Harmonic Inc. Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 Harmonic Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. David Hanover. Please go ahead, sir.

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's first quarter 2021 financial results conference call. With me are Patrick Harshman, President and Chief Executive Officer; and Sanjay Kalra, Chief Financial Officer. Before we begin, I'd like to point out that in addition to our audio portion of the webcast, we've also provided slides for this webcast, which you may see by going to our webcast on our Investor Relations website. 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 this press release. The remainder of the information will be available on a recorded version of this call or on our website. And now I'll turn the call over to our CEO, Patrick Harshman. Patrick?

Thanks, David, and welcome everyone to our first quarter call. Harmonic delivered another solid quarter with strong new bookings and significant year-over-year revenue, earnings, and cash growth. Both our Cable Access and Video segments contributed meaningfully, carrying substantial backlog and deferred revenue into the rest of the year. For Cable Access, we continued to scale with existing customers and secured new customer wins, achieving 79% year-over-year segment revenue growth. In our Video business, demand for our broadcast and streaming solutions remained healthy, leading to a 29% year-over-year segment revenue increase. Overall, Harmonic is effectively responding to current challenges and opportunities, investing in differentiated technologies and fostering strong customer relationships. This translates into strong market momentum and a positive growth outlook for the remainder of the year. Focusing on our Cable Access segment, we recorded another strong quarter with deployments among 53 cable operators worldwide, marking a 96% increase from the first quarter of 2020. These deployments now serve over 3 million cable modems, a 127% year-over-year rise. Segment revenue reached $41.3 million, an increase of 72% from last year. Although margins decreased slightly due to a heavier mix of DAA hardware and increased costs, we still maintained a positive segment operating margin. Looking ahead, we are well-positioned for continued revenue growth, with strong market momentum for next-generation broadband solutions across fiber cable and wireless, along with the synergy of cloud-native software and open distributed access architecture. Harmonic's solutions lead the market in this space, and we've been recognized by the Dell'Oro Group as the market leader in next-generation technologies. To leverage our position, we are focused on three interrelated growth strategies: scaling CableOS deployments with existing customers, acquiring new customers ranging from large Tier 1 operators to rural providers, and expanding our market to include fiber-to-the-home and fiber-to-the-business. We made progress in all three initiatives during the first quarter. We are actively deploying CableOS, and the pace is accelerating, with less than 6% of our customers' footprints currently utilizing the solution, indicating substantial growth potential. We also received an initial multimillion-dollar order from a new Tier 1 international operator and onboarded several new regional broadband customers. Additionally, we closed our first fiber-to-the-home deal in North America and observed steady growth in our global sales pipeline, with engagements across a diverse clientele. We continue to invest in new technologies and services, adding new functionality to our cloud-native software core and collaborating with public cloud providers on new edge cloud capabilities. Our initiative for a converged cable solution for fiber-to-the-home remains a top R&D priority. While we face global supply chain constraints and shortages of key components, impacting our costs, we remain committed to our revenue growth targets. Consequently, while we expect higher costs and lower margins for certain products in the coming months, we are actively pursuing opportunities to expand our DAA footprint and are raising our revenue guidance. In summary, Harmonic had another strong quarter in Cable Access, with favorable global broadband trends, healthy near-term demand, successful scaling by early customers, and the addition of new customers. The future of broadband access technology is tied to cloud-native core software supporting flexible distributed access networks, and Harmonic is well-positioned to lead this evolution. Now transitioning to our Video segment, we built on a robust second half of 2020 with another strong quarter. First quarter segment revenue was $70.3 million, up 29% year-over-year and 5% from the first quarter of 2019, signifying growth beyond post-pandemic recovery. Our gross margin stood at 55.1%, with a segment operating margin of 5.4%, highlighting continued profitability amidst business transformation challenges. Our key strategic shift is moving from a traditional broadcast technology model to a blend of broadcast CapEx and streaming SaaS with recurring revenue. Demand for high-quality live streaming solutions is rising, as evidenced by a strong sales pipeline, several new streaming SaaS wins, and a near-record backlog of deferred revenue. We acquired seven new streaming SaaS customers this quarter, many of whom are new to Harmonic, bringing our total to 97 media companies on our streaming platform, a 72% year-over-year increase. About a quarter of these customers are still launching their new services, underscoring our growth expectations in streaming. A notable example is a new sports streaming service that went live recently, generating millions of daily ad impressions, with potential for further growth as the service evolves. While streaming is our primary focus, we are also seeing a revival in broadcast demand, with a rebound in project activity worldwide. We are capturing a growing market share and witnessing new opportunities from 5G bandwidth reclamation, which we anticipate will contribute to business in the second half of 2022. As a result, we are modestly raising our revenue guidance for the Video segment for the full year. Looking ahead, we see success with the C-band initiative opening broader opportunities for wholesale IP video distribution over terrestrial fiber networks, creating positive trends for sustained investment in video broadcast. In summary, we delivered another strong quarter in the video segment characterized by solid revenue growth, gross margin, operating profit, new wins, and bookings. This performance highlights the resilience of our video business, our industry-leading technology, and the increasing success of extending our brands into high-performance cloud streaming and SaaS. With our substantial backlog, deferred revenue, and strong video sales pipeline, we are moving forward in 2021 with market momentum and confidence in our growth plans. Now, let me turn the call over to Sanjay for a detailed look at our financial results and outlook.

Thanks, Patrick, and thank you all for joining us today. Before I discuss our quarterly results and outlook, I'd like to remind everyone that the financial results I will be referring to are provided on a non-GAAP basis. As David mentioned earlier, our Q1 press release and earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP that are discussed on this call. For the first quarter of 2021, we delivered solid results generally above our guidance ranges. We reported Q1 revenue of $111.6 million, up 42.3% year-over-year and gross margin of 50.4% or 150 basis point improvement year-over-year. Operating margin was 4.5%, comprised of 3.1% for cable access and 5.4% for video, and we generated adjusted EBITDA of $9.1 million and EPS of $0.04. We also had seasonally strong bookings during the quarter with a book-to-bill ratio of 0.9. As a result, we ended Q1 with a solid backlog and deferred revenue of $274.3 million, positioning us well for the remainder of the year. Now I will review our first quarter financials in more detail. Turning to Slide 7, total company Q1 revenue was $111.6 million or a 42.3% increase compared to $78.4 million in Q1 '20. As Patrick mentioned, we continued to see increased traction in our cable access business. In Q1, with 53 commercial deployments, we saw sequential growth of 20% compared to 44 at December 31, and up 96% year-over-year. Cable access revenue was $41.3 million, up 72.1% compared to $24 million in Q1 2020. In our video segment, we reported Q1 revenue of $70.3 million, which increased by 29.2% compared to $54.4 million in the prior year period. We continue to see recovering video activity worldwide during the quarter, including continuous satellite C-band 5G related revenue. We had two customers representing greater than 10% of total revenue during the quarter. Comcast contributed 23% of total revenue, and SES contributed 16%. As previously mentioned, gross margin improved to 50.4% in Q1 '21 compared to 48.9% in Q1 '20, up 150 basis points. Cable access gross margin declined slightly to 42.2% in Q1 '21 compared to 43.3% in Q1 '20, down 110 basis points, reflecting increased supply chain costs and a higher mix of DAA hardware. As mentioned earlier, cable access operating margin was 3.1%. Video segment gross margin was 55.1% in Q1 compared to 51.3% in Q1 of last year, a 380 basis point recovery to business as usual before the pandemic. Moving down the income statement on Slide 8, Q1 '21 operating expenses were $51.1 million compared to $47.9 million in Q1 '20. The year-over-year increase was primarily due to increased cable access research and development and services and sales and marketing for both segments, as we continue to invest in our growth initiatives. The secondary reason for the increase was the conversion of some employee incentive compensation from stock to cash. We reported operating profit for the first quarter of $5.1 million, comprised of $1.3 million from cable access and $3.8 million from video. This is a substantial year-over-year improvement compared to an operating loss of $9.5 million in Q1 '20. Adjusted EBITDA for the first quarter was $9.1 million, reflecting contributions of $3 million from cable access and $6.1 million from video. This compares to an adjusted EBITDA loss of $7 million in Q1 '20 and translates to Q1 EPS of $0.04 compared to Q1 '20 EPS loss of $0.10. We ended the quarter with a diluted weighted average count of 103.2 million shares compared to 100.3 million in Q4 '20. The situation increase is primarily due to the issuance of 2 million shares to employees for vested restricted stock units and performance-based compensation and 0.9 million shares for convertible debt valuation as a result of our increased average stock price. Q1 bookings were $96.3 million, a 26.2% increase compared to $76.3 million in Q1 '20. It was encouraging to see another quarter of year-over-year bookings growth during the first quarter, demonstrating continued strong demand for our differentiated technology solutions. Turning to Slide 9, let's discuss our liquidity position and balance sheet. We ended Q1 with cash of $100.8 million compared to $71.7 million at the end of Q1 '20 and $98.6 million at December 31. The 2.2 million sequential cash increase is comprised of $1.7 million cash generated from operations, primarily attributable to the profitability of both our businesses, net of $3.6 million cash used for the purchase of fixed assets, and $4.7 million received from common stock sold to employees under our ESPP and from stock option exercises. Our days sales outstanding at the end of Q1 was 69 days compared to 107 days in Q1 2020. The year-over-year decrease in DSO reflects continued overall collection improvements and the timing difference of certain large receivables. Our days inventory on hand were 58 days at the end of Q1 compared to 78 days at the end of Q1 2020. At the end of Q1, our total backlog and deferred revenue was $274.3 million, compared to $207.9 million at the end of Q1 2020 and a record $290.5 million at the end of Q4 '20, reflecting a sequential decrease of 6%. Our near-record backlog and deferred revenue reflects both increasing commitments from our large cable customers and our growing video streaming SaaS businesses. We are pleased to maintain a strong level of high-quality backlog, knowing that historically about 80% to 90% of our backlog and deferred revenue gets converted to revenue within a rolling one-year period. The deferred revenue component of our total backlog and deferred revenue was 27% at the end of Q1 compared to 27% at the end of Q1 2020, demonstrating that revenue conversion of backlog and deferred revenue continues at levels consistent with our expectations. As mentioned on previous calls, not included in our backlog is additional contractually agreed CableOS business with three of our Tier 1 cable customers. At the end of Q1 '21, this incremental amount was approximately $156 million, down from $158 million last quarter, as approximately $2 million went through the purchase order process and therefore moved into bookings. Taking these CableOS contracts into account, we have total future contracted revenues of $430.3 million, which provides us with a solid foundation for the remainder of 2021 and into 2022. Now, I will turn to our non-GAAP guidance for 2021 on Slide 10. While COVID-19 related uncertainty and volatility still exist, our customer activity and pipeline have substantially recovered since the height of the pandemic. On the other hand, we are contending with a somewhat unprecedented global supply chain situation, creating both cost and production timing challenges. Based on extensive conversations with our key customers and supply chain partners and internal analysis, we expect that demand recovery will continue throughout the balance of 2021. With over typically seasonally stronger Q4 and second half and that meeting this demand will likely be somewhat at higher cost, particularly for our cable access hardware products. For the full year of 2021, we expect total company net revenue in the range of $435 million to $480 million; at the high-end, this reflects upwardly revised growth expectations for both segments. Gross margin is expected in the range of 50.6% to 52%, at the midpoint of our guidance, this represents a decline of 120 basis points year-over-year. This reflects a slight increase in video gross margins and a lower gross margin on cable, which I will elaborate on shortly. Operating expenses are expected to range from $209 million to $218 million, an increase from previous annual guidance due to increased cable access research and development expenses and the decision to settle certain employee incentive compensation payouts with cash instead of stock, reducing valuations. Adjusted EBITDA is projected in the range of $25.1 million to $45.7 million, an increase of approximately 49% year-over-year at the mid-point. EPS will range from $0.06 to $0.24, with an effective tax rate of 10% and our weighted average diluted share count of approximately 104.7 million. Finally, cash at the end of the year is expected to come in between $110 million and $120 million. On Slide 11, I will focus on total company guidance for the second quarter. Revenue is projected in the range of $102 million to $112 million, with the midpoint of our guidance reflecting an increase of 45% compared to Q2 last year. Gross margin is expected in the range of 48.7% to 50.6%; at the midpoint of our guidance, this reflects a decline of 195 basis points compared to Q2 last year. Operating expenses are expected to range from $52 million to $54 million due to the reasons mentioned previously. Adjusted EBITDA is projected in the range of $0.8 million to $5.8 million, versus a loss of $2.8 million in Q2 last year. EPS is expected to range from a loss of $0.03 to a profit of $0.01 per share, with an effective tax rate of 10% and a weighted average diluted share count of approximately 101.2 million to 104.2 million. Finally, cash at the end of Q2 is expected to range from $90 million to $100 million. Starting this fiscal year, we will be augmenting our segment guidance to include segment gross margin, operating expense, and adjusted EBITDA corresponding to our existing practice of providing these segment metrics in our reported quarterly results. On Slide 12, I will discuss guidance for our video segments for the full year and the second quarter. For the full year 2021, we expect video revenue in the range of $260 million to $280 million. At the midpoint of our guidance, this reflects 11% growth year-over-year attributable to both rebounding broadcast market demand and growth in streaming. Gross margins are expected in the range of 55% to 57%; at the midpoint of our guidance, this represents a 150 basis point improvement over last year, mainly due to improved product mix. Operating expenses are expected to be between $138 million and $143 million, an increase of 7% versus last year. Most of the increase is due to increased sales expenses tied to higher projected revenue. Adjusted EBITDA is projected in the range of $13.5 million to $25.1 million, a 135% increase over last year at the midpoint. For Q2, we expect video revenue in the range of $57 million to $62 million. At the midpoint of our guidance, this represents approximately 25% growth over Q2 last year. We expect video gross margin in the range of 54% to 56%. This year, the midpoint is at a 20 basis point improvement from Q2 last year. Operating expenses are expected to range from $34 million to $35 million, a 14% increase over Q2 last year, primarily due to increased sales expenses as mentioned previously. Adjusted EBITDA is projected in the range of a negative $1.3 million to a positive $1.6 million. On Slide 13, I will give guidance for our cable segment for the full year and the second quarter. For the full year 2021, we currently expect cable access revenue in the range of $175 million to $200 million. At the midpoint of our guidance, this reflects a 38% growth year-over-year. This growth is driven by strong momentum with our existing customers as the actual rate deployment, as well as new customer growth and models converging fiber-to-the-home revenue. Gross margins are expected in the range of 44% to 45%, a 440 basis point decline versus last year at the midpoint, primarily due to increased costs related to supply chain headwinds and an increased mix of DAA hardware. Operating expenses are expected to be between $71 million to $75 million, a 33% increase versus last year. Most of the increase is due to increased research and development and sales and marketing expenses. Adjusted EBITDA is projected in the range of $11.6 million to $20.6 million, an increase of 3% over last year at the midpoint. For Q2, we currently expect cable access revenue in the range of $45 million to $50 million. At the midpoint of our guidance, this reflects 79% growth for cable over Q2 last year. Gross margin is expected in the range of 42% to 44%, at the midpoint of our guidance; this reflects a 270 basis point reduction over Q2 last year for the reasons mentioned previously, regarding our full year gross margin guidance. Operating expenses are expected to range from $18 million to $19 million, at the midpoint of our guidance, reflecting a 42% increase over Q2 last year, primarily due to increased research and development and sales and marketing expenses. Adjusted EBITDA is projected in the range of $2.1 million to $4.2 million. In closing, again, we are grateful for our team's continued dedication and strong performance during the first quarter. We continue to execute on our strategic priorities, positioning our cable access and video streaming businesses for long-term success. With that, thank you, everyone. And now I'll turn it back to Patrick for final remarks before we open up the call for questions.

Okay, thanks, Sanjay. We want to conclude by reviewing our strategic priorities for the year. For our cable access business, our objectives are accelerated expansion of existing Tier 1 deployments, entering new global operators, particularly additional Tier 1s, and expanding our domestic market for CableOS new converged to DOCSIS, the fiber-to-the-premises capabilities. We are pushing forward aggressively despite near-term cost challenges. For the video segment, our objectives are accelerating the growth of our streaming and SaaS customer base and usage, capitalizing on the coming transformation of traditional media and broadcast infrastructure globally, and delivering both top and bottom-line growth. Putting it all together, we aim to create value, deliver industry-leading solutions, and to enable superior subscriber experiences worldwide. Finally, we're pleased to announce that later in May, we will be hosting two special industrial events: a deep dive into our cable access business and associated multi-year outlook, and a similar deep dive in multi-year outlook for our video business, featuring additional members of our executive management team. We expect to finalize the details shortly and hope that you all join us. With that, I would now like to open up the call for questions.

And your first question comes from Samik Chatterjee from JPMorgan.

Hi, this is Joe Cardoso on for Samik Chatterjee. My first question is on your guidance, kind of more of a clarification. You obviously spent a large portion of the prepared remarks mentioning the supply constraints and implications on the higher costs. I'm just curious if you guys are seeing any implications on the supply constraints on your top line? And basically, are you being impacted by your ability to supply customers? And whether you're baking any of that into your full-year guidance?

Yes, in terms of top line and the supply chain, we have factored in any risk we consider in our guidance range. So our guidance range completely entails the risk we consider at this point for this supply chain.

I just wanted to follow up. Are you experiencing any challenges with your ability to supply customers right now, or have you not encountered that issue yet?

We've not seen that to date. If I can step in, we've not dealt with that to date. I think the current situation creates a ceiling. It’s not to say we're not working to remove that, but it does create a little bit of a ceiling on the upside. What we're talking about today is, is going beyond our guidance from last quarter. So we're fortunate that we don't see any reduced expectations. But if your question is, is sky the limit? Right now, the sky is not the limit. There is a scenario where demand may outstrip supply. But right now, the supply that we see, we think we can manage and actually manage to deliver a little bit of upside, albeit, as we've said, a couple of times, at higher than originally anticipated costs, simply entailed with getting that done. It's a dynamic situation. As Sanjay said, we're confident that we've got the resources to deliver within the range that we've talked about. Is upside on that possible? It is possible. I think it's probably more likely that the demand is there than that we'll be able to satisfy the demand. But both of those things are a little bit dynamic and we'll continue to keep you updated as we move through the year.

No, I really appreciate the color. And then I guess, just for my second question, and this is more broader. It looks like there's a bunch of initiatives from governments globally in the pipeline, including RDOF and the infrastructure plan in the U.S. There's the UK’s project gigabit and the European Commission's broadband project. Just curious to hear your overall thoughts on these government projects in terms of when do you expect them to materialize? And how is Harmonic positioned to benefit from these investments globally? Thank you.

Yes. I very much appreciate the question. As your questions implied, the world is a big place. There are a lot of different initiatives with different timing happening all over the place. But I think we can agree the headline is, is that broadband and access to broadband is a priority issue in every country, from the United States to the UK to Bhutan. So being a participant and being a key supplier of broadband-enabled technology is a great place to be. We think we have an extremely strong position within cable. As you know, we're working to expand that position to also address fiber. Our first protocol, if you will, is those cable operators who are expanding into a fiber or have hybrid cable/fiber infrastructures, and we think that opportunity substantially expands our addressed market. We believe we can expand beyond that. So we think it's a very attractive environment. We're well positioned. We're not targeting the totality of the market today. But we're targeting a growing subset of the broadband market where we can not only participate, but really differentiate ourselves. We think that the future is pretty exciting. It's one of the reasons why we're leaning in now. We're continuing to invest in both the current and our upcoming technologies to strengthen our position, not just for 2021, but for the next several years. As I mentioned before, we do plan an investor event to really go into this topic from both the market and the technology perspective in more detail later on in the month. And I think that your question really hits on one of the reasons we want to have a slightly more in-depth conversation to talk about what we're doing and the market opportunity that we see.

Thank you. Appreciate the question and congrats on the results.

Thank you.

Thank you.

And your next question comes from Tim Long from Barclays.

Thank you. Two questions, if I could. First on the C-band side. It sounds like it's starting to broaden out a little bit more from a customer base. So could you kind of just give us an overview, Patrick, on kind of level of activity there and maybe update us as this moves along any changes to the competitive environment? And then, on the cable side, it sounds like there’s a really big pipeline outside of the backlog. So maybe if you could kind of give us a sense as to why you're seeing that growth. Is it a lot of new deployment? Is it the traffic growth that’s driving that or competitive wins, and maybe a little bit on the slope of the curve to turn that stuff into revenues? Thank you.

Okay. Thanks for the question. On the C-band stuff, indeed, we're seeing more opportunities. In particular, we see a couple of substantial new opportunities that really come into focus and where we see that is beginning to materialize in the second-half of the year, and we also see it as a high probability for 2022. I would say that the next wave of opportunity is domestic. Beyond that, we still see and we're engaged in a number of conversations around related international opportunities, but I would call those still not quite in focus and therefore not yet factored into any way into the guidance that we've given. But from a broader trend, I think that it continues to be promising from our perspective, not only because the government is looking to recover bandwidth, but because the market is waking up to the fact that actually, there are a lot of benefits to moving video traffic over terrestrial fiber networks, personalization, customization, targeted ads, etc. So it's a dynamic and positive opportunity that is leading to broader conversations with a number of customers, both domestically and internationally. There's not really been any change to the competitive environment. The last part of that question, Tim, is not really any change to the competitive environment. We're certainly not the only one. We've seen some deals go to competitors, but we think we're pretty uniquely positioned, and we're really leaning into a couple of very significant additional opportunities. On the cable front, since this is a bit all of the above in your comments, I think that as we touched on, the last question broadband is a must-do, whether it's from a consumer or from a government perspective, it's only becoming more important. There’s consumer demand, and I think there's strong and we're seeing strong demand from both our existing customers to go faster and from new customers, particularly our new customers as we continue to get success in the market with appointments. There’s a virtuous cycle; we think we're getting more and more credibility. Our slightly more conservative operators, or once we had a little bit more questions about the technology, are getting more comfortable with the deployment volume and the success of the quality of service that we're seeing. Both of those factors are factoring into a strengthening pipeline. That being said, the risk of rambling on here, we've also learned that, depending on the environment, this is not necessarily an overnight deployment process. There is a process, and to the comments, we're carefully managing our supply chain. That also modestly impacts, I would say, the pace at which we can move. So strong demand, competitive position is, I would say, stronger than ever. The translation of all that into volume deployment is okay; it's not quite as fast as we'd like to see. Supply Chain inhibits that a little bit. But it's going okay. If you look at our guidance range, the top end where year-over-year, it's a respectable number, getting close to 50%. Given everything that's going on in the market and the fact that we're still in many places, dealing with some pandemic-related issues, etc., I think that growth and our view that we want to discuss with you all later on about multi-year growth, all of that, from our perspective, is quite positive.

And your next question comes from Simon Leopold from Raymond James.

I wanted to ask maybe if you could help folks understand the metric you've been offering on the past several calls regarding the cable modem served. I guess, this quarter you're up to 3 million. And you talked about 6% or better than 6%, which would imply that the customers have a total of about 50 million. Could you help us understand how you measure that metric and what stands between basically serving 3 million and 50 million? What needs to happen for that number to grow is really what I'm looking for.

You have the right idea in rough numbers. The operators currently implementing CableOS serve over 50 million cable modem subscribers. They are gradually updating their systems, rather than making immediate changes. There is a need for centralized architecture, which involves significant rewiring and reconfiguring at the main headquarters. DAA nodes are being deployed in local neighborhoods, which requires maintenance work, such as replacing old nodes. This often means installing fiber deeper into the neighborhoods, which makes the process time-consuming. It is not primarily about our technology but rather about the necessary architectural and infrastructure updates throughout the system, including transitioning from outdated equipment to modern server infrastructure. This is a lengthy process that demands financial investment as well. For each operator, this process can limit the speed of implementation, as even financially strong operators will not allocate unlimited funds at once. Additionally, in many regions, finding work crews can be challenging. Thus, we maintain that we anticipate our solution will be implemented across their full plans over time. We expect this to be a multi-year process—around three to four years. As our customers gain experience, we believe the implementation pace will accelerate, particularly among our largest clients. This is a key aspect of our expected growth. While we anticipate progress in the upcoming year, we still see the rollout for larger operators as a multi-year endeavor across their entire service areas.

Thanks. And then as a follow-up, I wanted to see if maybe we could unpack the gross margin pressure on the cable access segment. I appreciate you don't have some crystal ball that tells you when the supply chains open up necessarily. But what I'd like to try to understand is, what's the impact of supply chain versus product mix, for example, nodes dilute your gross margin versus your software? We understand that. So I guess what I'm trying to understand here is what would you expect the gross margin in that business unit should be in a sort of more normalized, non-supply constrained market? And do you have a view on when we should get back to those levels?

So Simon, I appreciate the question. I think, as I pointed out in my prepared remarks, there are both pieces to the gross margin. The gross margin decline we are seeing now is substantially due to the supply chain related costs. At the same time, we are also seeing increased growth in the DAA hardware. Both pieces are there; it's hard to quantify what is the piece of each, but substantively, it's the supply chain costs. That said, once the supply chain challenges are behind us, we should return back to better margins, where we are expecting for this year, and I think not going in outer years. When we talk about the multi-year in our investor relations event, which Patrick mentioned, I think we can cover the expectation at that time. At this point, we are not going into the '22 margins. But directionally, we should see improvement from where we are this year.

Is there, I guess, the level that should we look at fiscal '20 as kind of a normalized value, or is that misleading for any reason?

If I could step in, our target is to do better than 2020. So I don't think it's a normalized value. Maybe if I could from the CEO perspective, look, there's a software component, there's a hardware component. The software component is going to be very high margin, right? It's 90 plus percent. Then we've got hardware. We've always said, we've said previously that the hardware has been, let's say, mid-30s on average. But, we expect that to be going up with volume as well as designer enhancements, etc. In the long term, that's still our expectation. Yes, we've gone the other way, short-term on the hardware. This is not a fundamental reset; we're paying a lot more to unpack that a little bit, as you asked. We're paying a lot more for key components, and we're also paying higher assembly and transport costs. We’re getting hit from a number of perspectives. We see none of those hits, though, as fundamental impairments to go forward indefinitely. We don't have a crystal ball on this supply chain thing. Right now, I think we expected it to carry over somewhat into 2022. We would expect, again, this is a very clear expectation, but we expect some recovery later in 2022. We certainly hope it's sooner; we don't have a good crystal ball. But what this guidance assumes is that it will be with us through 2021. I want to emphasize the fact that we could probably have higher margins if we were willing to take a lower deal with lower volumes. We see a land grab opportunity; we've got real momentum with our solutions. We're leaning into every opportunity, we have to deploy DAA hardware out there. This means we're scouring the planet right now for the materials we need, and we're paying top dollar in many cases for that. I think that's the right thing to do strategically. Capturing real estate is absolutely the right thing in terms of our multi-year growth opportunity, our market leadership opportunity. Yes, it's costing us the gross margin short-term. But I think the right way to look at it is that we're picking up significant market share, and that's going to be a durable strategic benefit to the business for many years after this near-term cost headwind is behind us.

Great, that's helpful. Thank you. That's what I was looking for. Appreciate it.

You have a question from George Notter from Jefferies.

I guess I wanted to come back to the C-band discussion from earlier. I think you said you're seeing a broadening out of opportunities. I guess the clarification here. Are you seeing then some of the 2023 opportunities coming forward? Then I guess there's, of course, a deadline December 5, I think 2023. So when you talk about a broadening of opportunities, are those the deals that you're seeing now kind of coming forward? Or are there some other pieces of business that are coming forward?

No, we're referring to something a little bit different, George. Just taking a step back, I know you know this, but others listening may not know. A huge amount of video is still moving around over satellite networks. And I think, in many ways, our philosophy has been out there, if it ain't broke, don't fix it. Even though intellectually, the question has been there, why not use fiber base to transport? The success of this initiative is opening the door to a different kind of discussion, saying wait a minute, even if the government isn't bearing down on us and requiring us to abandon satellite, maybe moving more of that traffic to fiber is going to save some money, and on the other hand, maybe it's going to allow a more innovative service delivery offer. So it's a dynamic and evolving opportunity that is leading to broader conversations with customers, both domestically and internationally. There's not really been any change. The last part of that question, Tim, is not any change to the competitive environment. We're certainly not the only one. We've seen some deals go to competitors, but we think we're pretty uniquely positioned, and we're really leaning into a couple of very significant additional opportunities.

That's very helpful. I guess I also wanted to ask about RDOF. The list of awardees is out there for phase one. Are there specific operators or customers that you see on that list that are Harmonic customers that create new revenue opportunities for you? Are there specific guides you can identify?

Yes, is the short answer. I don't want to suggest that we've got a seat right in the front and center of the auditorium. But the short answer is yes. There are people who are existing customers and there are people who are in our sales pipeline. Now, to be clear, as we've stated, we're focusing on today we're focusing on a subset. Those are the subset of those folks who own some cable infrastructure as well. So who would be kind of hybrid cable and fiber to the premises operators? But for anyone in that category, they are absolutely part of our go-to-market focus.

And you have a question from Steven Frankel from Colliers. Mr. Frankel, please check to see if your line is muted.

There we go. Patrick, thank you for the opportunity. To what extent is this acceleration in R&D reflecting kind of new projects that you think you need to get to market faster versus kind of just accelerating the pace around existing things you have already targeted?

I wish it were one or the other; it's actually a combination of both. To be honest, we've mentioned this previously. Each tier one has its unique products, and part of our success involves adapting to them. We made a significant announcement about a tier one last quarter, added another one this quarter, and we have several more tier ones in our pipeline. We are preparing for success with those we have recently signed as well as those coming up. But the second aspect is not just about looking forward. What we are learning from existing deployments and the fiber-to-the-home opportunities we've discussed a few times shows overall momentum, and we can see where things are headed. We believe now is the time to focus on this. If we invest in R&D now, it will yield benefits later in 2022 or 2023. We have real growth aspirations for those years, so we believe this is the right moment to act.

Well, and then one follow-up. I think I heard you say before that DAA is increasing in mix, and it's coming from the tier ones. So is it fair to say that those tier one customers that were dipping their toes and doing fits and starts over the last 18 months are now far enough into it that they can put their foot on the accelerator in terms of deployments?

Yes, the pace of deployment is definitely increasing. I think that's one thing. A couple of those operators initially started off with several different DAA sources. We think we're getting a little bit higher market share because of the strength of our particular solution. Even at short-term higher cost, we think the right thing to do is to lead into that, let's call it, incremental market share opportunity. We view putting a DAA node out there as gaining valuable real estate. Not just a short-term revenue opportunity, but a real presence in the network opportunity; that is where we're leaning into.

And you have a question from Tim Savageaux from Northland Capital.

I’ll be brief. I have a couple of questions. First, regarding the acceleration of deployment in cable and the gap between 3 million cable modems and 50. You mentioned at a recent industry event that this number might reach around nine by the end of the year, indicating significant market acceleration. Given this, it’s notable that the guidance has increased. While I understand there might not be a direct correlation between acceleration and cable modems served in Harmonic's revenue, should we consider the possibility of reaching the higher end of the range you mentioned, such as 50% growth, or is even that conservative considering those targets? I also have a follow-up question on a different topic.

Well, thanks for the question, Tim. I think you're referring to comments I made at a recent industry event, which was really targeted at the cable operator community. I was not talking specifically about Harmonic but the industry at large. I was not talking specifically about Harmonic but the industry at large. I was not talking specifically about Harmonic but the industry at large. I was not talking specifically about Harmonic but the industry at large. So yes, there's a couple of different variables floating around. Further, I will also concede that discussing growth forecasts with the industry is somewhat different than offering financial guidance. So, you've got a couple of different things going on. The good news is we’re seeing the industry get more and more comfortable with DAA as a technology. An important thing that came out of those live readings is increased industry conviction that DAA is not only viable, but is increasingly the way to go. One cannot therefore draw a straight line between those industry projections and our revenue for a couple of reasons as you highlighted as well as what I just said in terms of overall industry numbers versus Harmonic's.

Okay. Did you say you thought you were gaining share, but I'll just leave that one there. Second one is, I think there was a brief reference made to the incentive compensation discussion about part of the driver of that being the new kind of cooperation agreement or the board changes that you’ve seen. I wonder if you might comment a little more expansively on that; we also perceive that the more detailed segment guidance and Investor Days might be a function of that as well. At a high level, should we be thinking about these segments increasingly separately for Harmonic video and cable access, both tactically and strategically? If that were the case, it might make for a shorter press release at least or possibly a shorter call. But your choice for how to approach it, whether we should be thinking more about the strategic activity at Harmonic as a result of that agreement, and what has been the impact to date, besides what you've mentioned on the call?

Let me start with the first one. Let me clarify this change, of incentive comp from stock to cash has nothing to do with the cooperation agreement. This is purely an internal decision. As the Board looked at our plan for the year, we are generating very good cash and the operating profit level we are reaching, we took a decision to convert a piece of over stock compensation to cash compensation and it helps marginally reduce the valuation of the company as well. This has nothing to do with that agreement. Secondly, in terms of the two segments being distinct, we have always reported the two segments right from the revenue to the operating profit in actual reported results. But while giving the guidance, we have not given the guidance in that transparency. Starting this quarter, we felt the need to do it based on the continuous regular questions during the industry interactions we've had. We thought it's more transparent and it provides more visibility of what each segment is doing. This has also nothing to do with any other agreement, so this is more about transparency.

And Tim, just maybe a follow-on from my perspective, we value the relationship with Scopia; they've been in the stock for several years, and that's all very good, and so that's a full statement full stop. Separately, we think, along the lines of Sanjay just said, we’ve been quite clear over the past several years about how we think about the different pieces of our business and how we're trying to create value in the company. There really is no strategic change. It wouldn't be a mistake to conclude anything strategically from what we've discussed today. Both of our businesses, we think, have exciting futures and opportunities. We can see that we're investing in both and we've been quite transparent. We've received the question numerous times over the past several years, what is the level of synergy between the two? We've been quite transparent to say there's modest synergy; it's not overwhelming. The way the company, the management team, as well as our Board will work to create value, whatever way we can, that maybe what the two business units saying together and maybe what the part; there's no change in that answer nor in our thinking that has over the past several years. We will continue to move forward, looking to create as much value as we can and overall enterprise, which really means creating as much value as we can in both business segments. I'm very pleased coming into this call that we see actual good strategic progress on both sides of the business. I think there are a lot of reasons to be encouraged on both sides and see a good future on both sides of the business.

And there are no further questions at this time. I'm going to turn the call back over to management for closing remarks.

All right. Well, thank you very much for joining us. We've got a lot of challenges but a lot of opportunities ahead of us. We look forward to staying in touch with all of you and, in particular, as mentioned, keep an eye out for our planned investor dates in a month or so. Until then, take care and we look forward to speaking with you all again soon. Bye-bye.

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