Welcome to the Q2 2020 Harmonic Earnings Conference Call. My name is Jimmy, 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 will now turn the call over to Michael Smiley, Investor Relations.

Michael, you may begin..

Thank you, Jimmy. Hello, everyone, and thank you for joining us today for Harmonic's second quarter 2020 financial results conference call. With me today are Patrick Harshman, President and Chief Executive Officer; and Sanjay Kalra, Chief Financial Officer.

Before we begin, I'd like to point out that in addition to our audio portion of the webcast, we’ve also provided slides to this webcast, which you may see by going to our webcast on our Investor Relations website. Now turning to Slide 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 documents Harmonic filed with the SEC, including our most recent 10-Q and 10-K reports and the forward-looking statements section of today's preliminary results press release.

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

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

We will also discuss historical financial and other statistical information regarding our business and operations, and some of this information is included in the press release. The remainder of the information will be available on a recorded version of this call or on our website. And now I will turn the call over to our CEO, Patrick Harshman.

Patrick?.

Well, thanks, Michael, and welcome everyone to our second quarter call. Harmonic delivered better-than-expected results in the second quarter as our Cable Access business continue to grow and our Video business picked up more new SaaS customers.

That said, the COVID-19 pandemic created headwinds around the globe, particularly challenging in Asia Pacific and for traditional TV broadcasters. Resultant revenue was $74 million, down 13% year-over-year and EPS was negative $0.06.

Encouragingly, cash performance was positive and book-to-bill was greater than one, as we saw a good signs of market recovery in June that have continued into July. As highlighted on our call last quarter, our customers are fundamentally healthy and our technology position is both powerful and unique.

And this is what we see playing out resilient Cable Access and Video sales momentum and the new 5G related opportunity for our Video business that I'll discuss in a few moments, position us for return to profitability in the second half of the year and sustained future growth.

Taking a closer look now at our Cable Access segment, we had another solid quarter. Revenue was $26.5 million, up 100% year-over-year. We're now commercially deployed with 29 cable operators worldwide, up two from the first quarter and 81% year-over-year.

And Cable Access is actively serving 1.7 million cable modems, up 116% year-over-year and 27% sequentially, good results in any market condition. Looking ahead, we expect this momentum to continue.

We recently announced Vodafone Germany and Millicom as two additional market leaders previously referred to as anonymous design wins who are now successfully deploying CableOS at scale.

Vodafone is the largest cable operator in Europe passing over 25 million homes in Germany alone and a global industry leader across all access communication platforms. Millicom is also an industry-leading, operating across nine countries in Latin America.

They're both one of the largest cable operators and a leading wireless service provider in the region and notably a pioneer in cloud-native 5G.

The fact that the largest cable operator in North America, the largest cable operator in Europe and a cloud native leader in Latin America have all selected CableOS speaks for itself, a validation of how fundamentally different and powerful our CableOS is when compared with legacy solutions.

The pace of field deployments we saw during the second quarter and the way some of our customers began leveraging the advanced telemetry and operational efficiencies that come with a truly virtualized platform highlight the disruptive advantages of our CableOS architecture and services.

While the COVID situation somewhat slowed our progress onboarding additional new customers during the quarter, we nonetheless added two new cable operators actively deploying CableOS and we secured several additional new design wins with deployment scheduled to commence in the second half of the year.

Among these was our first significant CableOS purchase order in Asia Pacific. So around the world, the trend toward our solution is unmistakable and word of mouth is spreading among cable operators. Our pipeline of serious new account engagements both Tier 1 and smaller operators is stronger than it's ever been.

We now expect at least one additional top five North America cable operator to be purchasing CableOS by the end of the year. In addition to continuing to gain cable market share, a key goal is to expand our addressed market by moving into the fiber access space, a global market that's larger than the cable access space we address today.

To be clear, this move is based on our same virtualized software core that is at the heart of CableOS. While containerized DOCSIS has been our first application, we're leveraging the container architecture to seamlessly add additional access applications.

In this case, both XGS and 10G EPON, initially focusing on cable customers who operate both data-over-cable and fiber-to-the-premises networks. A unified core access platform will be a further game changer for our customers in terms of operational efficiency and service flexibility.

We've made good progress on this program and are now preparing to commence initial field trials. We'll keep you updated on this important incremental growth initiative. Summarizing this Cable Access update, we delivered a solid second quarter. We provided further evidence that industry leading cable operators around the world are moving to CableOS.

Our pipeline of serious engagements with both additional Tier 1 and smaller operators is strong and growing. We continue to aggressively push our technology forward expanding our competitive lead and addressable market, and our mid-to-long-term growth outlook remains positive.

Turning now to our Video segment, as anticipated, COVID-19 impacted us throughout the quarter, although we finished somewhat better than originally forecast. Segment revenue was $47.5 million, down 34% year-over-year as on-premises activity at many media companies, particularly in Asia Pacific was locked down.

We remain close to our global media customers and we're confident that business originally anticipated for this year has simply been delayed and not canceled or lost. Since mid-June, we've been seeing a growing number of these delayed appliance projects restarting in Asia and elsewhere.

And we now expect a corresponding revenue rebound in the fourth quarter. On the other hand, the recurring revenue component of our Video business remains solid throughout the quarter. And we're carrying a strong opportunity pipeline into the second half.

In particular, we saw an acceleration of demand for our streaming SaaS offerings that run on public clouds. And during the quarter, we added nine new streaming SaaS customers, bringing our total video SaaS customer base to 66, up 16% sequentially and 136% year-over-year.

Another key Video segment development of the quarter was the cultivation of a new business opportunity related to 5G. The FCC mandated reclamation of C-band satellite spectrum for 5G means that many media companies who use C-band for video distribution.

We need to reengineer the video delivery systems, [indiscernible] compression and in many cases moving to hybrid satellite and IP delivery networks, an opportunity that fits squarely into the sweet spot of Harmonic's expertise and market relationships.

We estimate this to be a new several hundred million dollar global opportunity that will play out over the next couple of years.

We've recently announced a partnership with satellite leader SES to begin this work and we expect associated revenue to commence in the fourth quarter of this year, contributing materially to the strong video revenue rebound in our second half guidance.

The near-term revenue boost associated with this 5G opportunity is a good complement to our more gradually growing recurring revenue SaaS model. So as I mentioned a few moments ago, we now have 66 SaaS customers and we expect this number to continue to grow as we work to convert what is now our strongest ever sales pipeline of SaaS prospects.

Regarding existing accounts, we currently recognize revenues in the range of less than $10,000 to over $1 million per quarter. It's important to understand that this quarterly SaaS revenue scales with video traffic and personalization processing volume such as personalized digital ad insertion.

This is a fundamentally different business model than that of our traditional video client sales.

For example, we have SaaS customers who initially delivered nominal revenue to us is that we're getting the streaming services off the ground, but now as the services have become more successful delivered quarterly revenue to us that is grown by multiples. So our SaaS growth opportunity has two dimensions.

First, the number of service providers in our platform, and second, streaming and personalization volume per service provider.

Big picture, while the exact rate of revenue growth remains challenging the forecast, in part because it's tied to our customers' success and growing their businesses, overall streaming volume is undoubtedly a long-term growth plan.

We consider the customers who are signing them now to be acorns that each have the potential to grow into large oak trees. So in summary, for our Video segment and coming back to the second half of the year, we're encouraged that our backlog and deferred revenue grew during the second quarter.

But many global media companies are now reopening their labs and data centers, that some live sports are returning and that our SaaS customer acquisition momentum has remained strong. For the third quarter, we'll likely remain sluggish as on-premises international media projects ramp back up.

We anticipate the recovery in global market, the new 5G related opportunity and our growing SaaS customer base with their growing streaming volumes will all combine to enable both a solid second half rebound and sustainable long-term value creation.

And on that note, I'll turn the call over to you, Sanjay, for a 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 our quarterly results and outlook, I would like to remind you that the financial results I'll be referring to are provided on a non-GAAP basis.

For the second quarter of 2020, we delivered solid results considering the challenging pandemic environment, reporting revenue of $74 million toward the high end of our guidance. Gross margins were 51.6%, a 270 basis points improvement over the prior quarter. And we reported a $0.06 EPS loss, better than our guidance.

Book-to-bill was 1.04 and consequently we are exiting the quarter with a stronger backlog and deferred revenue of $210.2 million. Further, we maintain a solid balance sheet with cash at $77.7 million, as we generated $11.9 million cash from operations positioning us well for the second half of 2020.

Turning to slide 7, let's take a closer look at our Q2 revenue and gross margin. Revenue was $74 million compared to $78.4 million in Q1 2020 and $84.9 million in Q2 2019. We continue to make good progress with our Cable Access segment.

Revenue was $26.5 million compared to $24 million in Q1 2020 and $13.3 million in the year-ago period, reflecting the continued market success of CableOS. In our Video segment, we reported revenue of $47.5 million compared to $54.4 million in Q1 and $71.6 million in the year-ago period.

Sequentially, Video revenue held steady across all the regions except APAC where saw very soft appliance demand due to COVID-related customer shutdowns in the region. Entering the third quarter, we are starting to see encouraging resumption of video appliance activity and demand worldwide.

We had one greater than 10% revenue customer during the quarter, as Comcast contributed 19% of total revenue. Gross margin improved quarter-over-quarter 51.6% in Q2 2020 compared to 48.9% in Q1 2020 and 53.6% in Q2 2019.

Cable Access gross margin came in at 45.7% in Q2 compared to 43.3% in Q1 2020 and 30.8% in the year-ago period, reflecting both improved mix of software and improving hardware margins. Video segment gross margin was 54.8% in Q2 compared to 51.3% in Q1 and 57.9% in the year-ago period.

Video margins improved as we caught up on support contract renewals this quarter and the year-over-year decrease was due to product mix, specifically delayed broadcast server appliance sales, which historically carry high margins. SaaS and service revenue was $31.8 million in Q2 compared to $30.7 million in Q1 2020 and $30.4 million in Q2 2019.

SaaS and service gross margins were 58.3% in Q2, 51.3% in Q1 and 62.6% in Q2 2019. The sequential increase was driven by increase in video support revenues as we caught up on the renewals from the first quarter.

The marginal year-over-year decline is due to increasing mix of Cable Access support services where we are ramping expenses in anticipation of continuing significant growth. We made substantial progress in expanding our Video SaaS customer base in the quarter, which will see further growth of our recurring revenue base.

SaaS customers increased to 66, up from 57 in Q1 and up from 28 customers in Q2 2019, growing 16% quarter-over-quarter and 136% year-over-year. As we look at the rest of our income statement on Slide 8, we maintain good expense control during the quarter.

Q2 2020 operating expenses were $43.3 million compared to $47.9 million in Q1 2020 and $48.3 million in Q2 2019. The sequential decrease is due to reduced travel, entertainment and trade show expenses as well as overall careful expense management. We reported an overall operating loss in the quarter.

Our Q2 operating loss was $5.1 million, comprised of $0.9 million from our Cable Access segment and $4.2 million from our Video segment. The company's Q2 operating loss of $5.1 million compares to an operating loss of $9.5 million in Q1 2020 and $2.8 million operating loss in Q2 2019.

This translates to better than expected Q2 EPS of $0.06 loss per share compared to Q1 EPS of $0.10 loss and EPS of $0.04 loss in Q2 2019. We ended the quarter with weighted average share count of 96.7 million compared to 95.6 million in Q1 and 88.9 million in Q2 2019. The sequential increase reflects the weighted effect of stock issued to employees.

The year-over-year increase is due to the issuance of 3.2 million shares to Comcast for exercise of warrants and 4.6 million shares for our employee stock purchase plan and performance-based compensation during the year.

Q2 bookings were $77 million compared to $76.3 million in Q1 2020 and $92.6 million in Q2 2019, resulting in a book-to-bill ratio of 1.04. It was encouraging to see sequential bookings growth despite the pandemic.

And of course the 16.8% year-over-year decline was a result of COVID-19 with the biggest demand impact felt on our video appliances and in the APAC and EMEA regions. We expect a recovery in both regions during the second half of 2020. We will now move to our liquidity position and balance sheet on Slide 9. We ended Q2 with cash of $77.7 million.

This compares to $71.7 million at the end of Q1 and $58.1 million at the end of Q2 2019.

This cash increase of $6 million is comprised of $11.9 million generated from operations and as planned $9.5 million used for capital purchases, primarily the purchase of fixed assets approximately $7 million of which relates to our new Silicon Valley headquarters, which is under construction.

Net of $3.2 million cash generated from financing activities, primarily short-term COVID relief loans of approximately $6.1 million received by our France and Swiss entities.

Our current San Jose headquarters lease was originally set to terminate in April 2020, however, we pushed out the termination date through a month to month arrangement because COVID-19 shelter-in-place orders caused delays in the completion of the fixed asset additions and leasehold improvements work for our new headquarters facility.

As previously disclosed, the new lease will reduce our annual cash outflow for rent by $5 million and annual pre-depreciation OpEx by approximately $2 million. So our headquarters relocation continues to be strongly accretive move for us. We expect the move to take place during Q3 and to start realizing these savings beginning in Q4.

Our days sales outstanding at the end of Q2 was 91 days compared to 107 days in Q1 and 75 days at the end of Q2 2019. The sequential improvement in DSO reflects collections getting back on track after the COVID-driven disruptions in March. We expect to further improve our DSO levels in Q3.

Our days inventory on hand was 81 days at the end of Q2 compared to 78 days at the end of Q1, and 63 days at the end of Q2 2019. At the end of Q2, our total backlog and deferred revenue was $210.2 million compared to $207.9 million at the end of Q1 2020 and $194.7 million at the end of Q2 2019, reflecting a strong 8% increase year-over-year.

Historically, approximately 90% of our backlog and deferred revenue gets converted into revenue within a rolling one-year period.

Please note that our deferred revenue represents 26% of total backlog and deferred revenue at the end of Q2 compared to 21% at the end of Q4 2019 and 27% at the end of Q2 2019, indicating that the revenue conversion is happening at the expected pace.

I would like to remind you that not yet included in this backlog metric is approximately $187 million of CableOS business associated with three Tier 1 CableOS customers under contract. Just to clarify, these contractual amounts are awaiting purchase orders before they get reported into our backlog and deferred revenue.

Hence, if you look at the complete picture, including backlog, deferred revenue and these CableOS contracts, in aggregate, we have future contracted revenues of approximately $397.2 million in hand, a strong position that gives us confidence in our outlook.

During the second quarter, we exchanged $37.7 million, out of $45.8 million of our 4% convertible debt due in December 2020 for new 4.375% convertible debt due in December 2022. We believe this exchange was a prudent measure to ensure the strength of our balance sheet in the current uncertain macroeconomic environment.

The company plans to pay off the unexchanged balance of $8.1 million due in December 2020 in cash, thereby eliminating potential dilution of 1.4 million shares.

Now let me turn to our non-GAAP guidance for the second half of 2020 on slide 10, while macroeconomic uncertainty still exists, we are seeing a significant increase in customer activity and pipeline worldwide including from the new C-band 5G opportunities, which Patrick mentioned.

Based on a thorough analysis of this pipeline activity and of our backlog and deferred revenue, we expect a strong second half rebound, specifically for Q3 we are providing the following items.

Revenue in the range of $75 million to $87 million, with Video revenue in the range of $40 million to $47 million and Cable Access revenue in the range of $35 million to $40 million. Gross margins in the range of 50.5% to 52%, operating expenses to range from $45 million to $47 million, operating income to range from a $9 million loss to breakeven.

Adjusted EBITDA to range from a negative $6 million to a positive $3 million. EPS to range from a loss of $0.09 to a loss of $0.01 and effective tax rate of 10%, a weighted average share count of 97.6 million, and finally cash at the end of Q3 is expected to range from $80 million to $90 million.

We also want to provide you with our non-GAAP guidance for Q4 where we expect revenue in the range of $122 million to $142 million with Video revenue in the range of $87 million to $97 million and Cable Access revenue in the range of $35 million to $45 million.

This expected Q4 strength is due to seasonality, catch up on delayed deals and other pent-up demand and the initial revenue associated with C-band 5G opportunity.

Gross margin in the range of 50% to 53%, operating expenses in the range of $45 million to $49.5 million, operating income to range from $16 million to income of $26 million, adjusted EBITDA to range from $19 million to $29 million, EPS to range from $0.13 to $0.22, and effective tax rate of 10% and the weighted average diluted share count of 98.5 million.

Finally, cash at the end of Q4 is also expected to range between $80 million to $90 million.

To summarize, despite the COVID challenges, the strategic momentum we have maintained and the activity we are now seeing makes us confident in a significant rebound in the second half of the year with both business segments delivering a profit and our combined company generating cash. With that, thank you and back to you, Patrick..

Okay. Thanks, Sanjay. We want to conclude by emphasizing that despite COVID-related challenges, our core growth drivers remain attached and our strategic priorities for the year are unchanged.

For Cable Access business we remain very focused on scaling our Tier 1 customer deployments across their entire footprints with a growing range of products and services, securing new design wins with additional global operators, particularly additional Tier-1s and launching new solutions that expand our addressed market.

For Video segment, our objectives continue to be accelerating the growth of our live streaming deployments, expanding our addressed market to include both non-traditional streaming customers through our SaaS platform and 5G bandwidth reclamation projects and to remain profitable as we drive these growth initiatives.

Now, finally, I want to recognize the extraordinary efforts of our employees and to thank our customers and shareholders who continue to place our confidence in Harmonic and during these unusual times. We're looking forward to a solid second half of the year and the building value for all our stakeholders.

And let's now open up the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Marchetti with Stifel. Your line is now open..

Great. Thank you very much. Good afternoon. I was wondering if you could just start real quick on the CableOS side and I wanted to go back, Patrick, and look at where we were at sort of the beginning of the year, you gave the guidance, say, $130 million to $150 million, you are now giving guidance really for the remainder of the year.

With that $15 million or $20 million that is sort of shifted out, has that been a function of either revenue that you had expected to close that is being pushed out because COVID is causing those delays, is it existing customers that are maybe rolling out a little bit more slowly.

Just trying to get a sense of some of the underlying pace of what's going on with some of the existing CableOS customers versus some of the newer stop or some of the customers that maybe you are hoping to sign and if those got pushed out a little bit..

Yes. John. Thank you for the question. It's primarily the former, it's primarily delayed revenue expectations around new customers. And indeed, the completion of trials, the launch has been somewhat delayed.

And no cases do we actually think we've lost any of those opportunities, but the curve simply has slid to the right, so I think for understandable reasons. There is a more modest impact, but I would call it modest around the existing customers.

In general, our existing customers after kind of an initial hiccup when shelter-in-place all this stuff started. They largely got back to business. So I think, we lost a little bit of time primarily around the end of the first quarter and the beginning in the second quarter.

But by and large, we see our existing customers having got back to the original plan. So there is a modest impact there more significant impact associated with a delayed scaling of new customers.

So though, I do want to emphasize that, let's say, that shouldn't be extrapolated to be less customer interest, and if anything, we see a stronger pipeline of new customers and activity. So in our mind, in a no way, it diminishes the opportunity. But indeed COVID has resulted in a timing challenge manifest in the revenue growth with the new gas..

John, I'd like to add one more….

Please Sanjay..

Yes. I apologize..

Sorry. I just like to add one more metric here, we had this $37.5 million one-time pickup last year in our Comcast revenue. So if we exclude that and take our updated guidance for the year at midpoint, we are still 32% up year-over-year..

Got it. Okay. And then just shifting gears a little bit to the 5G C-band opportunity, you mentioned, obviously you're forecasting a fairly significant sequential increase in 4Q.

I was just hoping you could help us understand how much of that is maybe some of which had gotten delayed earlier this year and it's catching up a little bit are coming back on again now versus what that SES is or what that opportunity is in 5G? And more importantly, how we should think about that potentially even into 2021 as a potential growth driver for the Video business?.

Well, I'll start with the C-band 5G opportunity, we see it as a several hundred million dollar opportunity to play out, let's say, over the next 24 months. So we don't expect to win all of that business, but we think we're positioned to win a good chunk of it. So it can, in fact, be impactful for multiple quarters.

We've got our first initial opportunities well in our sites, and indeed, it's a material contributor to the fourth quarter. I think, we don't want to go as far, John, as to kind of giving you the exact percentages, but we do want to say on one hand, that's a material contributor.

On the other hand, catch-up of the pent-up demand and, let's call it the regular Video business is a comparable piece of the step-up in Q4..

Great. Thank you very much..

Thanks..

Thank you. And our next question comes from Simon Leopold with Raymond James. Your line is now open..

Great. Thank you.

Maybe just following up on that line of thinking, looking at the Video segment, in 2019, the business averaged about $70 million a quarter and I think what we had envisioned at the beginning of this year prior to COVID was that the business would trend lower over time revenue but gross margins would improve with SaaS ramping in the mix.

So we sort of envisioned a gradual slope down, and I think, this 5G award is incremental to anything I was thinking about at the beginning of the year.

So even if you're not prepared to talk about 2021 yet, can you give us an idea of what the normalized level of business should be if we try to get past the COVID catch up?.

Well, I think, you summarized it about right, Simon. And I'll let Sanjay chime in here in a moment if he wants to add anything quantitatively. But qualitatively, let's put this 5G aside, indeed we expect a declining top line is we do less and less appliance sales more and more CapEx software sales as well as more and more SaaS.

And that I think we have the conversation previously that manifests itself is a continuing expanding gross margin. And over time, a more profitable and dependable recurring revenue oriented business. That's still with the broad – In broad strokes, that's still what we see.

I think our – it's interesting we've kind of gotten whiplash almost on one hand for reasons we've explained, the appliance thing really because it's by definition on-premises. It's taken a much bigger hit than was ever anticipated in 2020.

And on the other hand coming in the back end of the year, we have a new mostly appliance, but it's a mix opportunity coming into fill the gap. So that's not a long-term fundamental change, Simon, but it actually, it changes the equation, let's say, for the next 12 to 24 or so months.

And from our perspective that's very welcome news not only in the context of some of the COVID headwinds, but also giving the business a little bit more runway to affect this – getting our SaaS business to scale..

Sanjay, did you have anything to add numerically maybe?.

I'll just add that, Simon, for our Video business, we did have a range of margins of – in the range of 55% to 60% in the last year or two. Q1, we saw a lower margin 51%, but Q2 we've seen an improvement again. And the guidance we are giving for the next two quarters here entail marginal improvement again.

So I think, we are getting back on track at least on the margin perspective, the way our product mix is working. And while we are not talking about years at this time, but we see the margin improve – we see the margins improving as you march along..

So this leads to my follow-on question and I'm a bit puzzled why the fourth quarter gross margin is 50% to 53% pro forma basis. I would have thought that a higher mix of Video products whether they're appliances or software, I would have imagined that that would be more gross margin accretive.

And so I'm a little bit thrown by what you're forecasting on that fourth quarter gross margin, maybe you could drill down a little bit on what's influencing that prediction..

Yes. So 50% to 53% is a combined gross margin, Simon, for both the segments, Video and Cable. As Cable margins are somewhere close to 45% and Videos are between 55%, 57%. And there is a mix between Cable and Video and that's why you see 50%-53% for total. But Videos are on a improving trend in Q4 compared to where we are..

Okay. Thank you very much for taking the questions..

Thanks..

Thank you. And our next question comes from Samik Chatterjee with JPMorgan. Your line is now open..

Hi. Thanks for taking my questions. Sorry to ask you to go back to this 5G opportunity, but just wanted to understand this a bit better if you can help me think about who the target customers are.

Is every Cable customer target here and is there an opportunity kind of where you see this kind of projects being used outside North America as well? And then how quickly to your customers, do you believe kind of need to move to this kind of solution and how should we think about like how lumpy does that make this business win overall? Thank you..

So the customer base is our – or anyone who actually distributes video two things like cable headends, so it's actually more on the programmer side.

Historically, satellite was used and is still used extensively around the world to move a video programming from where it's created to the IPTV, cable, what have you, centers where then it's distributed locally. So that's a worldwide model and used in the U.S. as well as internationally.

So the target is really anyone who uses these so-called C-band satellite frequencies for this, what's called, primary distribution kind of think it is more trunking in the back end of the video content around. Each country and the way they're approaching 5G and finding a spectrum is a little bit different.

The opportunity – we are definitely – we're pursuing opportunities overseas, but I would say, the opportunity is in sharpest focus right now and our initial activities are anticipated to be in the U.S. where there is a kind of a well publicized process being led by the FCC to reclaim some of this – the spectrum.

And in fact, as noted in our press release with SES, someone who is really interested in digging deeper can look into filings that have been made by the major satellite operators with the FCC about how this whole thing is going to work..

Okay. Good. Just a follow-up on the Cable Access segment, so relative to the first half base that you have, you are taking a step-up here relative to roughly $35 million of revenue in the back half. You have mentioned there is more limited customer engagement, just given COVID.

So as you know now kind of have these discussions with customers, should we be expecting then another step up as we move into the first quarter of 2021, just trying to get an estimate of what you're hearing from customers in terms of the ramp up in the opportunity as some of these projects get delayed and pushed into next year?.

If you step back, I mean, let's forget about it this quarter or next quarter, I mean, this is a – we believe this is a strong growth engine.

We believe that cable operators in the world are figuring out quickly and I think that the whole pandemic situation has really highlighted the importance of not only having bandwidth, but having scalable bandwidth and a platform for scalable bandwidth going forward.

So I would say, the engagement, the dialog with customers has actually expanded significantly. That being said, it's a non-trivial matter to bring new technology in the field and to roll it out and it's that rollout process which has been somewhat delayed by the pandemic.

So as we look – yes, as we look forward into 2021, and of course, this is not a specific guidance, but we absolutely expect more customers as well as more consumption by existing customers being the two drivers of this business for the foreseeable future..

Okay. Thank you..

Thank you..

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

Thank you, Patrick, and congratulations.

I wonder on Cable Access, if you could talk a little bit about the shelf opportunity and how does that change either the revenue opportunity per customer or the margin opportunity as customers start to utilize shelf versus DAA? And maybe how you see that mix playing out over the next year or so?.

Well, thank you. It's an excellent question. I appreciate it. So depending on where a cable operator is in a particular community and what kind of traffic patterns you’re seeing, in some cases, the so-called DAA architecture makes sense, but in others, it doesn't, so-called centralized architecture.

And we see a ton of so-called traditional notes splits going on. And it's that latter application where the shelf really fits in. So for us it – we had a centralized solution from day one. In fact, the early deployments were all centralized.

I think that's still somewhat of a misperception out there that virtualization is somehow exclusively associated with DAA. But we really understood working with some of our key customers to really, let’s say, have an equally disruptive impact on centralized architectures coming up with this new shelf concept was really what the doctor was ordering.

And so we rolled that out and indeed that is opening the door to substantial opportunity to – across all customer types to have a centralized solution that's equally, I'd say powerful and disruptive as our DAA solution is. So if you will imagine a unified centralized software core, some cases, maybe even with the same cable operator.

It’s dealing with the centralized shelves and others with these deep devices, these so-called DAA devices. So it really allows the solution to have a more of a Swiss army knife kind of a feel to it.

And it means for us that we get to work with the customer, meet them where they are, and have a solution that satisfies the requirements regardless of what's making sense for them the particular architecture. Now you asked about margins, of course, the software core, extremely high margin.

The piece of the DAA that hardware that goes out on the node is somewhat lower margin. And the shelf is somewhere in between. It's a hardware appliance device, but it kind of has less hardware and more software content, and so it's a kind of a middle of the road margin device.

So on a blended basis, shelf deployments will tend to drive the blended margin up..

Okay..

I'll pause there.

Does that all make sense?.

Yes, that makes sense to me.

And what do you think the market looks like over the next couple of years? What percent of your customers do you think do shelf versus DAA?.

Yes, I'm not sure. The DAA architecture is extremely powerful. That being said, it really depends on topology and traffic pattern. And if I had to give you a rough number, I'd say it's half, a 50/50 each. That rough order of magnitude. I think it's possible over time, DAA gets more traction.

And certainly we see DAA being a favorite of a larger operators in particular, who are really building for the future in terms of bandwidth. But I would say just about every customer I can think of has an interest in using both. And so if I had to stick a stake in the ground right now, Steve, I'd say it's about 50/50..

Okay, great. And then one more question on this C-band opportunity.

Are the customers just the networks? Or is there revenue associated with the satellite operators, like the SES’ of the world as well?.

It's a somewhat – it's an interesting model. The end customer is certainly just the programmers. But the money is coming from the FCC is ultimately as part of this whole plan. So kind of depends on what you mean by customer.

I think it's a joint industry effort that involves programmers, satellite operators, technology providers, Harmonic, and the government to basically as efficiently and quickly as possible free up this bandwidth..

Okay.

And maybe just the last big picture question, if you look at your Tier 1 customers in their rollout of CableOS, are we in the – now that baseball has started up again, are we in the bottom of the first? Or we in the third inning? Kind of where do you think you are in the rollout of this first tranche of Tier 1?.

We're not at the first – the third inning yet. I mean, I can't tell you whether we're bottom of the first or top of the second or something, but we're not in the third inning yet. I think it's still relatively early days. I mean look at the numbers, we're proud of the 1.7 million modems, don't get me wrong. But I mean, let's face it.

That's a small percentage of the footprint of just the customers we've announced so far. So there's exciting runway – a lot of runway ahead of us with the existing customers, and of course, we're increasingly confident of bringing new customers onboard..

Thanks so much Patrick..

Thank you..

Thank you. Our next question comes from Tim Long with Barclays. Your line is now open..

Hi. This is Peter Zdebski on for Tim. Thanks for taking my question.

I wanted to start on Cable and, specifically, to what extent do you see potential upstream bandwidth demand growth as a driver of the outlook? Or maybe more specifically how much traction have you seen with customers in using your virtualized solution to address the needs?.

Upstream bandwidth is a big, big deal. And so it's definitely a – it's a driver of the wins that we've had to date and it certainly is a driver of the – a key driver of the business we anticipate going forward.

I mean, just to give you an anecdote where I live they're just about to start a school again in a virtual way, and guess what, you're suddenly going to have ton of kids signing on to Zoom or whatever it is to go to classes. So I think, that this was not a one-time bump in our view and I think in our customers' view.

I think, two-way traffic heavy upstream traffic is here to stay and it's going to be growing. And indeed, we think that is one of the key drivers of the opportunity we see and the competitive differentiation that we have..

That's helpful. Thanks. And moving to Video segment, to the extent that we might see maybe see some more challenging advertising revenues in broadcast. Do you still see that business being insulated from those as you sort of did in the first quarter? And then just touching on the 5G – C-band 5G opportunity.

Just that reengineering of the delivery systems, how do you see your competitive position being continuing to win more accounts in that business or to how great is there a competitive risk of maybe someone else coming in there taking a greater share of that?.

Yes. Well, look, on the first one, I think, we're all waiting to see what's going to happen long-term with media. But I mean there is no doubt that regardless across all platforms, media consumption is quite strong. Well, I definitely think the advertising market has taken some hits. It's great to see live sports coming back.

And fundamentally, our conversations with our broadcast and media customers suggest that they are as committed to ever to their businesses. I mean, remember these are hugely profitable businesses worldwide. So we don't think anybody is abandoning that infrastructure anytime soon. On 5G, it's a very fair question. We expect there to be competition.

That being said, it's kind of an interesting application, but as I said, really is to our sweet spot. It's a combination of appliances and know how about satellite, which is a little bit, if you will, old school, and fortunately, we've been around. But on the other hand, there is a very advanced element of it the touches on streaming and IP delivery.

And here, we think we've really differentiated ourselves relative to our traditional competitors. So we think we're in a really unique position and we think that's resulted in us being so confident in the initial opportunities we've got in our sights. Going forward, it is a significant opportunity.

Others are going to come afterwards for sure never overlooked a competition, but we like our position to, let's say, to capture our fair share or more..

Great. Thank you for that. Good luck..

All right. Thank you..

Thank you. And our next question comes from George Notter with Jefferies. Your line is now open..

Hi there. Thanks a lot. Hey, I was just curious about the competitive response you're seeing to CableOS in the marketplace, obviously, you've got some entrenched incumbent competitors you're competing against there. You've got some marketing customer wins, certainly.

And I guess I'm just curious on how those guys are responding competitively either through technology or through pricing or returns, or otherwise. And then on the flip side, you guys have this really significant deal with Comcast, of course, you've got a special kind of pricing model with those guys.

And I'm wondering if you're seeing customers asked for similar terms outside of Comcast and how are you handling that? Thank you..

Sure. The first one, we're not experts in everything our competitors are doing. And frankly, we don't know and we haven't seen anything material from a technology perspective. I will tell you that in a couple of international markets or situations, we've seen what I would kind of characterize as desperation pricing.

But other than that I'm not aware of any real response, frankly, we learned as much from earnings calls like this is from anywhere else. Our perspective, admittedly limited. We don't know what we don't know. From what we see and from what our customers tell us is that we maintain a very sizable lead.

So regarding the Comcast arrangement, fortunately that arrangement was documented well kind of in the early days when we first were showing demonstrating our virtualized software working on off-the-shelf Intel server, which I know you'll remember, George.

And I think other cable operators around the world kind of appreciate the fact that for a number of reasons, the relationship with Comcast was truly unique. And so therefore, we're not entertaining really, I mean it's not really an issue for us to date.

And of course we have to come with a strong value proposition, which we think we have, I mean that's – virtualization isn't good for its own sake. It comes with a very strong commercial value proposition. And today, we're finding that to be more than adequate in terms of getting it done commercially with new customers..

Got it. Okay. And if I could just squeeze one more in, you guys talked about the number of cable modems you have live and running relative to where, CableOS.

Can you talk about the denominator, just how many – what's the size of the broadband subscriber footprint collectively across all the customers you've won?.

I regret, I don't have an updated number for that. Ballpark is roughly $50 million..

Okay, very good. All right. Thank you very much. Appreciate it..

Just Comcast to Vodafone, alone I think, are really that number..

Perfect. Okay. Super. Thank you so much..

All right. Thank you..

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

Hi, good afternoon. Wanted to kind of pick up on that, baseball analogy there given that we're in relatively early innings of the ramp and Sanjay had mentioned for the 30% type growth rate, if you normalize for the software payment last year and that's with arguably fair bit of headwinds from pandemic and whatnot.

So would it then be reasonable to look at that 30% growth is sort of a baseline for what we might expect going forward or even as being conservative given the headwinds we saw this year. How are you thinking about kind of medium term growth in the Cable Access business? And I have a follow..

So Tim, for Cable Access especially, we've got a very strong backlog deferred revenue and these customer contracts. We think we are very well positioned not only for the second half but for – but beyond that as well.

It's hard to give a guidance at this time or come up with a very precise quantitative number, but we feel we are very strongly positioned. The number of customers or deployments Tier 1s we have and not only the discussion we had on shelves at the same time. I think all the signs of winding that Cable is a segment which is definitely growing.

But we don't at this point have a good view of the number for next year, and we will definitely share it in the upcoming calls as we get more precise there..

Okay. And just following along that front, you mentioned you had good visibility for the second half in Cable. And I guess I'm trying to figure out whether that's, it seems like that would be coming more from current customers ramping deployments then new customers given what you've described about pandemic related challenges to on-boarding.

But I just want to try to understand that in the context of what we've seen with Comcast in particular in the first half? It looks like outside of the quarterly software payment your kind of revenue there has been sort of flat with what you saw last year through the first half, although you did see a pretty good ramp there even excluding the software payment in the second half of last year.

So is it that sort of dynamic that you expect to drive the second half, which is current customers getting to kind of a new plateau in deployments and if we were to – I guess would you make the same comment any wise, I guess, about deployments with some of your bigger customers that you've been working on for a while as you would the entire opportunity in Cable Access, maybe another way to approach that thought..

Well, Tim, it's a mix of most of those factors as you said, we have existing customers who are ramping up deployments. At the same time, we have new customer starting also in the second half and the customers who with – whom we didn't see in the first half who kind of delay a little bit, they're also starting up.

So I think, it's a mix of all of them in the second half and you see that uptick compared to first half. And as you mentioned, excluding the one-time Comcast of last year, it's still up, but for the second half if you did that one piece out, we are up 23% just in second half. So that is the ramp with all these three factors..

Okay. Thanks very much..

Thank you..

Thank you..

Thank you. And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Patrick Harshman for any closing remarks..

Okay. Well, we simply want to say thank you all for joining us and your supports. We look forward to speaking with you all again very soon. Goodbye and have a good day..

Okay. Thank you..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect..