to hear I'm, just one follow up.

Is there any way for you to quantify at all how much revenue you think you werent able to ship this quarter due to the supply chain issues.

Trains that you would've otherwise been able to ship in the quarter.

Well, we cant quantify that I think as Patrick mentioned, we are trying to address all of our customer demands and we have we have done that in all the quarters and especially Q4 as we are raising the guidance further to what we said earlier three months ago that yourself.

As well I think we are marching on the past to address all of our customer demands.

Okay fair enough. Thanks, so much.

Alright, Thank you alright.

I'm not showing any further questions in the queue I would now like to turn the call back over to management for closing remarks.

Alright, well, thank you very much for your time.

And more generally your support we remain excited about our business excited about the progress, we're making and we look forward to updating you again soon with that we'll say good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.