Blair King – Investor Relations Patrick Harshman – President and Chief Executive Officer Sanjay Kalra – Chief Financial Officer.

George Notter – Jefferies Tim Savageaux – Northland Capital Matthew Galinko – Sidoti Simon Leopold – Raymond James Steven Frankel – Dougherty Jeff Bernstein – Cowen.

Welcome to the Q2 2017 Harmonic Earnings Conference Call. My name is Candace and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I’ll now turn the call over to Blair King, Harmonic’s Director of Investor Relations. Blair King, you may begin..

Thank you, Candace. Hello, everyone and thank you for joining us today for Harmonic’s second quarter 2017 earnings conference call. Again, my name is Blair King. With me at our headquarters in San Jose, California are Patrick Harshman, our CEO; and Sanjay Kalra, our new CFO.

Before we begin, I’d like to point out that in addition to the audio portion of this call, we’ve also provided slides for the webcast, which you can see by going to the Investor Relations Page on harmonicinc.com.

Turning to Slide 2, during this call, we will be providing projections and other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are only current expectations and actual events or results may differ materially.

We refer you to documents that Harmonic files with the SEC, including our most recent 10-Q and 10-K reports and the forward-looking statement section in today’s preliminary results press release.

These documents identify important risk factors that could cause actual results to differ materially from those contained in our projections or our forward-looking statements. Please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP basis.

These items, together with corresponding GAAP numbers and a reconciliation to GAAP, are contained in today’s press release, which we posted to 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 operations.

Some of this information is included in the press release, and the remainder of the information will be available on a recorded version of this call on our website. So with that, I’ll turn the call to our CEO, Patrick Harshman.

Patrick?.

Well, thanks Blair. Let’s get started by turning to our Slide 3. Second quarter revenue was $82 million, down 1% sequentially. Comprising this total, video segment revenue was down just over a percent sequentially as we saw stronger than expected transition to software as a service.

Cable Edge segment revenue was roughly flat with the prior quarter as this part of our business continues to transition to our new CableOS system.

Combined bookings were $91 million, up 11% sequentially, led by double-digit rebound in our video segment driven in turn by a heavier mix of new over-the-top recurring revenue orders, which grew 90% sequentially to 8% of total company bookings. Correspondingly backlog and deferred revenue grew to $195 million, a record for the company.

Associated gross margin dip to 48% due to both video mix and CableOS transition factors, will be discussed by Sanjay momentarily, and EPS was a loss of $0.20. So with that overview, let's turn to our video business in Slide 4.

The first key message here is that over-the-top software cloud solutions and related subscription business models are becoming more significant drivers of our video business.

While subscription video on demand over-the-top platform growth is not news, the drive of traditional media companies and service providers to new, unified, live, over-the-top services targeted both mobile devices and the big screen in the living room is accelerating faster than we anticipated.

Strategically, this is good news for Harmonic; compressing, managing and delivering premium live over-the-top video with a quality of experience consumers expect is hard. The Harmonic’s technology in this area is world-leading and fueling our over-the-top business momentum.

Specifically, our second quarter over-the-top bookings grew 50% sequentially and over 200% year-over-year. And while software as a service is still a relatively small component of this overall over-the-top business, the adoption of our SaaS solutions in the second quarter was greater than expected.

Cloud and SaaS total contract value grew 90% sequentially to a little over $7.5 million, while our annual recurring revenue grew 87% to nearly $6 million. Now had these subscription booking has been traditional CapEx orders recognizes revenue immediately, second quarter video revenue would have grown year-over-year.

So while we're experiencing the well known issues associated with transitioning part of the revenue stream from CapEx to recurring revenue, the key strategic point is that our Harmonic’s video business is positioned and succeeding where the market is headed and that is high quality live over-the-top delivered as agile and sticky software and services.

Now second key message is that particularly in the U.S. the strategic emphasis on high quality over-the-top services is impacting the pace of investment in more traditional broadcast and Pay TV systems. Now that said I want to emphasize that we do not believe investments in traditional Pay TV platforms is dead.

Globally, these traditional platforms are still the primary means of delivering and monetizing the world’s premium video assets. And in fact during the second quarter, we had solid sequential and year-over-year video segment bookings growth in Asia, Europe, the Middle East and Africa.

With that said globally and particularly here in the U.S., investments in traditional broadcast and Pay TV infrastructure are getting extra scrutiny and are moving more slowly to our customers purchasing processes and so we’ll continue to watch this dynamic very carefully.

Now putting this all together and looking ahead, the summary message is that we expect global demand will continue to transition to over-the-top software and cloud services and Harmonic is ready with an amazing cloud native over-the-top platform that can be delivered as CapEx or OpEx.

Seeing now that this transition will be faster than expected in key parts of our addressed market, we’ll take a new action to optimally line our investments driving sufficient profitability of our traditional broadcast video product lines to fund continuing investment in our new SaaS platform while at the same time enabling high single-digit operating margin for combined video segment in the back half of the year.

Now looking beyond 2017, the accelerated transition over-the-top and recurring revenue solutions marks the beginning of a new chapter for Harmonic’s video business, one of which we believe we can provide even more powerful business solutions for our customers, we’ll also driving more consistent results and enhance value for our shareholders.

So let’s now turn to our Cable Edge business in Slide 5. As anticipated legacy edge cloud demand continues to erode. Revenue was approximately $9 million in line with our expectations down 53% year-over-year. However, the real news here is that we continue to make material progress advancing our CableOS technology leadership in new business pipeline.

First on the technology front working closely with cable operators in the U.S.

and Europe, CableOS is now delivering live DOCSIS services to thousands of paying broadband subscribers, who have been successfully migrated off previously deployed competitor CMTS hardware expanding the commercial footprint of the industry's first fully virtualized access solution.

Notably, our CableOS system is delivering truly disruptive performance in these early deployments achieving 10s of gigabits of packet processing per x86 rack unit, proving out a datacenter architecture that cut space in power consumption and buy over 70%.

These results are driving growing customer appreciation for the power virtualization and looking forward of distributed access architectures seamlessly enabled by CableOS.

Informed customer feedback that Harmonic has a significant technology lead in this area underscores our continuing confidence that we have developed a powerful cable access solution that really as a generation ahead of the rest of the market. Our confidence is further bolstered by recent advance purchase orders.

Since our May conference call and through July, we received over $15 million of new CableOS orders, bringing our CableOS backlog to approximately $20 million.

Relative to our initial expectations, we are seeing a higher percentage of this demand being associated with new distributed access architectures, which makes sense given the growing industry focus on pushing fiber deeper and scaling bandwidth even faster.

As reflected in the most industry research which revises up the addressable CCAP market opportunity to approximately $2.8 billion.

So this dynamic opportunity rich CCAP space, our expanding tier-one customer engagements and our growing order backlog all strengthen our confident in hitting the $100 million 2018 target we discussed and more importantly ultimately growing will beyond this level to become a leading player in the $2 billion to $3 billion CCAP market.

We're now fully in the midst of an exciting execution phase and more determined than ever to turn our CableOS innovations and investments into a powerful new growth engine for our business. So I’ll now turn the call over to you, Sanjay, for a detailed overview of the second quarter and then our outlook for the third and fourth quarters..

First, regarding our video business, it is important to acknowledge that it is still early in our transition towards a recurring revenue model and it is, therefore, difficult to predict the exact mix of SaaS contribution. Therefore, we will transparently share our mix assumptions as we have done regarding Q2.

We anticipate both TCV of OTT SaaS will account for 4% of total bookings in our second half and that corresponding recurring SaaS revenue will continue to steadily build.

For Cable Edge, we expected to exit the year with bookings above $25 million as Patrick indicated earlier, including orders received in July 2017, our total CableOS backlog is approximately $20 million, placing us on a trajectory for $100 million revenue run rate in 2018.

For this year, revenue recognition timing is somewhat uncertain due to a heavier-than-expected mix in demand for the distributed access architecture variant of our CableOS solution. We are now ramping our DAA supply chain and expect capacity to sustain anticipated demand levels by early next year.

Now turning to our non-GAAP guidance for Q3 2017 on Slide 9, revenue to be within the range of $80 million to $90 million, which includes video revenue of $72 million to $81 million and Cable Edge revenue of $8 million to $9 million; gross margins of $51 to 52% comprised of video gross margin of 55% to 56% and Cable Edge gross of 20% to 21%.

Operating expenses to range from $48 million to $50 million, operating loss to range from $9 million to $1 million, EPS loss to range from $0.11 to $0.03, and effective tax rate of 15% and common shares of stock outstanding approximately 81.4 million shares; cash and short-term investment at the end of Q3 to between $40 million and $50 million.

Now turning to our non-GAAP guidance for Q4 2017 on Slide 10. Revenue to be within the range of $90 million to $100 million, which includes video revenue of $80 million to $86 million and Cable Edge revenue of $10 million to $14 million. Gross margins of 52% to 53.5% with video gross margins of 55% to 57% and Cable Edge gross margins of 27% to 29%.

For Cable Edge, new product introduction costs associated with associated with initial CableOS deployment will continue to weigh in on margin. We expect these margins to improve significantly in 2018. Operating expenses to range from $48 million to $50 million.

Our combined second half operating expenses will be $11 million to $15 million below first half operating expenses. Operating profit to range from $5.5 million profit to $3 million loss. EPS to range from $0.04 profit to $0.05 loss.

And effective tax rate of 15% and weighted average basic share count of approximately 82 million to diluted share count of approximately 84 million. Finally, cash and short-term investments at year-end are expected to range between $40 million to $50 million.

The implied full year 2017 guidance as a result of our guidance for Q3 and Q4 is contained in the table in our press release. I will now turn the call back over to Patrick..

Okay, thanks, Sanjay. Now turning to Slide 11, we want to close by emphasizing our business objectives to the second half of the year. For our video business, objective number one is to capitalize on the ongoing market transitions to grow our over-the-top and Software as a Service revenue streams.

Objective number two, we're aligning our investments with customer demand to improve the profitability of our traditional video broadcast product lines. And objective number three is to deliver our high single-digit operating margin in our combined traditional plus SaaS video business in the second half the year.

On the Cable Edge side of the house, objective number one is to continue to successfully scale our early CableOS deployments, spanning centralized and distributed architectures.

Leveraging initial field success recently booked to new orders and growing industry buzz around CableOS, objective number two is to secure new design wins with additional tier one operators.

And objective number three is to exit the year with sufficient backlog and bookings momentum to surpass our $100 million 2018 revenue target, positioning the business for return to the black and compelling growth well into the future.

Look, while there's no question our first half financial results has been impacted by faster-than-expected video market transitions, the internal investment and strategic shifts we have made over the past several years have positioned Harmonic to not only survive these headwinds but to thrive as premium over-the-top video and related CCAP transitions take hold in the marketplace.

While our path has not been a straight line, we're executing on the strategic agenda we've laid out for you, leading the market in both software-based video processing for the next generation of over-the-top services and in virtualized cable access delivery.

The new bookings data we presented today in both our over-the-top SaaS and CableOS areas make it clear that we're seeing real success in the marketplace and real progress toward our goal of entering the sustainable new phase of profitable growth and shareholder value creation. So with that, let's open up the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from George Notter of Jefferies. Your line is now open..

Hi, thanks a lot guys. I guess maybe I will start in the CableOS side. So I was intrigued by the orders this quarter. I think you said $15 million. I guess I'm wondering what genre of cable operators are those orders coming from.

Are we talking about tier ones? Or is that tier two or tier three types of cable operators? If you could give us a sense for where that's coming from, that would be interesting. And then also, I guess I'm wondering if the target changed a little bit.

If memory serves, you guys were talking about a $100 million annual run rate exiting this year in the overall Cable Edge business, i.e., I think you were talking about $25 million in Q4 and now that number is lower. I am kind of wondering what we’re looking at there in terms of timing and opportunity in? Thanks a lot..

Sure, so the primary focus, George, is with tier one operators. And so far, that's both North America and Europe.

And the bulk of the bookings that we've received to date comes from those focused to tier one engagements, starting to see some increased success out in the field, what we're slowly starting to expand our engagements to some, I'd say, non-tier ones, but it's still very early days in the strategic focus, and the results are almost exclusively associated with a small handful of tier ones that we’re engaged with.

The plan along coming to second part of your question, was to book at least $25 million in the back half of the year as a springboard to that rate or greater in 2018. From a bookings perspective, I actually think we're well on track and probably on track to exceed that.

That being said, as Sanjay alluded to, the recognition of that backlog or the revenue recognition is indeed a little bit more of a question now, and that is because the mix that we see is a little bit more tilted towards distributed architecture.

And because this is a little new for our customers and in terms of ultimate deployment in the field, we're a little bit more uncertain about when exactly that recognition will happen.

That being said, I think the real question about this business is, "Hey, is Harmonic for real? Are they winning business? Are tier one customers going to kind of make a bet on them as they roll out the next generation of DOCSIS systems?" And from that perspective, I would suggest that the primary metric is, are we racking up real bookings that indicates that customers are placing their bets with us.

And we are very encouraged by the recent progress we had. And we certainly stick to our guns in terms of the amount of bookings that we anticipate for the balance of this year and what that implies for the run rate in 2018..

Got it, thank you..

Thank you. And our next question comes from Tim Savageaux of Northland Capital. Your line is now open..

Hi, good afternoon. Just a couple of questions and I'll start in a fairly mundane place but maybe not. I know that you're guiding share count up to, I think, 84 million on a diluted basis by year-end from, I guess, around the $80 million level there.

Should we infer that that's anticipating some warrant exercise? Or what's driving that?.

Yes if you look at the $84 million it is basically on diluted basis, and all the prior numbers given for all the quarters so far has been on a basic basis because we had been in a loss position. But Q4, as we are guiding to our profitability position – so you see the jump there. But there is – it does not entail any warrant exercises.

It's primarily the dilutive effect of the options and restrictive stock. .

Got it understood. And just back on the bookings front, you did mention – I just want to make sure I got my timing right here, that bookings increased in the quarter to $91 million, noting that was principally driven by increases in video bookings. And yes, we're hearing a fair bit about incremental bookings on the CableOS side.

I wonder kind of how that math works to the extent if you booked an incremental $15 million in Q2 in CableOS..

Yes sure. .

[Indiscernible].

So the $194 million the bookings we talked about earlier, that's the booking as of the end of Q2. And the CableOS piece we talked about, that's including the bookings we had in July. So we did get significant amount of bookings for CableOS subsequent to the quarter end, which are not counted in the bookings number of $191 million we talked about..

Okay, so, well I guess I don’t if you want to quantify that, but I imagine a significant piece of what you're talking about in terms of the CableOS bookings came after the end of the quarter. .

Yes so the CableOS bookings after the end of the quarter were in the range of approximately $15 million to $20 million and were coming from cable operators..

Okay, great. I guess I missed that specific timing there. Sorry about that. As we look into fiscal 2018 and talk about the $100 million price target, price target revenue target, I think, we discussed given the software nature the margin profile for CableOS being fairly robust.

You've mentioned some new product introduction related costs weighing on that near term, as well as kind of a, I guess, a quarter or so push out from a revenue recognition standpoint, but what sort of margin profile broadly speaking would you be looking for CableOS in 2018 and would that broadly be in line with the targets you were sort of contemplating before, I think something over 50%?.

Tim, the picture has become a little bit more complex but bear with me for just a second and I'll try to walk you through that. Indeed, I think, the biggest part of the intellectual property and the value delivered with the CableOS system is associated with software.

And as we deliver that CMTS core we expect the – we expect to commensurate gross margins and indeed we expect, let me say the base or the originally targeted CMTS business to see a substantial step up from what our historic or legacy Cable Edge business was. That historic business, legacy business was in the roughly the mid 40s.

And we did and do see that stepping up in the context of centralized CMTS to a mid-50s number if not for the north of that.

I think the interesting thing that has happened since we first announced our activity in this area last October is that the pie has gotten even bigger as this whole distributed architecture has come forward in addition to the part that we were targeting with commensurate margins of let's say the mid-50s, there's additional component now associated with the distributed hardware, the nodes and the modules in the nodes.

We see that as incremental revenue to what we initially – saw. Albeit, additional revenue that is going to come at a somewhat lower gross margin point perhaps more typically associated with access equipment out in the field, maybe that's more like in the 40s.

So as we're thinking about the business, on a blended basis, our aspiration is still certainly north of 50, maybe a little bit less than we originally envisioned, but that's only because actually we see the pie being a little bit bigger in addition to the core CMTS software that we had targeted, we see a relatively richer mix of the modules that will go out in into the network, expanding the addressable market.

Does it make sense?.

It does completely. And it sounds like to extent that you’ve some constraints on revenue recognition or what have you it really has to do with ramping production of the nodes. Is that as simple that or….

Yes, that's certainly is the main factor that we're looking at right now in terms of where the market has headed and in getting there. We’re quite comfortable with the deployments we've done to date which are largely a centralized CMTS really proving out the technology.

We’ve started the distributed activity and we see that now beginning to ramp up faster. And there's a there's a deployment learning curve for us and our customers there. But the important thing is that there's no rocket science in that part in the core of our virtualized CMTS technology we feel like has been proven out to quite effectively..

Great. Thanks I’ll pass it on for now..

Alright thank you..

Thank you and your next question comes from Matthew Galinko of Sidoti. Your line is now open..

Hey good afternoon guys. My first question is on the SaaS video products.

Can you talk any more about the win rates you're seeing and generally how you feel you're competing for that business?.

Matt it’s still relatively early days. So it's perhaps a little bit of a challenge to generalize. I think there's a couple of things happening. As I mentioned particularly in the U.S. we're seeing most of our media and telecom and traditional Pay TV providers switched their strategic focus to over-the-top.

And when looking at over-the-top, I think, they're also contemplating the best business model for implementing that and technology. Harmonic has an amazing reputation as a provider of Tier 1 compression technology.

And then as we expose what we can do now and in a cloud environment either in a private or a public cloud, I think, that's capturing a lot of attention. And that's really what has been behind us the wins.

And in fact some of some of the projects that we originally anticipated being traditional CapEx sloshing or becoming OpEx or recurring revenue deals. The core though is the technology, the reputation of the company.

And as I mentioned also in our prepared remarks the nature of the application as high quality to the large screen in the living room as live really comes to the floor for these converged over-the-top offerings.

I think that's when the emphasis premium video and the kind of quality that Harmonic can enable, I think, really becomes a more powerful competitive selling value proposition..

Alright.

And is there – I think you kind of hit on this but is there a quantifiable elongation of the decision making process that you could point to or is there – do you think that you could point to two quarters out, three quarters out where any delays in these decisions are going to go either go in one direction or the other?.

That's certainly our feeling Matt that that's what's going to happen. I mean you don't have to look very far or you can look just in today's newspaper to see that there's a lot happening in the media in Pay TV landscape in the U.S.

So there's a lot of thinking going on, there's a lot of planning not the least of which is related to the underlying technology platforms. But there's a lot that our customers are grappling with and trying to figure out. Well I don't think everything will be sorted out in just a couple of quarters time.

I think people, our customers are figuring out their strategies and they're putting in place plans to move forward. So we're certainly optimistic about a crisper and decision making process one that maybe more mimics the decision making process we’ve seen in the past.

In the meantime we're working closely with all manner of Pay TV and immediate companies trying to get them educated and helping them through that process.

And we think we’re situated very well to continue to be and perhaps even with an expanded role, a key strategic partner of leading Pay TV media companies, both those who are historically our customers and frankly those who have not been our customers in the past..

Great thank you..

Thank you..

And your next question comes from Simon Leopold of Raymond James. Your line is now open..

Great thanks. Couple of quick ones. First of all you did give us guidance on the operating expenses.

I just want to get a better understanding of how to maybe think about that the mix? I’m assuming that most of the controls or reductions would be in SG&A and R&D should probably stay somewhat stable, is that the right way to think about it?.

I think by and large yes, although there are some changes in R&D around legacy product areas. Simon areas that we actually see the flip side of somethings going faster other things are going slower. So we've taken a hard look at some traditional product lines and whether they can and they should be managed more efficiently up and down the stack.

But beyond that you're right it's largely making sure SG&A is in line with where the company is and where we're going in the near term..

Great and you offered us a lot of detail in terms of guidance I appreciate that.

One line item that's missing that I think would be helpful to get a better understanding of in light of the mix towards more software is if you could talk a little bit about what you expect from deferred revenue, this quarter was actually I believe down sequentially from March and down year-over-year.

But with sort of the software business model I would expect to see deferred revenue growing.

Could you elaborate a little bit about how we should think about that line item?.

Yes sure. So the deferred revenue is down sequentially as you see, that’s because of the timing of certain projects which we had to record in this quarter for the revenue recognition. But our trends for deferred revenue should increase as we get more bookings and as our backlog grows.

So the trend I would expect going in Q3 and Q4 to stay around $60 million level, that’s what we've seen in the past..

Great..

The increase in the SaaS business which you would see actually sits in our backlog and doesn’t get into deferred revenue. So it's important to consider that when we look at our SaaS business growth, you want to see it deferred. So we should look at the metrics of backlog plus deferred, which will give a good idea of our business..

Great that's helpful. And then just one last one is if you could maybe talk a little bit about your perspective on the competitive landscape for the distributed CCAP products given that that’s sort of the emerging opportunity thank you..

Well as you alluded to and as we pointed out with the most recent market research, I think, there's a growing wave of investment in distribute architectures and indeed there's a view that the overall pie gets bigger and there's a lot to recommend to distribute architecture. And indeed therefore we see competitors getting active in that area.

As we see it to most of our competitors today are putting forward variants of their existing hardware-based solutions to address that opportunity. And we think that what we're doing is uniquely different and uniquely efficient because it's based on a completely virtualized or off software core that can run on a data center kind of architecture.

It’s bringing we think real powerful architectural cost and flexibility advantages to distributed and/or hybrid distributed and centralized within the same or broader network. So we're testing and proving all of that out as we speak Simon.

But so far the feedback on both the economics, as well as the operational aspects have been quite positive on what we're doing. And leave us with the impression that again we're well ahead of the rest of the market in terms of the platform and the capabilities.

So there's a lot of road ahead of us but we continue to be very optimistic and hear feedback from serious customers who are looking at all of the competitive landscape that really underpins our continuing growth, and optimism and confidence in what we're doing and its differentiability..

Great. Thanks for taking my questions..

Thank you..

And our next question comes from Steven Frankel of Dougherty. Your line is now open..

Good afternoon I like to revisit the CableOS ramp issue. So you talked about the shift to DAA creates a RevRec issue.

Is there anything around the fact that you can’t recognize the software piece and tell the DAA pieces is installed by the customer or these customers that are going with this configuration waiting to implement and tell the DAA piece is ready?.

For customers who are for the sub-set of applications that are DAA focused it’s really when the whole system is ready. And frankly the software is the easiest part of that.

The complexities around logistics on our side from a supply chain point of view, on the customer side from a rollout and deployment point of view is all about the distributing the deep fiber nodes that are in the network.

Once you've done that and I think one of things we've proven out with the field work in the early deployment so far turning on the software and centralized to data center is relatively straightforward. So the model that we see is a from a volume deployment perspective is work your way through getting the distributed aspects of it out in the field.

And then it's kind of just-in-time arrival of the headend or data center software to light the whole thing up..

Okay. And….

Makes sense?.

Yes that makes sense.

Let we switch gears to video side, did any of the delayed deals you talked about close in July?.

Yes is the short answer. Off of the top of my head I don't have a list but a couple of the ones that were originally anticipated in Q2 did close in July. And July is off to a reasonable start, I would say..

Yes I just like to add Patrick we did close most of the deals which you were expecting early to close in the last couple of weeks of the previous quarter have closed now.

And when we’re looking at current booking for this quarter the trends we have seen probably in reality are pretty strong compared to what we saw in the past month in the previous quarter. So the bookings have a very good start for the quarter and we believe we’re in the right track..

Okay.

And how long do you think it takes for SaaS to become much more meaningful piece of the total booking in video, to let's call it 20% rather than the single digit percentage today?.

I'd be surprised if we weren’t there within a year Steve. I mean I had to take a little bit only because just a quarter ago we were sitting here relatively pleased candidly that we were at 5%. And to see it surge to 8% in the second quarter was certainly a surprise to us.

We’ve not – as you’ve heard from Sanjay we've not expected we'll keep that pace in the second half of the year. That being said from a pipeline perspective and a customer engagement perspective, we're certainly seeing a pretty strong mix shift towards those kind of discussions.

And I think that let's say, for the slightly more conservative customers who are still thinking about it or watching to see what happens in the rest – with our early deployments or more broadly in the market, I think as the success of some of the larger deployments we've now got in full swing become more apparent, I think we'll see some pick-up.

So I think there is fairly wide uncertainty around it. But I think that three to four quarters, I'd be surprised, based on the trends we're seeing now, if we weren't north of 20% of bookings being associated with SaaS..

And you’ve made some comments about the U.S. broadcasters hesitating.

Is that hesitation just around a particular infrastructure decision? Do I go SaaS? Do I go hardware device? Do I go cloud? Or do you think it's a broader questioning of how they're going to spend money given the uncertainties around their business model?.

Yes, I think it's a little bit broader. I mean, the comment is across broadcaster, media company as well as pay TV. I think there's a certain amount of strategic focus and budget spend that we thought coming into the year would be focused on upgrading, augmenting, let's say, the traditional delivery platform.

And what we're seeing now is a pullback on investments in those traditional platforms and a real strategic mandate to all hands on deck on the over-the-top or the streaming strategy, if you will.

In many cases, it's not just down to, okay, a delayed decision around specific technology and it's – but it's more, I think, a derivative of a broader strategic shift that we're seeing playing out..

Okay. And one last quick one. You've made comments about the engineering credit not hitting in Q2. You get it in Q3.

But what happened to the amount that previously we would have assumed in Q3 and Q4? So what does that look like for the rest of the year?.

I regret if there's any confusion. We had not and we didn't include a forecast that's specifically for additional engineering credit through the balance of the year.

Frankly, this thing that was delayed was the final tranche of a $10 million arrangement that we announced a year ago or something and it's – we expected that to finish off in – towards the end of the second quarter. Now we expect it by the middle of this current quarter.

So that's simply a shift of that payment but it's – there is no expectation or there shouldn't be anything in the forecast about that effect continuing thereafter..

Okay. And I'll sneak one last quick one in.

How many field trials are ongoing for CableOS today?.

So we have not given a specific number, but it's north of four, less than ten. It's in that range.

Our strategy continues to be – to do a great job with a small number of lighthouse customers, if you will, and that's white-glove service and that goes a little bit to the – some of the field service cost we're incurring around those deployments that Sanjay alluded to in the context of the margin impact and really have those deployments be shining, positive proof points and then use that as a launching pad for, let's say, a broader introduction to the rest of the market.

So we're still in that mode of less than – focused on less than 10 customers and doing it really well..

Great, thank you..

Thank you..

Thank you. And your next question comes from Jeff Bernstein of Cowen. Your line is now open..

Hi guys. Just a couple of questions. I wanted to talk about the cash guidance. You've got $40 million to $50 million cash balance, I guess expected for Q3, Q4 and the end of the year.

And I'm just wondering, could it actually get down to $40 million in Q3? And what would cause that amount of cash burn?.

Yes, so as you know we ended $52 million in the quarter and we generated a lot of cash from working capital this quarter. We had around $100 million of working capital sitting on the balance sheet. And going in Q3 and Q4, depending on how we end up in terms of the guidance range, it could be between $40 million and $50 million.

But we believe $40 million is the low end and we will be somewhere in the middle based on how we manage our working capital and in terms of total operating profit..

Okay.

So that's more of a kind of over the two quarters as opposed to you could be on a sort of $10 million a quarter burn rate?.

Well, if you come to the low end of the guidance, we could be close to the low end for cash as well, but we believe we have enough working capital to bring us to, at least in the mid – between $40 million and $50 million..

Okay, alright. And then can you just talk a little bit more in the video side about competition? Obviously, Ericsson's got their business up for sale. I don't know exactly what stage that's in, but if you have information on that, I would be interested.

But who else is sort of showing up to the party here on these OTT SaaS deals?.

It's an interesting and it's a good question because it's definitely a changing competitive environment. We've publicly stated that historically, our big competitors out there have been Ericsson and Cisco. And frankly, the environment is changing.

We feel that we've really risen to the top in terms of, let me call it, the historic suppliers of solutions for managing premium video.

That being said, as people think about over-the-top platforms, there is, I'd say, a historic – from the earlier days of over-the-top when you're targeting small screens and quality wasn't so important, frankly, we saw a lot of open source being used in those platforms. And so it's a dynamic environment.

So the opportunity that we see is that – is the importance of quality on over-the-top platforms, as the bar is rising and the industry starts to turn and say, "Okay, what are the premium solutions that are out there?" we think Harmonic is in a pretty strong competitive position to be the obvious choice, if you will.

And that's certainly something we're endeavoring to do. And it's certainly too early to declare a victory, and as you see, we're not immune to the bumps and changes that are happening in the market. That being said, from a competitive point of view, we feel pretty strong about our position, and it's one of the reasons why we're not discouraged.

We're not backing down. And in fact, often, a difficult or a changing market is really an opportunity to gain share, and a pivoting market is an opportunity to gain share. And that's what it's all about for us about on the over-the-top thing. And not coincidentally, it's also what's happening for us in the Cable Edge side of the business.

Particularly with this distributed stuff, it's a pivoting market. There's a window of opportunity, and we're trying to run through it with strong technology there as well..

And then in the presentation, you guys showed some logos regarding the expanding cloud ecosystem. I'm just trying to understand what those meant, AWS, AliCloud, Google Cloud.

Are these clouds that people are running your software on now? Or what was that about?.

Yes, it’s only different competitive environment, Jeff, but it's also a different kind of ecosystem and partner environment. And we're finding a split between public and private cloud. And it's quite interesting and exciting and we find ourselves partnering with every single one of those customers that you've seen the logos of.

It's been an engineering investment, as Sanjay alluded to, the amount we're investing in our new SaaS platform. But we think it creates an extremely durable foundation from which to grow business worldwide.

So you see different cloud, public clouds in different kind of favor or preference around the world, and you also see those ecosystems showing up to varying degrees in terms of private or private clouds, for example, ran by large telecom operators.

So that slide and that diagram was just indicative of a partial list of the companies we're partnering with and the ecosystems we're planning ourselves part of in the context of these SaaS deployments..

Got you, okay.

And then can you guys say that you had Comcast bookings in this quarter? Or at what point can you actually talk about Comcast?.

We can talk about Comcast or any other large customer when they tell us that we can. And it's typically not the habit of our large customers across verticals and geographies, unfortunately, to allow us to have that flexibility. So we hope to give you as much color as we can going forward.

And please know that if and when we can describe any notable Tier 1 customer activity, we will do that..

Got you, that’s great. Thank you..

Alright thank you..

Thank you..

I think probably we have time for one more..

And our final question comes from the line of Tim Savageaux of Northland Capital. Your line is now open..

Great, sorry about that. Thanks for squeezing me in. Just a quick question to finish up here. I think you said that ex the SaaS impact for the quarter that the video business have grown year-over-year.

I just want to confirm that and say that – can we then say that like $1 of SaaS bookings is worth, what, $2.5 of license bookings? Is there sort of a rule of thumb there? And is that kind of an accurate way to look at the trade-off?.

Yes, Tim. So we're yet early in the process in terms of coming up to a real model that what makes exact mathematical sense for converting a CapEx deal to a SaaS deal.

There are various models which we can try to give a shape, but I believe you need another two more quarters at least to see the bookings and see the trends before we can come up for that kind of a mathematical model. And we'll share with you once we have that experience. For help, we have added two metrics this time. One is the ARR and one is the TCV.

So I think that gives a pretty good indication of what's the revenue impact, if so, to understand that position. So with the growth in TCV of 90% and the growth of more than 80% in ARR, it's a significant amount we can see for that business.

But to understand the logic of real math, how the model works, I think it will be too early if we give a multiple whether you come up with 3x or 2x or 4x. We need time to brush that up and come to a proper model, say, in two quarters from now. .

Yes, fair enough. I mean, I was just basically looking at what it would have taken to grow, which is $80 million, $20 million in incremental revenue relative to the SaaS bookings that you did report. That's fair enough.

A final question from me on gross margins in video and the potential impact of the increasing SaaS recurring revenue model which one would surmise would be positive. And indeed, if you look at your Q4 video margin guidance the high end of 57%, that's around what you did in Q4 last year on $20 million plus lower in revenue.

So that does seem to be in effect. I wondered if you can talk in that context to kind of margin targets over maybe a longer term on the video side. Should we, for example, start to be thinking about a 6-handle there at some point next year. And that’ll be it from me..

Yes. So this quarter, we saw some impacts of onetime charges in our COGS, which reduced the margins. But as you said, Q4, we expect our margins to go back in line with what we saw in Q4 last year.

And based on the bookings we have today, based on the deferred revenues we have and all the visibility we have right now in the Q3 and the pipeline of Q4, we feel pretty confident in terms of the guidance we are giving for Q4 margins for video.

And once we get into 2018 and once we will start working on the budget for 2018 in Q3, we'll be able to be in a better position to give the guidance for 2018 and the long-term percentage of gross margins.

But based on the trends we've seen and based on what we know today, we are very confident and the facts have underpinned our confidence for second half guidance regarding gross margins for video..

Okay thanks. .

Alright thanks Tim. And thanks everyone. Just in conclusion, I hope it comes across that while somewhat disappointed in the first half, we see no shortage of opportunity and positive momentum around our new initiatives as we head into the second half and onward into 2018.

We're executing on the strategic agenda we've laid out, and we really do believe we're leading the market in both software-based video processing and in this new virtualized cable access opportunity. The bookings data we presented today, the momentum that we see in the marketplace all speak to the growing opportunity and momentum that we feel there..

Please know that I, the rest of the management team, is intensely focused on executing. We’re excited about the opportunity ahead of us, and we're appreciative of the support and guidance that you all continue to give us. We look forward to speaking with you again next time. Thanks very much everyone..

Thank you..

Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation and you may now disconnect. Everyone have a great day..