Harmonic Inc. Q4 FY2021 Earnings Call

Welcome to the Q4 2021 Harmonic Earnings Conference Call. My name is Valerie, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to David Hanover, Investor Relations. David, you may begin.

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's fourth quarter 2021 financial results conference call. With me today are Patrick Harshman, President and Chief Executive Officer; and Sanjay Kalra, Chief Financial Officer. Before we begin, I'd like to point out in addition to the 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 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 in operation, 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'll turn the call over to our CEO, Patrick Harshman. Patrick?

Thank you, David, and welcome, everyone, to our fourth quarter call. Harmonic ended a strong 2021 with another quarter of impressive financial and strategic results. Revenue reached a record $155.8 million, reflecting an 18.5% increase compared to last year. Earnings per share stood at $0.16. We experienced robust cash generation, and our book-to-bill ratio was 1.7%, leading to a record backlog and deferred revenue exceeding $440 million. Full-year revenue grew over 33% as both our Cable Access and Video segments continued to invest in the future and achieve new strategic successes while maintaining positive operating income. In the fourth quarter, our Cable Access segment revenue increased by 53%, with a 66% year-over-year rise in the number of customers using CableOS. Our Video segment saw impressive year-over-year streaming revenue growth of 56.5% and an adjusted EBITDA margin of 19.8%. The results from 2021 and our outlook for 2022 affirm that we are successfully executing the multiyear strategic and financial plans we shared during our June investor days, despite ongoing pandemic and supply chain challenges. As we enter 2022, we are equipped with industry-leading technology, strong market momentum, a growing list of customers deploying our latest solutions, record backlog and deferred revenue, and a solid cash position, setting a great foundation for extending our market impact and growth. Looking specifically at our Cable Access segment, it performed excellently in both the fourth quarter and the year overall. By the end of the quarter, 73 broadband service providers were utilizing our CableOS, a 66% increase year-over-year. The number of broadband modems served reached 4.8 million, an 82% increase from last year. This segment's revenue totaled $69.7 million, up 53% from a year ago, with an adjusted EBITDA margin of 9.6%, despite challenges in the supply chain affecting both revenue and gross margins. In December, we announced that Rogers selected Harmonic and CableOS to support its next-generation multi-gigabit broadband services. This significant win not only validates our technology leadership but also enhances our market position in North America. Looking ahead, we have strong demand from existing customers deploying CableOS, as well as new clients such as Rogers who are in the early phases of deployment, alongside ongoing efforts to transition additional customers to our platform. Our fourth quarter bookings were largely driven by existing cable customers aiming to secure supplies well into 2022. However, interest from newer customers and new software and service applications continues to grow. We are particularly encouraged by our advancements in the Fiber-to-the-Home application of CableOS. The fourth quarter was notable for new Fiber-to-the-Home wins with existing cable operators, new cable clients, and rural telco customers without cable infrastructure. Additionally, we initiated shipments of our new 60-gig remote switch during the quarter. We believe Fiber-to-the-Home offers a competitive advantage among cable accounts, as our integrated hybrid DOCSIS along with Fiber-to-the-Home solution is both effective and unique. Our ongoing progress in qualifying our Fiber-to-the-Home solution with several Tier 1 cable operators further affirms this value proposition. We also view Fiber-to-the-Home as a significant opportunity to broaden our addressable market. Recent victories in the non-cable operator sector highlight the developing market expansion prospects, and we will continue to increase our Fiber-to-the-Home go-to-market investments in 2022. Overall, we foresee a robust demand environment for both our software and hardware DAA nodes and modules in 2022. This is crucial as it illustrates our growing leadership in end-to-end solutions and market share. However, we must manage supply chain issues, which means our current outlook for 2022 faces supply restrictions and high costs. Despite these obstacles, we are confident in our ability to meet our multiyear revenue and income growth goals. We believe there is an addressable market of over $2 billion, and we are on track to leverage our cloud-native and DAA technology to become the top player in cable broadband while expanding into attractive neighboring applications. The technological, market, and financial advancements we've achieved in 2021, along with our strong sales pipeline in both cable and Fiber-to-the-Home opportunities, indicate we are poised to meet or exceed our broadband access growth targets. Now, turning to our Video segment, we also delivered a solid quarter, rounding off a strong financial and strategic year in Europe. Fourth quarter segment revenue was $86.1 million, reflecting a 25% sequential increase while remaining flat year-over-year. The segment's gross margin was 58.8%, up 260 basis points year-over-year. For the full year, Video segment revenue rose 18.5%, with full-year adjusted EBITDA at 12.6%, driven by robust demand for traditional broadcast applications and excellent progress in our streaming strategy. Streaming revenue for the year, which includes both SaaS and perpetual license sales, reached $48.5 million, marking a 56.5% growth year-over-year. As a reminder, we laid out our multiyear Video business strategic plan last June, which focuses on gaining a leading position in the growing streaming infrastructure market while maximizing revenue from the slowly declining video broadcast market. Our results in 2021 illustrate strong execution in both areas of this plan. The revenue increase on the broadcast side shows that the global broadcast market has significant potential remaining, and we are well-positioned to profitably capture a larger share of this business. While we do not anticipate the surge in demand for broadcast appliances that we saw in 2021 to fully repeat in 2022, we believe there are still good opportunities to profitably leverage the broadcast market for years as we continue to grow our streaming SaaS business. Our investments in the streaming segment have resulted in a steadily increasing number of new accounts and a sustainable growth trajectory. In our third quarter call, we mentioned new streaming SaaS design wins with several Tier 1 media companies, and in the fourth quarter, we have seen a growing number of new services launching on our VOS360 platform. By the end of the year, we delivered over 2,500 live sporting events every month on our VOS360 SaaS. As adoption grows among Tier 1 customers, we have seen increased volume linked to major sports leagues and high-profile events, such as the upcoming Olympic Games, which present demanding content and quality of service requirements that enable our solution to truly excel. Moving forward, we believe our ongoing investments in the streaming platform will continue to drive growth with market-leading content creators and streaming service providers, especially in high-value live sports. Consequently, we anticipate our streaming SaaS revenue will grow over 50% in 2022, staying on track to surpass $100 million in streaming revenue by 2024, with at least two-thirds expected to come from SaaS, as we outlined during our June 2021 Investor Day. In summary, we achieved outstanding results in our Video segment in 2021 and are on course to reach the multiyear strategic transformation and financial performance goals we set, establishing a more differentiated and valuable video streaming business. Now I will hand it over to you, Sanjay, for a detailed look at the financial results and our 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'll be referring to are provided on a non-GAAP basis. As David mentioned earlier, our Q4 press release and earnings presentation includes reconciliations of non-GAAP financial measures to GAAP that are discussed on this call. Both of these are available on our website. For the fourth quarter of 2021, we delivered solid results, near or above the top of our guidance ranges. These results demonstrate the strength of our businesses, which continues to perform well, even with the challenges caused by the pandemic and supply chain landscape. As we enter the new year, we are incredibly proud of everything our teams accomplished in 2021. We have positioned our business for continued long-term success and are excited to build upon this foundation in 2022. Before I run through our quarterly and annual financials in more detail, I'll briefly review some of the highlights on Slide 7. We reported record revenue of $155.8 million, along with solid gross margin and EPS. We also saw strong sustained business momentum with a record book-to-bill ratio which contributed to record backlog and deferred revenue, positioning us well for 2022. For the full year 2021, total revenue was $507.1 million, up 33.9% compared to 2020. Annual revenue in our Cable Access segment was $218.6 million, up 60.4% year-over-year; and Video was $288.5 million, up 19% year-over-year. Now let's review our fourth quarter performance in more detail. Cable Access revenue was $69.7 million, up 53.2% year-over-year, reflecting both the continued ramp-up of existing customers and new customer wins. In our Video segment, we reported Q4 revenue of $86.1 million, up 25.3% sequentially and approximately flat year-over-year. This solid performance reflects continuing broadcast demand, robust revenue from 5G bandwidth reclamation projects, and strong streaming SaaS revenue growth. During the fourth quarter, our total streaming revenues grew 56.5% and subset SaaS revenues grew 133% year-over-year due to increasing usage from existing customers and activation of new customers. We ended Q4 '21 with 112 SaaS customers, 24.4% year-over-year growth. In the quarter, we added 13 new SaaS customers and saw a churn of 2 small deployments. We had 2 customers representing greater than 10% of total revenue during the quarter. Comcast contributed 26% of total revenue and Intelsat contributed 15% of total revenue. As shown earlier, total company gross margins declined by 480 basis points to 50.5% in Q4 '21 compared to 55.3% in Q4 '20. This is due to Cable segment revenues becoming an increasing part of our overall revenue mix. For the full year 2021, Cable segment revenues grew over 60% compared to 2020. Cable Access gross margin for Q4 '21 was consistent with our expectations at 40.3% compared to 42% in Q3 '21 and 53.7% in Q4 '20. Extraordinary supply chain costs related to the pandemic continued to depress margins in 2021 relative to the prior year, with a sequential decline, primarily reflecting high supply chain costs in Q4. Video segment gross margins were 58.8% in Q4 '21 compared to 61.9% in Q3 '21 and 56.2% in the year-ago period. The sequential decrease was due to product mix, while the annual improvement reflects an improved software mix within our appliance category as well as an expanding SaaS business. Moving down the income statement on Slide 9. Q4 '21 operating expenses were $58 million compared to $54.9 million in Q3 '21 and $49.3 million in Q4 '20. The year-over-year increase is primarily due to increased research and development and sales and marketing activities to drive the growth of our Cable Access business. Adjusted EBITDA for Q4 '21 was 15.3% of revenue at $23.8 million, comprised of $6.7 million from Cable Access and $17.1 million from Video. This compares to an adjusted EBITDA of 11.7% of revenue at $14.8 million in Q3 '21 and 20.1% of revenue at $26.4 million in Q4 '20. These all translated to Q4 EPS of $0.16 per share compared to $0.09 per share in Q3 '21 and $0.20 for Q4 '20. We ended the quarter with a diluted weighted average share count of 110.5 million compared to 106.4 million in Q3 '21 and 100.3 million in Q4 '20. The sequential increase is primarily due to convertible debt dilution of 2.3 million shares and the dilutive effect of outstanding RSUs and options by 1.1 million shares, both resulting from an increase in our average stock price in the quarter and 0.7 million shares due to the weighted effect of stock and ESPP shares issued to employees. The year-over-year increase reflects dilution of our convertible debt by 4.2 million shares and the dilutive effect of our outstanding RSUs and options by 1.1 million shares, both resulting from an increase in our average stock price during the quarter and 4.9 million shares due to the weighted effect of stock and ESPP shares issued to employees. Q4 bookings were a record $267.3 million compared to $114.3 million in Q3 '21 and $206.4 million in Q4 '20. We are pleased to report another strong quarter of new bookings demonstrating continued robust demand for our innovative solutions and services. Our book-to-bill ratio was a record 1.7 in Q4 '21, 0.9 in Q3 '21, and 1.6 in Q4 '20. The strong Q4 '21 book-to-bill ratio was primarily due to Cable Access bookings, driven partly by accelerating CableOS deployments and partly by customers ordering ahead to secure supply well into 2022 due to increased lead times in this extraordinary supply chain landscape. The full year 2021 book-to-bill ratio is 1.0 for video and 1.3 for Cable. Turning to Slide 10. We'll now discuss our liquidity position and balance sheet. We ended Q4 with cash of $133.4 million compared to $128.4 million at the end of Q3 '21 and $98.6 million last year. The $5 million sequential increase is comprised of $7.4 million of cash generated from operations, primarily attributable to both Cable Access and Video segment operating profits, net of $2.4 million cash used in purchase of fixed assets. Our days sales outstanding at the end of Q4 was 51 days compared to 54 days at the end of Q3 '21 and 45 days in Q4 2020, all reflecting very healthy collection metrics. Our days inventory on hand was 83 days at the end of Q4 compared to 78 days at the end of Q3 '21 and 54 days at the end of Q4 '20, reflecting increasing inventory at the end of the quarter as we prepare for heavy 2022 shipments. Where possible, we continue to stock up on the inventory at higher-than-normal levels in anticipation of continuing supply chain challenges. At the end of Q4, total backlog and deferred revenue was a record $441 million, up 32.3% sequentially from $333.3 million at Q3 '21 and representing 51.8% growth year-over-year from $290.5 million at Q4 '20. This Q4 backlog and deferred revenue reflects continued growing demand from our large cable customers and increasing video streaming SaaS volume commitments. Note that historically, about 80% to 90% of our backlog and deferred revenue gets converted into revenue within a rolling 1-year period. As mentioned on previous calls, not included in our backlog is additional contractually agreed CableOS business with 3 of our initial Tier 1 cable customers. At the end of Q4 '21, this incremental amount was approximately $104 million, down from $137 million last quarter, and approximately $33 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 approximately $545 million, which continues to provide us with a very solid base for 2022 and beyond. With a strong finish to 2021, I will now share highlights of our progress towards our long-term models for Cable Access and Video segments, which we shared with you during our investor events in June of 2021. Starting with Cable Access on Slide 11. We are making solid progress towards our 2024 revenue and profit goals. In 2021, top line growth was well in excess of our multiyear growth target. Our 2022 outlook further reflects continuing strong revenue growth despite the current supply chain environment. This faster-than-anticipated growth is due in part to higher-than-expected DAA hardware market share and sales. Consequently, gross margins were lower in 2021 due to both extraordinary supply chain costs and product mix, although gross margin dollars remain roughly on track. We expect these trends to continue in 2022. Having said that, when normalizing for these industry-wide issues, our hardware margins continue to improve with volume, and we remain confident in software growth rates we outlined last June. In fact, excluding supply chain costs, our gross margins in 2021 would have been approximately 46%, and we expect this to improve further in 2022. Hence, we expect adjusted EBITDA margins to improve in 2022 and remain in line with the progress anticipated to meet or exceed our 2024 goal. As for the Video segment on Slide 12. 2021 was an outstanding year compared to 2020 and with respect to our 2024 goals. Both revenues and gross margins improved significantly, already approaching our 2024 targets. Broadcast revenue in 2021 was stronger than anticipated and strategically important streaming revenue growth remains on target to achieve our $100 million goal by 2024. Streaming revenue growth is substantially driven by SaaS growth and 2021 SaaS revenues grew 66% over 2020. Looking at adjusted EBITDA margins. While we anticipate a slight step back in 2022 from an exceptional 2021, the overall picture is fully in line with the transformation trajectory plan to achieve our 2024 target. Now with that big picture background, I also want to provide an update on our convertible debt. We have $153.2 million of outstanding convertible debt, of which $37.7 million will mature in December 2022 and $115.5 million will mature in September 2024. In 2021, in light of our expectations for healthy cash generation under our multiyear business model, we made an irrevocable election to redeem the principal amount of these notes in cash upon maturity, thereby eliminating dilution exposure of 6.6 million shares in 2022 and 13.3 million shares in 2024. I'll now turn to our detailed non-GAAP guidance for 2022 beginning on Slide 13. I will first review guidance for full year for our Cable segment, followed by Video segment and then for the full company. To offer some further clarity, as I go through the guidance, I'm going to highlight anticipated effects of certain items included in our 2022 guidance versus 2021 with respect to operating expenses, changes in accounting treatment of SaaS R&D, and income tax rate. For the full year 2022, based on the progress to date, we expect Cable Access to achieve revenue in the range of $295 million to $307 million and gross margins in the range of 41% to 43.6% as we expect continued heavy DAA hardware demand and supply remediations. Gross profit in the range of $121 million to $134 million, operating expenses in the range of $92 million to $96 million, adjusted EBITDA to range from $34 million to $43 million. For our full year 2022 Video segment results we expect revenue in the range of $275 million to $289 million, gross margins in the range of 56.5% to 58.3%, gross profit in the range of $155 million to $168 million, operating expenses in the range of $146 million to $150 million. With a strong pipeline of streaming SaaS opportunities, we are increasing SaaS investments accordingly. Our operating expenses guidance reflects the impact of discontinuing the capitalization of certain SaaS R&D costs and needing to expense these going forward. This change was required because in the fourth quarter of 2021, certain SaaS R&D activities are also supporting some of our broadcast appliance products. We expect this to result in approximately $2 million higher R&D expenses in 2022 compared to 2021, and then higher SaaS gross margins thereafter. Adjusted EBITDA to range from $15 million to $24 million. For total company for the full year '22, we expect revenue in the range of $570 million to $596 million, gross margin in the range of 48.5% to 50.7%, gross profit to range from $276 million to $302 million, operating expenses to range from $238 million to $246 million. Our 2022 operating expenses expectations include approximately $4 million of additional expenses associated with higher-than-normal salary increases and additional planned travels to secure new customer wins. Adjusted EBITDA to range from $49 million to $67 million. EPS to range from $0.26 to $0.40 per share. The net result of additional operating expenses I just mentioned, together with the change in SaaS R&D capitalization and tax rate change, which I will discuss momentarily, results in a $0.05 decrease to our full-year EPS at the low end and a $0.06 decrease at the high end, an effective tax rate of 13%, which is an increase from 10% in 2021. This is primarily due to a reduction of NOLs as we continue to be profitable. The weighted average diluted share count of approximately 112.6 million, reflecting the impact on share carried via our convertible debt and due to stock issuance to employees. Finally, cash at the end of 2022 is expected to come in between $100 million to $110 million, which allows for healthy continued investment in working capital needed for growth. This cash range is net of approximately $38 million that we have committed to pay in cash for the redemption of convertible debt principal due in December 2022, which I mentioned earlier. Now on Slide 14, I'll review our non-GAAP guidance for the first quarter of 2022. For our Cable Access segment in Q1, we expect revenue in the range of $70 million to $80 million; gross margin in the range of 36% to 38%; gross profit in the range from $25 million to $30 million; operating expenses in the range of $22 million to $23 million; adjusted EBITDA to range from $4 million to $8 million. For our Video segment in Q1, we expect revenue in the range of $64 million to $69 million; gross margin in the range of 56% to 57%; gross profit in the range of $36 million to $39 million; operating expenses in the range of $37 million to $38 million; adjusted EBITDA to range from breakeven to a profit of $3 million. For our total company for the first quarter of 2022, we expect revenue in the range of $134 million to $149 million; gross margin in the range of 45.6% to 46.8%; gross profit in the range of $61 million to $69 million; operating expenses to range from $59 million to $61 million; adjusted EBITDA to range from $4 million to $11 million; EPS to range from $0.01 to $0.06, our weighted average diluted share count of approximately 111.7 million. At the end of Q1, cash is expected to range from $110 million to $120 million. In summary, we made significant progress in 2021 to position ourselves for continued business momentum in 2022 and towards attaining our long-term targets. We are very proud of what we have already achieved, and our 2022 outlook remains consistent with the long-term revenue and operating models we shared with you previously. We appreciate your attention today. 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 very much, Sanjay, a lot there. What we'd like to conclude by summarizing our strategic priorities as we enter 2022. For our Cable Access business, our objectives remain, enabling volume deployments with our growing list of Tier 1 customers, winning and scaling with new global operators, and expanding our address market through our unique converged software core for DOCSIS and fiber-to-the-home applications. Our Video segment objectives continue to be accelerating the growth of our streaming SaaS customer base extending the capabilities of our streaming sales to support the requirements of our growing list of top-tier customers and the most valuable content, especially for online sports and capitalizing on a traditional broadcast business to profitably enable these transformations. 2021 was a year of strong, strategic, and financial execution. In 2022, we aim to continue to leverage and extend our industry-leading solutions and create even greater value for our customers and for our shareholders. And with that, I want to thank you all for your support and open up the call for questions.

Our first question comes from Simon Leopold of Raymond James.

You're right, Patrick, there's a lot to consider here. Looking first at the gross margin trends in the Cable Access segment, you've provided a forecast for the first quarter and the entire year. I believe this suggests significant improvement as we progress through the year. I'm trying to understand where you anticipate we will finish 2022 in terms of gross margin in the Cable segment. What factors will contribute to reaching the higher level indicated by the full year guidance, especially since it seems input costs are unlikely to decrease? How much can you increase prices, and to what extent is this due to a shift in mix from hardware to software? Could you provide some insight into the factors and outlook for the Cable Access gross margin? I have a follow-up as well.

Thanks, Simon. There are a couple of points to discuss. First, for Q1, we guided a range in the high 30s, but for the full year, it's close to 43.6% at the high end, falling between 41% and 43%. Overall, we expect margins for the full year to be similar to last year, with a slight improvement if we reach the high end. Starting in Q1, however, margins are a bit lower, but we anticipate they will improve in the later quarters compared to Q1. The lower margins in Q1 are mainly due to the mix and supply chain carryover from last year. As the year progresses, we expect margins to return to a more normal state. It's important to note that supply chain issues have impacted overall margins. Without these issues, I mentioned in my prepared remarks that we could be at 47% instead of the 42.6% we are currently showing. In 2022, despite margins being in a similar range as last year, our supply chain impacts are greater than in 2021, increasing from 4% to possibly 6%. However, these supply chain impacts are being mitigated by price increases we are implementing with our customers, along with economies of scale resulting from growth. So while the margin looks the same, there are many factors influencing these offsets.

And then just as a follow-up here. You've been giving us the metrics in terms of cable modems served and it's kind of had a steady cadence; I don't think you gave us the number of passings. So I'm trying to get a better sense of what is the penetration rate for cable modems? And my sense is that it's not growing that quickly at this point. And I'm just wondering how to think about maybe longer-term trending of the number of modems that should be served given the potential that you can serve.

The number of passings is approximately $60 million. As we reported, we are now serving 4.8 million, so we still remain below 10% of the passings. There has been a modest pickup, which we view as positive. On one hand, we continue to add new customers, including a few new Tier 1s that are still in the early stages. While we believe we are starting to establish a good rhythm with some of our larger customers, we are expanding our market presence. I expect that within this year we may surpass 10% of the passings addressed, but I certainly do not anticipate reaching 20% this year. This is one of the reasons we are confident in the long-term prospects of our business. The demand from our existing customers remains strong and is expected to drive healthy growth over the next several years. Additionally, we anticipate winning more business, which should provide us with a robust growth trajectory for the foreseeable future.

Our next question comes from Steve Frankel of Colliers.

Could you provide some insight into how the supply chain situation has worsened since our last discussion? How confident are you in securing the necessary parts to meet the significant demand ahead? Will this primarily be a cost challenge in determining how much you can pass on, or are there substantial risks in obtaining the materials needed to deliver your products?

There are risks, but we believe we've taken a balanced approach in our forecast today. As mentioned, the outlook we provided is supply limited, with demand exceeding our ability to supply and what we've guided. We've adjusted our expectations based on our experience over the past year, so we're relatively confident we can deliver on what we've outlined. There is potential for upside, but it's too early to make assumptions about that, and we wouldn't recommend doing so. However, what we can supply is likely to be high cost for the entire year. As previously noted, in 2021, we faced price increases and challenges primarily in the second half of the year. Now, as we start 2022, we are dealing with these issues right from the beginning. While some pricing adjustments may help, we face bigger challenges from a full-year perspective. I want to clarify that the situation hasn't significantly worsened since the second half of last year; it hasn't. But we are actively managing it from day one. We feel we have managed it well and will continue to do so, but these issues are present, and we don't expect them to ease before year-end. I'd like to pause here and see if this addresses your questions.

Yes. I think that addressed my question. And then you made two other comments during your prepared remarks. One was it sounded like you might be able to quantify what that supply chain impact was to revenue? Being Q4 you said there were some things that you probably couldn't deliver. And then my second question maybe is a little more color on those comments around, well, beef up travel to go after some potential customer wins? Maybe some color on what that means?

In Q4, we experienced a very modest impact from unfulfilled demand. Our comments about being demand constrained are relative to the guidance and plan we set for the second half of the year. Looking ahead to 2022, we anticipate a strong demand environment and believe we may not be able to fully meet that demand. We are collaborating closely with our customers to cater to their needs, but it appears that the demand realized in 2022 will result in orders that may need to be delivered in 2023. From a long-term view, we’re not losing this business—it's not disappearing—but it suggests that 2022 might not be as robust as it could be. Nevertheless, year-over-year growth remains strong, as reflected in our guidance, and we are proud of what we have accomplished. Increased demand is evident from our success with existing customers and the growing number of new customers we are attracting. Regarding customer engagement, we believe that as the pandemic situation improves, there will be more opportunities for in-person meetings, as many customers are already requesting them. We think these meetings could help us accelerate our market share gains achieved over the past 18 months. Consequently, while our travel and entertainment budget won't return to pre-pandemic levels, our guidance reflects a significant increase compared to 2020 and 2021, all aimed at continuing, if not speeding up, market share gains in both the Cable Access and Video segments.

And would you characterize the CableOS pipeline is something that still has a material number of Tier 1s that you haven't conquered yet? Or were you after the next?

Yes. Our ambition and belief is that we will be number one. I think eventually, we will be present in every Tier 1. It may not happen in 2022, but it will happen. We are actively engaged with virtually every Tier 1 out there. Regarding the 2022 pipeline, while I can't say it's every Tier 1, it is strong overall and includes remaining Tier 1s as well as an increasing number of Tier 2 and Tier 3 operators, both in cable and a growing number of fiber-to-the-home. This aspect of the business remains unchanged. The sales pipeline continues to be strong, and that is one reason we are continuing to invest in our go-to-market strategy.

Our next question comes from Tim Savageaux of Northland Capital Markets.

Congrats on the strong quarter and the impressive bookings and backlog results. My question is related to this. Following your comments about customer acquisition, could you share your latest perspective on the competitive environment? It seems that a couple of your major competitors indicated stagnant growth in cable networking during their Analyst Days late last year, which contrasts with your significant growth. What are your thoughts on this, and how do you view the competitive landscape moving forward as you maintain your market leadership position?

Well, look, we compete against some very good companies that have kind of long histories and a very strong installed base. And we give them a lot of respect, and take them seriously as competitors. That being said, as you know, Tim, for some time, we have continued to believe that we are way out in front on the next generation of technology. And well, some of the public comments that you mentioned were a surprise to some of the market. For us, there are more confirmation of what we think we're seeing day in and day out in the marketplace. So we think we're ahead, and we think that our technology leadership position is not something that can be easily replicated. I think that the experience over the last year or two has demonstrated that doing a completely new cloud-native virtualized access platform is a monumental task that's not a quick R&D program. So we think we're way out in front. And that's why, frankly, hopefully not with Vivado, but in all sincerity, we believe that we can, and we'll ultimately be #1 in this space. That won't happen overnight. There's a lot of installed competitor product out there, et cetera. But from a competitive perspective, we think our position, frankly, has never been stronger.

And to follow up, I guess, maybe you could extend those comments to the PON side of the house as well or maybe you were including them. And going back to the bookings performance in the quarter, I think you mentioned a couple of drivers, both an acceleration in customer deployment activity and maybe some pre-ordering given the supply chain issues. I wonder if you can kind of parse among those two factors. And to what extent did you have you really seen a meaningful step-up in deployment plans, both among your top customers or more broadly?

Okay. Well, let's start with the PON piece of that first. I think it's premature for us to compare our fiber-to-the-home solution with the telecom specialists, who are, let's say, selling to AT&T and Verizon every day. Well, we do think we are increasingly strong and it is in a hybrid converged solution for DOCSIS and PON. It's unique. And it really is a competitive multiplier within cable accounts, which are increasingly themselves going after rural opportunities, business services, and the like. I think we all heard a lot of that on recent conference calls. So when it comes to fiber applications for cable operators, that in and of itself is a significant TAM expansion, and we think we really have something that's truly unique. That being said, going beyond that, we think that our fiber solution is pretty slick. And as I mentioned in the prepared remarks, we've started to see some interesting wins with operators that have no cable infrastructure at all. Now I think it's premature to declare victory there, but it's a pretty encouraging trend. It's something we're leaning into more, and we'll continue to report on as we go forward. Now in terms of the backlog and the fourth quarter bookings, both on in particular, Sanjay talked about, indeed, we saw two things. Number one, we've just got a bigger group of customers, and they're all at various places on kind of accelerating deployment ports. So I wouldn't say it's a market stepped up by anybody, but all of our customers, existing and new are not kind of out of flat deployment curve, but in fact, they're on a parabolic or accelerating deployment curve. So that's part of just what is feeding the overall growth of the business. Now in addition to that, we are in a very difficult supply environment. And our customers are seeing that, not only from us, but from their other suppliers across product categories. And so a number of customers really are working to get out ahead of that. And so we saw from several customers, orders that really look beyond Q1, look into Q2 and in some cases, even into Q3. So it's a mix of those two things that drove the kind of extraordinary order input that we saw in the fourth quarter.

Our next question comes from Ryan Koontz of Needham.

And most of my questions have been answered, but any more color you can share on the supply chain costs here that are impacting Q1 in terms of the types of chips? Are there any logistics costs? Any more color would be helpful. That's the only question I had.

Well, it's all of the above to tell you the truth, Ryan. I think that the components are the big thing, but you're right, component availability comes quickly after that. Light availability drives continuing higher production costs, requiring us to run certain lines late in the quarter around the clock, for example, and airfreight instead of lower-cost transportation. So it's a little bit of everything we're dealing with, but component cost and component availability are really the core of the problem.

Our next question comes from George Notter of Jefferies.

I guess I wanted to ask about pricing increases. I think Patrick, earlier on the call, you mentioned that you guys are starting to mobilize on pricing increases. Could you just talk about how that works with customers, both on the video appliance side? And then also, I guess, on the hardware piece of the Cable Access business, the nodes business, how do you go into large customers like Comcast and negotiate higher pricing? And how much higher do you think you can get in terms of where pricing levels can go?

Thanks for the question, George. I can sense my competitors paying close attention. I can't be too specific about that, but I will say that each larger customer is unique. Therefore, every discussion and existing commercial agreement is distinct. The positive aspect is that we've positioned ourselves increasingly as not just a supplier but a partner. Our conversations are focused not only on sales but also on collaborating to help our customers achieve their goals. For our cable customers, the aim isn't merely to secure a lower price. They are actively providing competitive broadband services to rival AT&T fiber, for example. Thus, we engage in collaborative discussions to ensure timely and efficient delivery. These conversations vary with different operators. I'm pleased to say we are experiencing considerable success in this regard. However, some agreements have yet to take effect or are just starting now in Q1 or were implemented late in Q4. As Sanjay mentioned, we anticipate seeing more benefits throughout 2022, which contributes to improving gross margins beyond our Q1 forecasts. That said, it's a constantly changing situation. We don’t believe we’ve seen the last of surprises, and our customers also acknowledge that surprises are likely to continue. Overall, this ongoing cooperative dialogue is fundamentally rooted in a partnering approach.

Got it. Okay. And then I guess the other one I had was really on CableOS. And I guess I'm trying to drill down a bit in terms of what growth rates and revenue contributions look like there? I ask because you've had a lot of success on cable modem adds, you've gone from, I think, $3.9 million to $4.8 million sequentially, and that's the biggest jump we've seen in, I think, forever in this CableOS business. And then at the same time, the SaaS and service segment isn't growing that much on a year-on-year basis or on a sequential basis. So I guess I'm kind of wondering, are there moving parts in here that I'm missing in terms of what's going on with the Cable Access business and then that SaaS and service revenue line. I guess I'm inferring perhaps that maybe more of the business is coming from Comcast where you have more kind of all-you-can-eat type of pricing structure rather than other customers. Is that the right read? Or am I on the wrong path here?

Not quite, but I appreciate the question. We understand that it's not completely transparent. Currently, our SaaS and service revenue is mainly driven by the Video segment of our business. We have a significant number of video appliances in the market, and a substantial part of our video broadcast business comes from legacy support agreements related to those products. The decline in our services and SaaS revenue is tied to the drop in our broadcast appliance business, although this is being counterbalanced by growth in video SaaS. CableOS is still relatively new, and support revenue from CableOS is currently modest as a percentage of our overall revenue. We’re not breaking down software and services by cable versus video, but to clarify, it's SaaS and support revenue for now. As we've discussed, software revenue in Cable generally grows alongside hardware revenue, except for Comcast due to a unique software license agreement. We're seeing strong cable growth, and the software component is growing as we expected. However, hardware is growing even faster, capturing greater market share and segmenting networks further. We will consider additional ways to provide more clarity on this. For now, rest assured that our software segment in the cable business is performing well, aligned with our projections, and is not affected by supply chain and cost issues impacting hardware.

I'll just add to that, that the SaaS growth, which primarily is for SaaS streaming, we have seen very significant growth in the most recent quarters, 133% up from Q4 year-over-year. And if you look at for the full year, the streaming SaaS is up 60%. So I agree, Patrick, as you said, SaaS and service, nearly for SaaS streaming but for Cable is the support, which is more linked to the hardware growth. So maybe we have to see going forward how we dissect between the two to clarify George's question. But overall, we are on target for SaaS and support for Video as well as our software growth relative to our long-term targets.

I'm showing no further questions at this time. I will turn the call back over to Patrick Harshman for any closing remarks.

Okay. Well, good. We're just about the top of the hour. We appreciate your time today. And more generally, we appreciate all your support of your business. We had a fantastic 2021. Thanks again for your support throughout the year. We're looking forward to an equally exciting 2022. We're excited about the opportunities, and we have the momentum that we have, and we look forward to keeping you all updated as we progress through the year. Thank you very much, everyone. Good day.

Thank you all.

Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.