Nicole Noutsios - IR Patrick Harshman - President & CEO Sanjay Kalra - CFO.

James Kisner - Loop Capital Markets George Notter - Jefferies Simon Leopold - Raymond James Steven Frankel - Dougherty Tim Savageaux - Northland Capital Markets.

Welcome to the Q3 2018 Harmonic Earnings Conference Call. My name is Candice, and I’ll 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 call is being recorded.

I will now turn the call over to Nicole Noutsios, Investor Relations. Nicole, you may begin..

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic’s Third Quarter 2018 Earnings Conference Call. With me today are Patrick Harshman, our CEO; and Sanjay Kalra, our CFO.

Before we begin, I’d like to point out that in addition to the audio portion of the webcast, we’ve also provided slides to this webcast, which you can see by going to our IR website. Now turning to Slide 2.

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 the 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 items, together with corresponding GAAP numbers and on a reconciliation to GAAP, are contained in today’s press release, which we’ve 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 operations and some of those information is included in the press release. But the remainder of information will be available on recorded version of this call or on our website. And now, I’ll turn the call over to our CEO, Patrick Harshman..

Thanks, Nicole, and welcome, everyone, to our Q3 call. We’re pleased to again be reporting a positive quarter with solid year-over-year financial and business progress enabled by the ongoing success of our strategic CableOS and Video software and SaaS transformation.

Specifically, continued CableOS progress delivered 153% year-over-year revenue growth for our Cable Access segment while the combination of solid over the top streaming and ultra-high-definition sales drove 7.2% operating income for our Video segment.

Other notable corporate financial highlights include 11% year-over-year revenue growth 5.6% operating income and 7.6 million cash increase to our balance sheet. Taking a closer look at our Cable Access segment. CableOS success continues to steadily build.

We expanded the combined number of commercial deployments and field trials to 25 customers up from 20 reported last quarter. Among these we probably announced last week our deployment with Buckeye Broadband who have migrated 100% of the greater than 120,000 subscriber broadband service footprint from competitive systems to CableOS.

This is a compelling case study, as CableOS enabled both the introduction of new gigabit services for Buckeye's residential and business customers.

And behind the scenes significant operational efficiencies to the consolidation of approximately 15 former CMTS sites to a single CMTS operational center where CableOS software is running in dense commercial off-the-shelf servers.

Buckeye has been a great business partner communicating openly about the benefits of this CableOS powered DOCSIS 3.1 upgrade garnering a lot of positive attention in last week's annual cable industry conference in Atlanta.

Including this Buckeye Broadband deployment CableOS is now actively delivering broadband service to over 480,000 cable modems worldwide up 20% from last quarter. So let me be clear this is over 480,000 live 24 x 7 consumers and business customers who are paying for and receiving broadband service that is being delivered through CableOS.

The key takeaway here is the CableOS's virtualized software architecture can and is being successfully deployed and operated at scale, delivering significant benefits to our early customers.

Another positive milestone attained during the quarter was the commencement of volume shipments of our new Remote 5 nodes for distributed access architectures also known as DAA. Specifically no shipments were up 174% from Q2 contributing materially to Q3's record CableOS revenue.

The nodes were in the process of being deployed in the field by our customers and once installed will be followed by companion CableOS software license sales.

Coming out of last week's cable industry conference there is no question that DAA is going to become a major part of cable's future and that we are establishing ourselves as the industry leader in DAA. All of this activity continues to drive a positive financial trajectory. Segment revenue was $28 million up 153% year-over-year and 39% sequentially.

And operating profit was 1.5% our second consecutive cable access segment profit. And our strategic design wins and project pipeline continue to support the payment of approximately 100 million of revenue in 2018, and continued growth in 2019.

So looking ahead global customer feedback during the recent cable events in Atlanta made it clear that the combination of our technology leadership, our initial wave of wins with influential customers, increasing market understanding of the advantages of both virtualized and distributed access solutions and our growing expertise in successfully deploying these solutions all position Harmonic uniquely to be the market leader in the next generation of scalable cable access.

Okay, so turning now to our Video segment. Here also we’re seeing continuing evidence of our strategic initiatives gaining momentum in the marketplace driving consistently improved financial performance.

Video segment operating income was 7.2%, making Q3 the fifth consecutive quarter of positive segment operating income, enabling this operating profit consistency segment gross margin was 57%, reflecting an improving mix of software sales.

Looking ahead, we continue to carry forward strong Video segment backlog and deferred revenue enabling segment visibility and performance consistency.

Underpinning this more consistent financial performance is the transformation of our historically broadcast centric appliance business to more profitable and predictable over-the-top streaming software and SaaS business, demonstrating that the strategic transformation is on track Harmonic is now deployed over 35,000 high quality live in linear over-the-top streaming channels worldwide.

Up 4% sequentially and 23% year-over-year further strengthening our position in the growing live premium video streaming space. The same with the team of quality. During Q3, we also saw a continued demand for ultra high-definition solutions.

UHD related sales in the third quarter were up 138% sequentially, which is particularly impressive when we recall that Q2 UHD sales were up 200% year-over-year. We’re well positioned to take advantage of growing worldwide interest in deploying and monetizing high-quality ultra high-definition programming.

Also key to our video strategy is expanding our addressable market for our new cloud-based SaaS offerings.

Raising our visibility in the screening world and leveraging the combination of a market-leading ultra high definition and Saas capabilities we recently partnered with NASA and Roku to launch a new streaming channel based on stunningly beautiful NASA content.

Since this channel was launched in September the app on Roku has been installed over 58,000 times. Leveraging this video technology leadership positioning and following a land and expand approach to new business development.

We’re pleased to report the number of active revenue-generating video Saas customers has grown to nearly 20 up to a 100% year-over-year. So look in summary in both our cable access and video business segments.

We continue to make excellent progress in bringing truly differentiated and relevant solutions to market and as a result in improving our financial performance. And on that note I will now turn the call over to Sanjay for more detailed discussion of our financial results and outlook..

Thanks, Patrick. And thank you all for joining our call this afternoon. Before I share with you my detailed quarterly remarks, I will like to remind you and the financial results as we referring to are provided on a non-GAAP basis. As you just heard from Patrick our third quarter performance was solid.

We’re pleased that we sequentially delivered a profitable quarter in both of our segments supported by strong results across a number of key financial metrics. Revenue and gross margins were at high end while our operating expenses came in below our guidance range. This resulted in a profitable quarter with EPS exceeding expectations.

This was coupled with strong balance sheet and an improved cash position. This performance marks five consecutive quarters of solid financial and strategic execution. As we turn to Slide 6, to review our Q3 results. Revenue was 101.4 million near the high end of our guidance. This is compared to 99.4 million in Q2 ’18 and 91.6 million in Q3 ’17.

Resulting in 2% quarter-over-quarter growth and 11% year-over-year growth. This top-line growth is primarily due to our Cable Access segment. Cable Access revenue was 28.1 million, compared to 20.2 million in Q2 and 7.5 million in the year ago period. Presenting in a 39% quarter-over-quarter and 153% year-over-year growth.

As you have seen, activity in our Cable Access segment has been progressing steadily throughout 2018. Of particular note, in Q3 was a sequential increase of 174% in shipments of CableOS nodes for new Distributed Access Architectures underscoring and expanding addressable market opportunity for our Cable Access segment.

Video revenue was 73.3 million, compared to 79.2 million in Q2 and 84.2 million in the same quarter last year. As a reminder, Q3 is typically a weaker quarter seasonally. The last year being an exception when we saw Video revenue catch up after a very slow first half of the year. Consistent with the past two quarters.

In Q3, we had one greater-than-10% revenue customer, Comcast, who contributed 16% of total revenue. Gross margins were 52.1% in Q3 compared to 54% in Q2 and 53.4% in Q3 ’17. Cable Access gross margins were 38.7% in Q3 compared to 50.3% in Q2 and 9.2% in Q3 ’17.

The sequentially decrease in gross margin reflects the increased mix of DAA no shipments which go out the door before corresponding CableOS software licenses, which customers prefer to take just in time after the node have been deployed in the field.

So to be clear as field installation of nodes ramp up and as enabling CableOS core software is turned on the blended Cable Access margins are expected to improve. Video segment gross margin was 57.2% in Q3 versus 55% in Q2 and 57.4% in Q3 ’17.

The sequential increase reflects an improved mix of video software as expected in our ongoing video business transition. We maintain strong access controls without compromising our strategic growth investments. As a result, our Q3 operating expenses are 47.2 million below our guidance range of 49 million to 50 million.

Consistent with recent operating expenses of 47 million in Q2 and 47.7 million in Q3 ’17. Q3 operating income of 5.7 million was primarily driven by our Video segment it's contributed 5.3 million and 7.2% operating margin in the quarter. This marks five consecutive quarters of video operating profitability.

Also we are pleased that our Cable Access segment was sequentially profitable, generating approximately $400,000 of profit this quarter, compared to $500,000 profit in the prior quarter despite increasing our Cable Access R&D spending during the quarter.

Total Q3 operating income of 5.7 million, compares to 6.8 million in Q2 and 1.3 million in Q3 ’17. Q3 EPS was $0.04 compared to Q2 EPS of $0.05 and a loss of $0.01 in Q3 '17. This year-over-year EPS improvement was driven primarily by our cable segment turning around from an operating loss to an operating profit and overall vision and cost management.

We ended Q3 with a weighted average diluted share count of 87.8 million compared to 85.8 million in Q2 and 81.4 million in Q3 '17.

The increase of approximately 2 million shares in mainly due to the issuance of approximately 1 million shares of ESPB and performance based employees' RSUs and of approximately 1 million shares of previously granted RSUs, options and warrants becoming in the money this quarter.

Note this quarter we also saw some dilutive effect due to Comcast warrants which vested as we successfully achieved a critical Philly trial acceptance milestone for which we filed an 8-K in early August. Q3 bookings were 79.5 million compared to 107.9 million in Q2 and 96 million in Q3 '17, resulting in a book to bill ratio of 0.8.

This booking result was in line with our expectations since as mentioned previously Q3 is typically seasonally slow especially internationally due to summer vacations and due to timing of support contract renewals.

We ended the quarter with backlog and differed revenue of 207.6 million down 10% sequentially but still up 3% year-over-year and near the high end of what have seen historically. I would like to now provide some context regarding the impact of SaaS activity on our Video segment results.

Specifically total contract value or TCV of Q3 SaaS bookings was 4 million compared to 6 million in Q2. Total ARR for our SaaS views was 9.7 million at the end of Q3 compared to 9.6 million at the end of Q2. Our ARR is comprised of subscriptions and related professional services.

Subscription related ARR increased from 8.6 million in Q2 to 9.3 million in Q3 and subscription related professional services decreased from 1 million in Q2 to 400,000 in Q3. This 8% increase in subscription based ARR reflects both an increasing SaaS customer base and increased usage of SaaS offerings.

As Patrick pointed out earlier on the call our SaaS customers grew by 200% year-over-year. Looking ahead for the full year 2018 we believe that total SaaS bookings will continue to be approximately 3% to 4% of total bookings. We believe we are still in early stages of our SaaS evolution as we continue to grow and expand our install base.

As I alluded on our previous calls we enhance the financial transparency of two operating segments during the fourth quarter of 2017. Historically we employ and execute a location methodology based on total revenues to attribute professional services revenue and sales expenses between our video and Cable Access segments.

Beginning in the fourth quarter of 2017, we adopted a more precise attribution methodology as activities relating to selling and supporting our CableOS solutions have become increasingly distinct from those of our video solutions.

Since this change was made starting Q4 2017, our sequential operating segment results have been directly comparable without any need of adjustment.

However for year-over-year comparison of operating segments results, we need to retroactively apply the new attribution methodology to Q3 2017 results, which decreases the reported Q3 '17 operating income of our Video segment by $2.7 million while narrowing the operating loss of our Cable Access segment.

Without of course any impact to total combined company results, therefore with this adjustment of our Cable Access segment revenue and margins both increased 153% on a year-over-year basis. I will now move to our liquidity position and balance sheet on Slide 7. As mentioned previously at the end of Q3, backlog and deferred revenue was 207.6 million.

This compares to 230.4 million in Q2 and 200.9 million in Q3 '17. We ended Q3 with a cash of $1.7 million this compared to 54.1 million at end of Q2 and 50 million at end of Q3 '17.

The sequential increase in cash of $7.6 million primarily reflects cash generated from operations of 2.4 million and net cash generated from financing activities of 5.2 million. Our day sales outstanding at the end of Q3 were 70 days as compared to 75 days in Q2 and 70 days at the end of Q3 '17.

Our days inventory on hand were 43 days at the end of Q3 compared to 45 days at the end of Q2 and 67 days at the end of Q3 '17.

In summary, while we have a lot of work ahead of us, overall I’m encouraged by our third quarter results and our year-to-date performance which we have delivered while remaining committed to our mid to long-term value creation opportunity. Now let’s turn to Slide 8 of our Q4 non GAAP guidance.

For Q4 '18, we expect revenue in the range of 105 to 118 million with Video revenue in the range of 80 million to 83 million and cable access revenue in the range of 25 million or 35 million.

Gross margin in the range of 49% to 50%, operating expenses to range from 49 million to 50 million, operating income to range from 2.2 million to 9.6 million, EPS to range from $0.01 to $0.07 and effective tax rate of 16%, a weighted average diluted share count of 89.2 million.

And finally, cash at the end of Q4 is expected to range from 55 million to 65 million. I want to pause here and provide a little more color on our cable access revenue range. Consistent with the trend of past two quarters, we expected shipments of DAA nodes to steadily grow again sequentially in Q4, which is positive news.

What is somewhat lesser than is the quantity of nodes which need to be shipped as demand is dependent on the pace at which previously shipped nodes will be deployed in the field and correspondingly then associated CableOS core software licenses will be purchased and turned on.

Hence, this beginning ramp of volume DAA deployment and associated learning curve demands wider cable access guidance range that in the prior quarters. As DAA becomes more mature, we expect revenue timing visibility to improve. Moving to Slide 9.

For our full 2018, we now expect total revenue in the range of 396 million to 409 million with Video revenue in the range of 304 million to 307 million and cable access revenue in the range of 92 million to 102 million.

This compares to our prior guidance of 388 million to 411 million where Video revenue contributed 296 million to 309 million and Cable Access contributed to 92 million to 102 million.

Gross margins in the range of 52.5% to 53%, marginally, better than our prior guidance of 52% to 53%; operating expenses range from 192.5 million to 193.5 million improved from our prior guidance of 195 million to 197 million, primarily due to strong expense management.

Operating profit to range from 15.1 million to 22.5 million, improved from our prior guidance of 6 million to 24 million primarily due to improved gross margins and reduced operating expenses. EPS to range from a profit of $0.09 to the profit of $0.16, improved from our prior guidance of a loss of $0.01 to profit of $0.15.

An effective tax rate of 15% and a weighted average share count of 86.9 million value added shares. We expect cash to range from 55 million to 65 million, improved from our prior guidance of 50 million to 60 million.

As a result, the only notable changes to full year guidance which we provided in our last earnings call in July, our narrowing our Video revenue range by 8 million at the low-end and 2 million at the high-end, narrowing operating income by 9.1 million at the low-end and 1.5 million at the high-end.

Improving our EPS low-end by range of $0.10, with no change at the high-end and increasing our cash guidance range by 5 million. As a reminder, there is no change to our annual Cable guidance of 92 million to 102 million.

Before I conclude, I would like to inform you that with our proactive planning around potential tariff, we do not expect any significant impact from tariff to our financial results. I’d like to conclude by stating that we have delivered five strong consecutive quarters both strategically and financially and the outlook for Q4 remains positive.

We remain focused on executing our strategic initiatives and delivering long-term profitable growth and shareholder value. So with that, thank you all and back to you Patrick..

Okay, thanks Sanjay. I want to wrap it up by again highlighting our strategic priorities. For our Cable Access business objective number one is to continue to successfully scale our first wave of CableOS deployments.

Leveraging our growing CableOS market momentum, objective number two is to secure new design wins with additional operators, both Tier 1 and midsized customers such as Buckeye Broadband. And as cable operator investment plans in DAA solidify, objective number three is we establish ourselves as the clear technology and market share leader in DAA.

Turning to our Video segments, objective number one is to continue to grow our over the top streaming solutions across media and service provider verticals. Objective number two is to leverage our SaaS offerings to expand our addressed market, tapping into new higher growth customers and business models.

And objective number three is to deliver consistent segment profitability as we have done over the past five quarters. Our commitment to these priorities has enabled clear strategic and financial progress through the first three quarters of 2018 and continuing confidence in driving renewed growth, profitability and shareholder value.

I would like to thank our global employees for their creativity and commitments, our strategic customers for their partnership and our shareholders for their continued support. Let's now 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 James Kisner of Loop Capital Markets. Your line is now open..

So I just want to clarify first your comments regarding the guidance for Q4 in Cable Access and that wide range.

Is that wide range more related to just the size of inter-quarter bookings? Or are there some significant slugs of revenue in there that are winning revenue recognition as I kind of understand those dynamics?.

I think there are two things which I pointed out in my prepared remarks and I'll provide a little bit more color. The range of 10 million entails two things which we are going to get clarity on as we progress in the quarter, but we believe it's going to fall within this range.

One is the quantity of nodes which we will ship for the DAA nodes we talked about. We have seen sequentially the quantity is going up from Q1 to Q2 and Q2 to Q3. Q3 to Q4 also we expect that to go up, but how much that’s going to go up is that something which we are still trying to nail down to the precision.

At the same time that’s also dependent on the way our customers are going to deploy those nodes in the field. And once the deployment continues at a certain pace, we will shift more nodes and then the corresponding software license which will follow it would also come after that.

So, this range of 10 million entails both these things, the quantity of nodes as well the CableOS software which will kick in only after deployments are completed..

Also you sort of I guess I'm wondering too about the gross margin retention, it seems like they are going to modeling the video margin flattish that you could have something that's up 35% in the cable edge business and it sounds like that’s really temporary given that you don’t have a lot of experience in CableOS.

I mean it seems like this should be an anomalous quarter.

Is that correct? Like from here, could it stay at this level for several quarters until CableOS ramps? How should we think about that CableOS gross margin given your guidance for Q4 just sort of on a longer term basis?.

Yes, James, so, you are right. In terms of total margins for the quarter, we are guiding 49% to 50%, and you know video is close to 55% in that calculation. And as we have seen throughout Q1 to Q3 getting 57.5% to 57.2% and 55% in Q2, I think a range of 55% for video is totally reasonable.

But in terms of cable, the mix shift and together with the guidance range of revenue we entail which includes nodes as well as software. Currently, we are anticipating close to high 30s because that’s what we experienced in Q3 as well. And you are right, this is temporary we believe as far as software component is not in this.

But as software component starts digging in over a period of couple of quarters, we would expect the gross margins to return or rebound and get back to what we’ve shown earlier in Q1 and Q2..

Just a couple more quick ones and I'll pass it.

Do you have any thoughts on just -- is this brand new cycle for you, but you're thoughts about Q1 seasonality at this point might have been more or less seasonal than typical? I mean, nodes, I think, are pretty weak usually seasonally in Q1, any thoughts at all on seasonality?.

So, James, at this point we’re giving guidance for Q4, and we’re making our full year more precise, and we’re not giving guidance for next year. In our next call in early next year, we will provide more color on Q1 and next year..

Okay, just last one, I guess from this 25 trials, there's a nice increase to add five more, I guess within that 25.

Do you see more of a kind how some of these are progressing towards your actual wins? I mean, does it feel like there is any kind of point of interest you can give us on number of trials that have been completed? Or just this number it's just hard to understand meaning of that and maybe talking about conversion rate, to acceptance.

Just and also just in this on terms of cable modems deployed, how much have you recognized? And is there a point, you think some point you’re going to see pretty significant inflection in number of modems reported? Or is that just going to slowly grind higher to the way it has last couple of quarters? And I'll pass it. Thank you..

So, James, I regret it's a little hard to generalize. Every operator, cable operator kind of goes about things a little bit differently. To be clear, we think nearly half a million live at end consumers or business customers are being served through CableOS, is a pretty maternal milestone.

Indeed that volume is actually being addressed by less than half of the 25 deployments and advanced trials that we talked about here. So, under the umbrella of 25, assuming they'll all move to volume deployment, we see a significant amount of business latent there in the pipeline.

In some cases, we talked about a large customer contract of over 50 million I think a quarter or two ago, I can’t even recall, that customer, we’re still working towards initial deployment and they aren't reflect at all in the 480,000 consumers.

On the other hand, Buckeye Broadband as I said, come along and it's pretty exciting that they flipped a 100% of their footprints in volume deployment to CableOS. So it's a little bit of a mixed bag in terms of different approach that different cable operators have to evaluating a testing and then deploying in the field CableOS.

I think the real thing to take away is the number one it's working its scale that’s for sure. And number two that the number of customers who is getting deeply engaged with us either in terms of full on deployment or whether it's advanced field trials is going to be a significant number. After all, it is a fairly concentrated industry.

So where we continue to be excited by the uptake, the real time energy that our customers are putting into to evaluate and early deployments of CableOS, and we as I said earlier, we think that this pipeline of activity Sanjay said we’re not giving you quantitative view on 2019, but we definitely think that the future continues to look bright for CableOS..

And the next question comes from George Notter with Jefferies. Your line is now open..

I guess I wanted to keep going on CableOS. I think one of the marquee opportunities for you guys there is with your largest customer you’ve got a warrant deal out there as well. Any new milestones, obviously, you guys talked about the one back in August with I think you called it field trials.

But anything would it stay there in terms of the progress with that customer or potential for breaching additional thresholds and milestones coming up through the balance of the year? And then also wanted to go back to the deferred revenue and backlog figure, I think you said 230 million which I think was down versus 206.

Can you talk about what drove that delta sequentially in deferred revenue and backlog?.

Well, I’ll take the first part, which as regrettably, again brief George. Unfortunately, we can’t comment in any detail on what’s going on with Comcast. We did hit that milestone that resulted in 8-K filing and investing of warrants. And beyond that, there is nothing we can disclose publicly.

I would say though that the Comcast as well as a number of other operators were at the recent cable show in Atlanta in force, and several of their executives spoke at some length as part of the conference. And I think you’ll find a lot of interesting commentary about what they’re aiming for, what they’re doing a technologically.

And in fact just today, there’s a pretty interesting light-up in Fierce Telecom where Comcast executives reflecting on lessons learned from deploying virtualized CMTS. So, this is a situation where we’re going to have to let them speak for themselves, but the good news is I think there is some interesting stuff out there, to be going from.

And I’ll turn the second part over to you Sanjay..

Yes, so, George, I’ll get back to your question on warrants. So the two milestones, one was originally when we signed the deal, and the second one, field acceptance vested. The remaining other milestones which were detailed in the 8-K we filed in September 2016 not at all technology acceptance related.

They’re all commercially, based on commercial business. So technology risk is behind us. It’s all about deployment and other remaining warrants have not been vested yet and once they vest we will make a public announcement for that as well, as it is for the previous vesting. Also cover on the other part of the question on backlog.

The backlog actually was 207.6 million at Q3 and it has dropped from Q2, Q2 was 230.4. But the drop of backlog is totally within our expectations, Q3 seasonally has been a low bookings quarter as I mentioned in the prepared remarks. We do generally ease up from backlog in Q3.

But the big book to bill ratio has usually more than one, and we actually build it up. But in Q3 we eat it up so it's a part of the normal seasonality we've seen. And in Q4, we are expecting the trend to continue as well..

And the backlog deferred is up year-over-year, I think this is an important metric..

It is over 3% up year-over-year, definitely..

Okay. I’m sorry.

And then deferred revenue backlog you would anticipate would be up sequentially of course in Q4 seasonally?.

Well, seasonally, it could be -- the book to bill ratio could be 1 or 1.1 or 0.9, it usually fluctuates and we will have to see, but it's going to be between 0.9 and 1.1. We generally don’t guide to the bookings number, but it's in the range of 0.9 to 1.1..

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

I wanted to touch on the mix expectations on the cable access business. You have talked about the wide range and I just want to get a better understanding of the gross margin implication for that because I think when you were suggesting gross margin by segment, you talked about Cable Access being high 30s again.

And I'm sort of struggling with, what would be on the high end? So if you do get to that 35 million, is that the assumption that you have more licenses and therefore that should be a higher gross? Or if you get to the 35 million of Cable Access in the fourth quarter, should we think of it is net gross margin dilutive? I'm just trying to think about the mix within the mix question..

Well, I'll tell you what, I'll give your answer and then -- I understand the struggle in terms of building a model, but the truth is there is not just one answer to that assignment. There is a scenario where the node, the node demand really takes off and we could imagine getting the 35 largely on nodes.

So, there is a scenario we are high end on revenue yet the margin is low because it's still tilted towards hardware.

There is a different scenario, let me call it kind of modest upside in nodes, but where modest upside in hardware but then actually good progress is made deploying those nodes and so we also see incremental purchases of the associated software licenses.

So, there is a slightly different mix formula for getting to the high end of the range and that would give a different gross margin result. And what we are trying to be very transparent about is that I think it's still early days, and I think you see this again also from our customers own statements.

They are working out a lot of the operational issues associated with DAA. And so, there is a number of different mix scenarios that can play out. So, we are acknowledging that it's still early days there is a couple of different scenarios deployments scenarios that can underpin this range.

And yes, those different scenarios actually correspond to slightly different gross margin ranges as well.

So I think it creates a little bit of a challenge for all of us and precisely modeling Q4 and I think we just want to acknowledge that but take a step back I think it's all goodness I mean frankly, it's not that long ago that people were saying DAA is still several years off its not possible.

And the fact that we are sitting here today talking about ramping shipments of DAA being a reality that our customers are talking about it being a reality at this recent tradeshow. I will take the uncertainty of the next quarter or two any day in exchange for the fact that the train feels like it's leaving the station..

And that actually, dovetails nicely into my following question which is that last earnings period for the June ending quarter one of your competitors talked about the DAA opportunities sliding out into 2019 and it sounds like you are probably more upbeat about DAA happening.

I'm wondering to what extent you can look at the industry overall and to what degree are you seeing yourself gaining share or would you characterize this is simply your customer mix might be different than your customer mix might be different than your competitors' customers.

How do you think about sort of company specific versus industry trend?.

I think all good questions and candidly not one that we have super crisp answers for Simon but I mean let me take a step back.

There is no question but the DAA is coming and coming industry wide and for those who want to dig deeper, I pointed to recent Kagen modeling that is been done by the industry and couple of our customers specifically referenced. So there we see a nontrivial proportion of the new cable access spend projected over the next couple years flush into DAA.

I do think underneath that a different customers are progressing at different paces, so we have one large customer who I think recent heavy leading webinar, said, they are going to beginning rolling out in volume in the fourth quarter of this year.

We don't think that's every MSO by any means, but certainly there are some who are leaning into it and leaning into it heavily. So, I guess you also asked about market share. I mean to me, this is kind of it's a brand-new blue water kind of scenario.

So I don't know if it's the best analogy but I mean it's a little bit from our perspective, it's more a question of land grab initially that it is market share sloshing around.

We think of it as a new space, we think we've got significant technological advantages and we also think we got an operational deployment experience head start with at least a couple of the early adopter operators.

So, it's a new space it's growing, it's not growing kind of uniformly across all the operators, but there's a couple big ones who are quite aggressive. And we think that we’re positioned at the right place to be capturing a kind of a pull position kind of from day one here.

And doesn’t mean our visibility is perfect, but it does mean that that we can see it moving. And I think our Q3 results speak to the fact that were pushing product out the door specifically, in the service of this activity..

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

I would like to go back to CableOS and this notion of you, have 25 customers in some form of deployment or field trial.

And maybe if you can give us a feel for how many customers have completed their field trials? And have there been any cases of the customer doing that and not talking to you about moving forward with the deployment?.

The answer to the last part of the question is no. But to be clear, there are some who are moving more quickly and aggressively than others. Nobody said, yes, that's not for us but I think the question is out there for several operators exactly with what pace they will be rolling out.

We talked about 480,000 end consumers being fed Steve and that's a -- the majority of that is a minority of the 25 that we're engaged with so far. So, the only couple that have really deployed in real volume, but we were encouraged by the number of engagement both those that have hit volume in the field and those that are I'd building towards that.

So, it's -- it's a little bit all over the map with different operators, but as I said earlier we're encouraged by the logos if you will. And the encouraging progress we're receiving across the board as well as having hit this volume milestone of nearly 0.5 million consumers being fed active commercially right now..

And you’ve obviously talked a lot in your guidance about this visibility issue around nodes.

How do you get a handle on that inter-quarter? Are you getting any feedback or any visibility into node actually being deployed or your feedback is simply going to be, they call up and order software and that's how you know you kind of moved from one milestone to the next?.

We’re working very closely with our customers on this. I mean, it is new technology and so, I think we and our customers are learning as we go. On a few calls, the bleeding edge, but it’s certainly the leading edge. And I think we will be open about the fact that there’s a lot of learning and discovery going on. It’s a little bit painful.

But I think that’s what happens when you’re leading this. The good news is we’re acquiring those experiences that I think are operationally part of the value proposition. We will be bringing to the next line of customers. So no, we’re actively engaged in what’s happening in the fields across all of our customer accounts.

And so there’s a heavy dialogue between our deployment team, our support, field support team, our account management organization and the rest of the Company..

And if I go back to beginning of the year, I had some discussions with you and others that Harmonic and there was this notion that nodes are commodities and we don't really care in the end, if we get the node as long as we get the software.

But it sounds like you’ve at least captured a lot of mindshare in the node business and you’re talking some good numbers here.

Is that changed overtime and now you want to sell nodes in every case that you can?.

We’re looking to grow the business however we can. There’s no doubt that the nodes are lower margin, lower gross profit elements of the solution. That being said, particularly in early days, and although we’ve been involved in a lot of interoperability testing. The early customers just want it to work.

So I think there’s a lot of value in bringing the whole end-to-end solution. So that’s one piece of it.

But certainly another piece of it is for every node that we deliver we believe that there’s a virtualized CMTS software license that’s going to come; and so from that perspective, we’re happy to get them out there and to and to get that these, early DAA systems going.

Not only because of the gross margin of profit associated with the node itself, but also because of the companion license. And Sanjay was saying earlier, if you think about this business on a blended basis. The blended margin point is quite interesting. And early days, we see the node volume curve out in front of the software license piece of it.

But the licenses will come and on a steady state going forward business it’s an attractive blended business..

I'll just add to it that the nodes are very much still accretive to our margin dollars as well as to the bottom line. And like for example in Q2 for Cable Access, we saw a margin of approximately 50% this time is 39. So, it’s always a mix of nodes and software and as far as they’re accretive and adding to the bottom line, we will go for it.

And as we scale more we should improve those margins as well. So I think it’s a good business to be in..

And then Sanjay I don’t want to leave you out.

So in terms of your cash guidance for Q4, what scenario gets to the low end? It would seem to me like Q4, would be a cash generation quarter but that’s not necessarily implied in your guidance, if I have the numbers correct?.

It should be Steve. What we are seeing as there is this 10 million range and how much of cash we would need to keep for working capital changes that is something we are keeping a reserve for otherwise if that equation works well, we should be in the middle close to the high end.

But there is a working capital piece which we are not very clear on that’s what the range entails..

And you have mentioned that you kind of engineered your way around the tariff.

Has that come at any gross margin cost or you had enough visibility to this year you're able to do this without sacrificing gross margin?.

Not at all, no impact on gross margin..

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

Congrats on the ongoing cable ramp, that’s kind of why being focus of my first question which is to say. If you look at what you saw sequentially in terms of Cable Access growth, that was a pretty sharp increase.

It looks as if Comcast overall or the customer was just up slightly, so I wondered if we could look at those two facts and conclude that your Cable Access business is diversifying a bit? And what are your expectations there for how important large Tier 1 operators will be in the overall mix of business over time versus which seem to be a growing number of Tier 2 and even Tier 3 type operator opportunities that in the aggregate look like they could be pretty material too?.

Yes, I think it’s a good question or good observation. We were quite clear that early on the focus was on Tier 1 not only because that’s like the bank robber says that’s where the biggest volume is the money is, but also because in this industry the Tier 1s are influential.

That being said, we have expanded out and I think the Buckeye case study is a great one, a medium-size operator who very forward-looking and actually great win for us and highly respected operator and engineering team here in the U.S. in particular and influential.

So we are definitely spreading our wings and maybe it's an easy answer, but longer term I expect our revenue to somewhat be proportional to where the subscribers are. Certainly, in a concentrated industry with a couple of big players domestically a couple of really big players in Europe, et cetera, our aim is, is to do well with the biggest players.

But equally half the market is the -- at least half the market is what I would call the midsized and smaller operators. And in many instances, those smaller operators can be more aggressive about embracing newer technology, taking advantage of real efficiencies.

And in many cases they're the ones who have to fight the hardest in terms of the competitive dynamics competing against telco services, coming 5G, what have you. And so, we’re actually impressed by the resonance we're seeing with what I'd call the medium and smaller size operators, both in this country and in other countries.

And so, it's over time we're excited about not only the Tier 1 opportunity, but the other guys as well as your question suggests..

So, let me maybe focus more back on the Tier 1s and you referenced in article today, and it’s certainly been my observation in the week setting up to the cable show and if the show itself. The Comcast has been I think more vocal with regard to their commitment to this technology and really making a lot of noises around accelerating deployment.

How do you contrast that with your the range of your guidance in Q4 for Cable Access and your sort of commentary there is it really I guess maybe should we distinguish between pretty significant commitments to roll the technology out versus operationalizing that on a quarter-to-quarter basis is the real swing factor here?.

I guess two comments. One, if you do check out this Fierce Telecom article, as you say on my reading of it is twofold. Number one a strong commitment to the architecture, but at the same time candid acknowledgment of the broader operational challenges of doing something new and I think we all understand that.

And so, I don't understand those executives or frankly executives there's any of -- the other large MSOs is being too focused on just the coming quarter.

They're talking about where their focus is over the next couple of quarters to couple of years, and I think from that obviously, we're tightly focused in executing quarter-to-quarter, But we shouldn't lose sight of the fact that this is an opportunity that is ramping and will be ramping over the arc of the next couple of years.

And I think the recent commentary from cable operators really speaks to that. So our objective is obviously to manage the business quarter-to-quarter but make sure that we not miss the forest for the trees, if you will, and that is the broader opportunity that is clearly build.

And as you say, I think that the commentary of several cable operators at the most recent Atlanta event and some kind of press and webinars leading up to that makes it clear that there tooling out for you know almost call it broadband 2.0, a real step up in terms of the service capability that they are rolling out, not only to residential customers, but also to business customers.

And I mean you just have to be impressed looking at the opportunity, and they are a collective commitment to maximizing the opportunity through investments in new technology and architectures..

Great, I will finish up with one question moving back to bookings and order trends, and I just want to make sure I understand something you said Sanjay.

But to preface that, you had a pretty strong, to very strong order booking really for the last five quarters or so, book to bills above one including what I think was in Q4 ’17 a very strong video bookings driven number. You also look back to your point historically you've been down about 20% sequential in Q3 back when there was no CableOS business.

So, should I infer from that, that most of the booking weakness or decline that you saw in the quarter? Is that historically seasonally on the video side? And you have any comment about kind of the cadence or seasonality of bookings on the Cable Access side? And the question I had, Sanjay so you think the expected trend to continue I don’t know if that trend was working through backlog in Q3 or building it for the previous five quarters? I heard your book to bill question, but I just want to come back and answer, but I just want to come back to that..

So, the trend we saw in 2017 and that's just because the 2017, first half was very different than the second half. So 2017 per se is not like I would say is directly representative of what the trends should be. But if we leave last year and go back to prior years, you will see that’s range we fall in Q4 which I mentioned earlier.

But at the same time, I'll also acknowledge that as the CableOS business ramps up, the ratios of historical trends for our total bookings to total revenue may not exactly make sense going forward. So, there’s a little bit of adjustment needed for how the cable business is playing in that entire book to bill ratio and the conversion.

So, it’s not very clear, hence, the reason we don’t guide for it into Q4. But for Q3, what we saw is definitely more on the video side, which was seasonal as I mentioned earlier. I hope that provides some color on bookings..

Thank you. And that concludes our question-and-answer session for today. I’d like to turn the conference back over to Patrick Harshman for closing remarks..

Well, it's just left for us to thank you all for joining us. Today, we appreciate the support, and we look forward to speaking with you all again soon. Good afternoon..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day..