Harmonic Inc.
Q2 2021 Earnings Call Transcript

Published: 2 Aug 2021

[Operator:]

Welcome to the Q2 2021 Harmonic Earnings Conference Call. My name is Sara and I will be your operator for today’s call. As a reminder, this conference is -- call is being recorded. I would now like to turn the call over to David Hanover, Investor Relations. David, you may begin.

[David Hanover:]

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's second 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 for this webcast, which you may see by going to our webcast on our Investor Relations website.

[Patrick Harshman:]

Well, thanks, David, and welcome everyone to our second quarter call. Harmonic delivered an excellent quarter with strong year-over-year revenue and earnings growth, and book-to-bill of 1.6, resulting in record backlog and deferred revenue. Both our Cable Access and Video segments again contributed materially to these results, each with double-digit revenue growth and positive operating income and with comparable book-to-bill. The Cable Access delivered 89% top line growth, while also making great progress extending our addressed market and global leadership position through multiple new design wins. Our Video business was up 34% year-over-year as demand for both our latest broadcast edge and streaming SaaS solutions grew, with streaming SaaS revenue up an impressive 68% year-over-year. 2 months ago, Harmonic laid out detailed multiyear growth plans for our two businesses. The financial and strategic results of this quarter demonstrate that we continue to be firmly on track and well-positioned to seize the compelling broadband and streaming video opportunities ahead of us, and to deliver on our associated financial objectives. Taking a closer look now at our Cable Access segment. It was another really strong quarter. Segment revenue was $50.1 million, up 89% from a year-ago, and we finished the quarter commercially deployed with 62 cable operators worldwide, up 114% from the second quarter of 2020. These deployments scale to serve over 3.3 million cable modems, up 94% year over year.

[Sanjay Kalra:]

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 Q2 press release and earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP that are discussed on this call. Both of these are available on our website. Turning to Slide 7, let's start with an overview of second quarter financial highlights. We delivered solid results, which were above our guidance ranges, including revenue of $113.4 million, up 53.2% year-over-year, gross margin of 53.9%, a 230 basis point improvement year-over-year. Adjusted EBITDA of $9.5 million, or 8.4% of revenue, and EPS of $0.05. We also had record second quarter bookings with a book-to-bill ratio of 1.6x. As a result, we ended Q2 with record backlog and deferred revenue of $347.2 million, up 65% year-over-year. Cash was $115.2 million, up 48% year-over-year, positioning us well for the remainder of this year and into 2022. Now let's review our second quarter financials in more detail. Turning to Slide 8. Total company Q2 revenue was $113.4, up 53.2%, increased compared to $74 million in Q2 2020. Cable Access revenue was $50.1 million compared to $41.3 million in Q1 '21 and $26.5 million in the year-ago period, reflecting over continuing market share gains.

[A - Patrick Harshman:]

Okay. Thanks, Sanjay. Sanjay just mentioned our strategic priorities. So let's wrap it up by reviewing those priorities for the remainder of this year. For Cable Access business objectives or accelerated volume deployments with a growing list of Tier 1 customers, entering new global operators, particularly additional Tier 1s, and expanding our addressed market with CableOS's new converged DOCSIS and fiber to the premises capabilities. For Video segment, our objectives were accelerating the growth of our streaming and SaaS customer base and per customer usage. Capitalizing on the coming transformations of traditional broadcast media infrastructure globally, particularly the new edge processing opportunity and delivering consistent margin expansion, recurring revenue growth and profitability. Putting it all together, we continue to aim to deliver industry leading solutions to enable superior subscriber experiences and to create value for our customers and our shareholders. Thank you all for your support. And with that, let's now open up the call for questions.

[Operator:]

Your first question comes from the line of Simon Leopold from Raymond James, your line is open.

[Simon Leopold:]

Great, thanks for taking the question. I just first want to start with the gross margin you reported for this second quarter. Both of your reporting segments were better than we expected and my recollection was last quarter, it sounded like gross margin was going to get hit pretty hard from supply chain constraints and it actually was pretty meaningful improvement. Could you unpack that a bit in terms of what was different from your original expectations?

[Patrick Harshman:]

Sure. Simon, so let me start with Cable first. I think Cable we saw good software make this time. Although we -- when we guided, we were expecting some supply chain impacts, and they did happen. It came in accordance with the guidance. But we saw a good mix of software. So that's the improvement we saw in the Cable margins. In terms of Video gross margin what we guided, we saw strong mix as I said in my prepared remarks. We saw improved mix of software and SaaS revenues and good margins there.

[Simon Leopold:]

And in terms of where we stand today with the supply chain constraints, what's sort of being baked into your guidance by segment? And how are you thinking about, essentially the supply chain getting worse or staying the same as it was before?

[Patrick Harshman:]

So Simon, in terms of our supply chain impact, whatever we considered in the past guidance, there remains the same. For full year, the gross margins for Cable are exactly the same at midpoint. We guided $44.5 previously, we are at $44.5 now, so the supply chain is the costs have remained the same for the whole year.

[Simon Leopold:]

And in the past, we've talked about opportunities for you coming from government stimulus programs. Could you give us an update, have you seen progress? Have you any of these new awards? Are they related to what we consider government stimulus type programs? And what's your assessment of that particular opportunity as you look out longer than just a quarter.

[Patrick Harshman:]

There has been no material contribution to our business from projects that have the government stimulus behind them. But that being said, we're certainly pursuing opportunities that may have government stimulus, I think particularly on the Cable fiber-to-the-home-side, that's relevant. So it's part of the opportunity pipeline, but it's not part of the revenue pipeline. But it's not part of the revenue or bookings results that we are reporting today.

[Simon Leopold:]

I guess what I'm just trying to confirm and my impression is that no decisions have been made. And I just want to confirm that that's correct assumption.

[Patrick Harshman:]

Decisions in what regard?

[Simon Leopold:]

Well, in terms of the operators making selections and signing contracts.

[Patrick Harshman:]

I think it varies. I think it varies. Frankly, there are some opportunities out there that we think we're too late for others. We think that we're in plenty of time for. So we -- I can't give you an overall -- a complete blanket statement, Simon, but they are certainly plenty of still available opportunities that we're competing for.

[Simon Leopold:]

Okay. Well, thank you very much for taking the questions.

[Patrick Harshman:]

Thank you.

[Operator:]

The next question comes from the line of George from Jefferies. Your line is open.

[George Notter:]

Hi, guys. Thanks very much. I was very impressed by the bookings number this quarter. I think you said the book-to-bill was similar across both sides of the business, if you could just confirm that would be great. And then I guess I was just hoping to go another layer deeper in those bookings on each side of the business, I assume that C band reclamation was a big piece of the narrative on video, with the second wave of that activity out in front of us. But maybe you could just confirm that also, and just give us any more flavor you can for the nature of the bookings. Thanks.

[Patrick Harshman:]

Well, let me confirm both George. Yes. Both segments has similar book-to-bill and I confirm the other piece as well.

[George Notter:]

Got it. And then -- so on the Cable Access side it was -- Was it broad based among many different cable operators that you have in your customer base? Or was it more narrow among some of your biggest Tier 1s and anything else you could give us there?

[Patrick Harshman:]

It's really broad based on both sides, George. Yes, Cable we benefited from both new orders from existing customers as well as strong order input from newer customers. So I would say that was -- Cable was strong, broad based. Indeed, some part on the video side there's Sanjay just confirmed was related to 5G, but he also mentioned earlier, in his remarks, we actually saw strong bookings across geographies, and to date of the 5G activity has been limited still to the U.S.. So it would be incorrect to attribute the video strength exclusively to 5G.

[George Notter:]

Got it. Okay, that's helpful. And then, I guess, just to kind of follow on to the prior question. You guys are doing a lot of development work on the fiber to the friend, piece of the solution? Can you talk about kind of where you are in that development just give us updated versus 3 months ago? And how do you see yourself kind of aligning, product wise with some of the opportunities that are out there on fiber, the prem and all the stimulus, it's out there these days?

[Patrick Harshman:]

Well, let me take a step back and remind or clarify that our initial strategy where we're focused is not -- we're not going after Verizon, AT&T, or frankly, any exclusively, historical Telco player, or real, I think value add is a converged DOCSIS and fiber solution. And we believe that just the subset of operators who will be deploying both DOCSIS and fiber in either the same or different parts of the network. It's that creates a compelling, let's say initial or Phase I opportunity for us. And it's those customers who are making progress with as those customers with whom we have our initial deployments, and it's some of the larger of those customers where we're starting to make some real good progress in their labs and in their testing. And I would say that the value of what we're proposing is coming into greater focus and at the same time, we're better understanding the different use cases and how these things will be deployed. I mean, the market is evolving. Just late last week, for example, Virgin Media in the U.K., kind of made a splash by talking about some aggressive new fiber to the home plans there in the U.K market. And that there were further clarified on the earnings call where they talked about Fiber and Cable kind of moving forward and in coexistence was maybe the fiber serving the higher end customers of being the premium Tier of service.

[Patrick Harshman:]

I think that's a picture that for us is becoming a sharper focus, and it's helped us steer the way we position the technology, both technologically and commercially. So we're making good progress on both fronts. So George, we're quite encouraged by the work we're doing with our customers as well as that, I'd say the strategic thinking of customers large and small in this area. So we're we -- obviously we continue to invest in it, and what will continue to keep you posted on our progress.

[George Notter:]

Great. Thank you very much.

[Operator:]

Next question comes from the line of Ryan Koontz from Needham & Co. Your line is open.

[Ryan Koontz:]

Hi. Thanks for the question. First a clarification, if I could on your prepared remark about bookings. You commented that you're at 80%, 90% of your typical backlog is shippable in the next year. But we are implying that that's still the case with this new surge in bookings as well that same characteristic would apply?

[Patrick Harshman:]

That's right, Ryan, that's their sort of historical trend, that 80% to 90% of deferred revenue on backlog gets converted within the next 12 months. And we expect the same trend to continue.

[George Notter:]

Perfect, thank you. And then just look at your set of eight Tier 1 wins, obviously are critical and very strategic. Could you maybe characterize, well, where those customers are now in their path toward buying deployment, how many are involved in deployment today and -- where the balance kind of sit in that process of operations integration or field trials, that sort of thing?

[Patrick Harshman:]

Out of the eight that we've discussed, we have four who I'd say really in volume deployment today.

[George Notter:]

Okay.

[Patrick Harshman:]

Within those, let's say various maturation. I'd say nobody is probably completely moving at the pace and volume they would ultimately like to, but I think we could safely call for a volume. And I'd say the other four are in various kind of stages of startup.

[George Notter:]

Helpful. Thank you both.

[Patrick Harshman:]

All right. Thank you.

[Operator:]

Next question comes from the line of Tim Savageaux from Northland Campbell Capital. Your line is open.

[Tim Savageaux:]

Hi, good afternoon, and congrats on the bookings in particular. And I did want to follow-up there a little bit around the kind of topic of new versus existing customers. And you mentioned a Virgin call where they're talking about fiber-to-the-home. Actually, Comcast had some pretty interesting things to say about virtualization and accelerating next gen technology deployment on their call. I don't know if that's coincidence. I mean, you obviously saw a fair bit of growth here in the quarter with Comcast. And so, as you look at that is, are you seeing a -- can you comment, I guess, on those comments, or if you're seeing a meaningful acceleration there. And despite that, it does look like from a booking standpoint, you did add some meaningful new orders there. So, any further color on those specific comments, and then with regard to whether you're seeing -- you might have seen a few of those four Tier 1s, you mentioned, go into volume deployment pretty much last quarter. And that might have accounted for some of the strength in bookings that beyond contest.

[Patrick Harshman:]

I would attribute the step up in bookings in the second quarter. I don't actually have the breakdown in front of me and I don’t know if you’ve got a comment, Sanjay, but I think it totally wasn't dominated by existing customers. New customers contributed materially, Tim. So I think it's probably safest to think about the booking number as an equal balance between healthy orders from existing customers and new customer order inflow.

[Sanjay Kalra:]

I agree. That’s a decent mix between new and existing.

[Patrick Harshman:]

Yes. We're gratified to hear some of the leading operators in the space talk openly about, about their thinking. I mean, they've been talking about I think the leaders in the Cable industry began talking about 10G, maybe 2years ago at the CES conference. And with increased worldwide competition from fiber coming, I think that the topic of competing next generation broadband, thinking through what next generation broadband looks like. And here, I'm just talking about going beyond just symmetric to really symmetric multi gigabit services and ultimately symmetric 10 bigger you are able to services. This is not science fiction anymore. This is a very symmetric 10 gigabit services. This is not science fiction anymore. This is a very relevant topic. And our view is that those who have selected us early, were really -- among the operators who were out front earliest thinking about this and who put the greatest importance on, ensuring that their networks were going to be competitive, not just in the next 18 months, but over the next decade. So from that perspective, it's not news to us. Tim, I think the news is, if you will, that there's more open discussion about it. And perhaps the element of news there is the extent to which we're now seeing a mix of advanced DOCSIS, virtualized DOCSIS DAA together with fiber as really coming into focus as a attractive blend of capabilities for meeting these next -- this kind of next phase of competition and consumer demand in the industry. Does that help? If you had the color ..

[Tim Savageaux:]

Yes, much appreciate it. Thanks very much. I'll pass it.

[Patrick Harshman:]

Okay. All right. Well, thank you.

[Operator:]

Next question comes from the line of Steven Frankel from Colliers. Your line is open.

[Steven Frankel:]

Good afternoon. Patrick in the spectrum, reallocation, part of the video business, there was an opportunity to not just sell some hardware into those customers, but build a recurring revenue relationship around maybe some of your SaaS offerings as well. Could you update us on how that mission might be going?

[Patrick Harshman:]

It continues to be an attractive opportunity, I would say fairly well. But we have -- we still have work to do if I had to summarize it, Steve. I mean, taking a step back, overall, we're quite pleased with the progress we're making and says, certainly, the discussions with operators involved in the whole 5G thing are part of that mix, but I wouldn't put disproportionate weight on it. But it is an attractive opportunity. More generally, I think our brand is really strengthening from a SaaS perspective, more and more media companies around the globe are starting to understand what we're doing in that space. Both those who might have an opportunity to reallocate stuff between satellites or in fact, take it off entirely and move to fiber, I think everybody is understanding better that Harmonic is bringing both some of that traditional network capability as well as streaming SaaS capabilities to the party. And it's continuing to be pretty fun and exciting to work on.

[Steven Frankel:]

And how is the size of the typical SaaS engagement changed over the last year? Are you getting larger initial deal sizes or these deal sizes growing over time as that ad element comes in and the customer ramps?

[Patrick Harshman:]

Well, it's all of the above. On one hand, definitely part of the growing pipeline includes a bigger deals than we've had before. And I'd say that end of the spectrum is bigger. At the same time though as our brand become stronger where we're kind of doing a better job of addressing what I call the long tail. On an aggregate when you think about content generation worldwide, there's a lot of opportunity under that long tail. So for sales force investments that Sanjay mentioned through a new channel development as well as direct sales, what we're trying to go after both ends of the spectrum, and we're seeing more success on both ends of the spectrum. Both the bigger deals and the smaller. Thinking about the ad stuff in particular, I'd say they're -- most impressive so far has been some of the maturation of that stuff. Maybe maturation is too far along, but some of the development of that with some of the larger engagements we have particularly in North America. So engagements with larger media companies, who perhaps have more mature advertising models as where we’re seeing some very encouraging uptick there and hence we're increasingly optimistic about that targeted ad model getting more traction with the other large ones as well as the longer tail that I mentioned a moment ago.

[Steven Frankel:]

Great. And then on CableOS, now that it's the market starting to mature, and you have such a strong reputation in the market, do you have any more visibility into those that haven't launched into kind of velocity of their launch once they get started?

[Patrick Harshman:]

I think it's improving. It's still work in progress, but it's still improving, particularly a large Tier 1, every one of them has their own kind of unique environment, operating paradigms, et cetera. So, I think there is no such thing as a turnkey, 15 day, Tier 1 turnout. That being said, we are getting better, we're getting more sophisticated. I think our lab integration, field service, professional services teams are excellent. I think it's a big part of the value we're bringing to the party now. It's not only the technology, but the knowhow, and that's serving us well. But to be clear, it's still heavy lifting and that's okay. I mean, these are -- we're all broadband customers. So the fact that our consumers, I mean, the fact that our customers are taking it carefully, they’re triple checking everything to make sure the service is fully robust, et cetera, et cetera. It makes complete sense. But we're seeing good progress and I think you're seeing that show up in our numbers.

[Steven Frankel:]

Great. Tremendous quarter. So congratulations, and I look forward to the back half of the year.

[Patrick Harshman:]

All right. Well, thank you very much, Steve. We appreciate it.

[Operator:]

Showing no further question at this time, I would like to turn the conference back to CEO Patrick Harshman for closing remarks.

[Patrick Harshman:]

Okay. Well, thank you all for joining us today. We've had a strong quarter. The outlook is strong. We're executing the plan we've discussed. We're excited about our business. We're encouraged by the market conditions and we look forward to continuing to make progress and continue to communicate with you. So we look forward to talking with you all next time. Until then, have a good day.

[A - Sanjay Kalra:]

Okay. Thank you all. Bye.

[Operator:]

Listen gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.