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Harmonic Inc  (NASDAQ:HLIT)
Q3 2018 Earnings Conference Call
Oct. 29, 2018, 3:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Q3 2018 Harmonic Earnings Conference Call. My name is Candice, and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference call is being recorded.

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

Nicole Noutsios -- Investor Relations

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

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

Now turning to slide two. 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 items, together with corresponding GAAP numbers and a reconciliation to GAAP, are contained in today's press release, which we've posted on our website and filed with SEC on Form 8-K.

We also -- we'll also discuss historical, financial and other statistical information regarding our business and operations and some of those information is included in the press release. But the remainder of information will be available on recorded version of this call or on our website.

Now I'll turn the call over to our CEO, Patrick Harshman.

Patrick Harshman -- President and Chief Executive Officer

Well, thanks, Nicole, and welcome everyone to our Q3 call. We're pleased to again be reporting a positive quarter with solid year-over-year financial and business progress enabled by the ongoing success of our strategic CableOS and video software and SaaS transformation. Specifically, continued CableOS progress delivered 153% year-over-year revenue growth for Cable Access segment, while combination of solid over the top streaming and ultra high definition sales grew 7.2% operating income for Video segment. Other notable corporate financial highlights include 11% year-over-year revenue growth, 5.6% operating income and a $7.6 million cash increase to our balance sheet.

Taking a closer look at our Cable Access segment, CableOS success continues to steadily build, and we expanded the combined number of commercial deployments and field trials to 25 customers, up from 20 reported last quarter. Among these, we publicly announced last week our deployment with Buckeye Broadband who've migrated 100% although greater than 120,000 subscriber broadband service footprint from competitor systems to CableOS. This is a compelling case study as CableOS enabled both the introduction of new gigabit services for Buckeye's residential and business customers, and behind the scenes significant operational efficiencies to the consolidation of approximately 15 former CMTS sites to a single CMTS operational center where CableOS software is running a dense Commercial off-the-shelf servers. Buckeye has been a great business partner, communicating openly about the benefits of this CableOS powered DOCSIS 3.1 upgrade, garnering a lot of positive attention at last week's annual cable industry conference in Atlanta. Including this Buckeye Broadband Deployment, CableOS has now actively delivering broadband service to over 480,000 cable modems worldwide, up 20% from last quarter. And let me be clear, this is over 480,000 live 24/7 consumers and business customers who are paying for and receiving broadband service that is being delivered through CableOS. The key takeaway here is the CableOS's virtualized software architecture can and is being successfully deployed and operated at scale, delivering significant benefits to our early customers.

Another positive milestone attained during the quarter was the commencement of volume shipments of our new Remote PHY nodes for Distributed Access Architecture, also known as DAA. Specifically, no shipments were up 174% from Q2 contributing materially to Q3's record CableOS revenue. The nodes were in the process of being deployed in the field by our customers, and once installed, would be followed by companion CableOS software license sales.

Coming out of last week's cable industry conference, there's no question the DAA is going to become a major part of cables future, and that we are establishing ourselves as the industry leader in DAA. So all this activity continues to drive a positive financial trajectory. Segment revenue was $28 million, up a 153% year-over-year and 39% sequentially and operating profit was 1.5%, our second consecutive cable access segment profit. In our strategic design wins and project pipeline continue to support attainment of approximately $100 million of revenue in 2018 and continued growth in 2019. So looking ahead, global customer feedback during the recent cable event in Atlanta made it clear that the combination of our technology leadership, our initial wave of wins with influential customers, increasing market understanding of the advantages of both virtualized and distributed access solutions and ongoing expertise and successfully deploying these solutions all position Harmonic uniquely to be the market leader in the next generation of scalable Cable Access.

Okay. So turning now to our Video segment. Here also we are seeing continuing evidence of our strategic initiatives gaining momentum in the marketplace and driving consistently improved financial performance. Video segment operating income was 7.2%, making Q3 the fifth consecutive quarter of positive segment operating income. Enabling this operating profit consistency, segment gross margin was 57%, reflecting an improving mix of software sales. Looking ahead, we continue to carry forward strong Video segment backlog and deferred revenue, enabling segment visibility and performance consistency. Underpinning this more consistent financial performance is the transformation of our historically broadcast-centric appliance business to a more profitable and predictable over the top streaming software and SaaS business. Demonstrating that the strategic transformation is on track, Harmonic has now deployed over 35,000 high-quality live and linear over the top streaming channels worldwide, up 4% sequentially and 23% year-over-year, further strengthening our position in the growing live premium video streaming space.

Staying with the theme of quality, during Q3 we also saw continued demand for ultra-high-definition solutions. UHD related sales in the third quarter were up 138% sequentially, which is particularly impressive when we recall the Q2 UHD sales were up 200% year-over-year. We're well positioned to take advantage of growing worldwide interest in deploying and monetizing high quality ultra-high-definition programing.

Also key to our video strategy is expanding our addressable market through our new cloud-based SaaS offerings. Raising our visibility in the streaming world and leveraging the combination of our market leading ultra-high-definition and SaaS capabilities, we've recently partnered with NASA and Roku to launch a new streaming channel based stunningly beautiful NASA content. Since this channel was launched in September, the app on Roku has been installed over 58,000 times.

Leveraging this video technology leadership positioning and following a land and expand approach to new business development, we're pleased to report that the number of active revenue generating video SaaS customers has grown to nearly 20, up 200% year-over-year.

So, look, in summary, in both our Cable Access and Video business segments, we continue to make excellent progress in bringing truly differentiated and relevant solutions to market, and, as a result, in improving our financial performance.

And on that note, I'll now turn the call over to Sanjay for more detailed discussion of our financial results and outlook.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

Thanks, Patrick, and thank you all for joining our call this afternoon.

Before I share with you my detailed quarterly remarks, I would like to remind you that the financial results I'll be referring to are provided on a non-GAAP basis. As you just heard from Patrick, our third quarter performance was solid. We are pleased that we sequentially delivered a profitable quarter in both of our segments, supported by strong results across a number of key financial metrics.

Revenue and gross margins were at high-end, while our operating expenses came in below our guidance range. This resulted in a profitable quarter with EPS exceeding expectations. This was coupled with strong balance sheet and an improved cash position. This performance marks five consecutive quarters of solid financial and strategic execution.

As we turn to slide six to review our Q3 results, revenue was $101.4 million near the high end of our guidance. This is compared to $99.4 million in Q2 '18 and $91.6 million in Q3 '17, resulting in 2% quarter-over-quarter growth and 11% year-over-year growth. This top line growth is primarily due to our Cable Access segment. Cable Access revenue was $28.1 million compared to $20.2 million in Q2 and $7.5 million in the year ago period, resulting in a 39% quarter-over-quarter and 153% year-over-year growth. As you have seen, activity in our Cable Access segment has been progressing steadily throughout 2018. Of particular note, in Q3, there was a sequential increase of 174% in shipments of CableOS nodes for new Distributed Access Architectures, underscoring and expanding addressable market opportunity for our Cable Access segment. Video revenue was $73.3 million compared to $79.2 million in Q2 and $84.2 million in the same quarter last year. As a reminder, Q3 is typically a weaker quarter seasonally. The last year being an exception when we saw video revenue catch-up after a very slow first half of the year.

Consistent with the past two quarters, in Q3 we had one greater than 10% revenue customer, Comcast, who contributed 16% of total revenue. Gross margin was 52.1% in Q3 compared to 54% in Q2 and 53.4% in Q3 '17. Cable Access gross margin was 38.7% in Q3 compared to 50.3% in Q2 and 9.2% in Q3 '17. The sequential decrease in gross margin reflects the increased mix of DAA node shipments, which go out the door before corresponding CableOS software licenses, which customers prefer to take just in time after the node have been deployed in the field. So, to be clear, as field installation of nodes ramp up, and as enabling CableOS core software turned on, the blended Cable Access margins are expected to improve.

Video segment gross margin was 57.2% in Q3 versus 55% in Q2 and 57.4% in Q3 '17. The sequential increase reflects an improved mix of video software as expected in our ongoing video business transition. We maintain strong expense control without compromising our strategic growth investments. As a result, our Q3 operating expenses were $47.2 million below our guidance range of $49 million to $50 million, consistent with recent operating expenses of $47 million in Q2 and $47.7 million in Q3 '17. Q3 operating income of $5.7 million was primarily driven by our Video segment, which contributed $5.3 million and 7.2% operating margin in the quarter. This marks five consecutive quarters of video operating profitability.

Also, we are pleased that our Cable Access segment was sequentially profitable, generating approximately $400,000 of profit this quarter compared to $500,000 profit in the prior quarter, despite increasing our Cable Access R&D spending during the quarter. Total Q3 operating income of $5.7 million compares to $6.8 million in Q2 and $1.3 million in Q3 '17.

Q3 EPS was $0.04 compared to Q2 EPS of $0.05 and the loss of $0.01 in Q3 '17. This year-over-year EPS improvement was driven primarily by our Cable segment turning around from an operating loss to an operating profit, and overall vigilant cost management. We ended Q3 with a weighted average diluted share count of $87.8 million compared to $85.8 million in Q2 and $81.4 million in Q3 '17. The increase of approximately 2 million shares is mainly due to the issuance of approximately 1 million shares of ESPP and performance-based employees RSUs, and of approximately 1 million shares of previously granted RUSs options and warrants becoming in the money this quarter. Note, this quarter we also saw some dilutive effect due to Comcast warrants, which vested as we successfully achieved the critical field trial acceptance milestone for which we filed an 8-K in early August.

Q3 bookings were $79.5 million compared to $107.9 million in Q2 and $96 million in Q3 '17, resulting in a book to bill ratio of 0.8. This booking result was in line with our expectations. Since, as mentioned previously, Q3 is typically seasonally slow, especially internationally due to summer vacations and due to timing of support contract renewals. We ended the quarter with backlog and deferred revenue of $207.6 million, down 10% sequentially, but still up 3% year-over-year and near the high-end of what we have seen historically.

I would like to now provide some context regarding the impact of SaaS activity on our Video segment results. Specifically, total contract value or TCV of Q3 SaaS bookings was $4 million compared to $6 million in Q2. Total ARR for SaaS was $9.7 million at the end of Q3 compared to $9.6 million at the end of Q2. Our ARR is comprised of subscriptions and related professional services. Subscriptions related ARR increased from $8.6 million in Q2 to $9.3 million in Q3, and subscription-related professional services decreased from $1 million in Q2 to $400,000 in Q3. This 8% increase in subscription-based ARR reflects both an increasing SaaS customer base and increased usage of our SaaS offerings. As Patrick pointed out earlier on the call, our SaaS customers grew by 200% year-over-year.

Looking ahead for the full year 2018, we believe that total SaaS bookings will continue to be approximately 3% to 4% of total bookings. We believe we are still in early stages of our SaaS evolution as we continue to grow and expand our installed base. As I have noted on our previous calls, we enhanced the financial transparency of two operating segments during the fourth quarter of 2017. Historically, we employ an aggregate allocation methodology based on total revenues to actually build professional services revenue and sales expenses between our Video and Cable Access segments. Beginning in the fourth quarter of 2017, we adopted a more precise attribution methodology as the activities relating to selling and supporting our CableOS solutions have become increasingly distinct from those of our video solutions. Since this change was made starting Q4 2017, our sequential operating segment results have been directly comparable without any adjustment. However, for year-over-year comparison of operating segment results, we need to retroactively apply the new attribution methodology to Q3 2017 results. This decrease is the reported Q3 '17 operating income of our Video segment by $2.7 million, while narrowing the operating loss of our Cable Access segment, without, of course, any impact to the total combined company result. Therefore, with this adjustment of our Cable Access segment revenue and margins, both increased 153% on a year-over-year basis.

I will now move to our liquidity position and balance sheet on slide seven. As mentioned previously, at the end of Q3, backlog and deferred revenue was $207.6 million, this compares to $230.4 million in Q2 and $200.9 million in Q3 '17. We ended Q3 with cash of $61.7 million. This compares to $54.1 million at the end of Q2 and $50 million at the end of Q3 '17. The sequential increase in cash of $7.6 million primarily reflects cash generated from operations of $2.4 million and net cash generated from financing activities of $5.2 million. Our days sales outstanding at the end of Q3 were 70 days as compared to 75 days in Q2 and 70 days at the end of Q3 '17. Our days inventory on hand were 43 days at the end of Q3, compared to 45 days at that end of Q2 and 67 days at the end of Q3 '17.

In summary, while we have lot of work ahead of us, overall, I'm encouraged by our third quarter results and our year-to-date performance which we have delivered while remaining committed to our mid to long-term value creation opportunity.

Now let's turn to slide eight of our Q4 non-GAAP guidance. For Q4 '18, we expect revenue in the range of $105 million to $118 million with Video revenue in the range of $80 million to $83 million and Cable Access revenue in the range of $25 million to $35 million. Gross margin in the range of 49% to 50%, operating expenses to range from $49 million to $50 million. Operating income to range from $2.2 million to $9.6 million. EPS to range from $0.01 to $0.07, and effective tax rate of 16%, our weighted average diluted share count of $89.2 million, and finally, cash at the end of Q4 is expected to range from $55 million to $65 million.

I want to pause here and provide a little more color on our Cable Access revenue range. Consistent with the trend of past two quarters, we expected shipments of DAA nodes to steadily grow again sequentially in Q4, which is positive news. What is somewhat lesser than is the quantity of nodes which need to be shipped as demand is dependent on the pace at which previously shipped nodes will be deployed in the field and correspondingly then associated CableOS core software licenses will be purchased and turn on. Hence, this beginning ramp of volume DAA deployment and associated operational learning curve demands a wider Cable Access guidance range than in the prior quarters. As DAA becomes more mature, we expect revenue timing visibility to improve.

Moving to slide nine for full 2018. We now expect total revenue in the range of $396 million to $409 million with video revenue in the range of $304 million to $307 million, and Cable Access revenue in the range of $92 million to $102 million. This compares to our prior guidance of $388 million to $411 million where video revenue contributed $296 million to $309 million, and Cable Access contributed $92 million to $102 million. Gross margins in the range of 52.5% to 53%, marginally better than our prior guidance of 52% to 53%. Operating expenses to range from $192.5 million to $193.5 million, improved from our prior guidance of $195 million to $197 million, primarily due to strong expense management. Operating profit to range from $15.1 million to $22.5 million, improved from our prior guidance of $6 million to $24 million, primarily due to improved gross margins and reduced operating expenses. EPS to range from a profit of $0.09 to a profit of $0.16, improved from our prior guidance of a loss of $0.01 to a profit of $0.16, an effective tax rate of 16% and a weighted average share account of $86.9 million diluted shares. We expect cash to range from $55 million to $65 million, improved from our prior guidance of $50 million to $60 million. As a result, the only notable changes to full year guidance which we provided in our last earnings call in July. Narrowing our video revenue range by $8 million at the low end and $2 million at the high end. Narrowing operating income by $9.1 million at the low end and $1.5 million at the high end. Improving our EPS low end by range of $0.10 with no change at the high end, and increasing our cash guidance range by $5 million. As a reminder, there is no change to our annual cable guidance of $92 million to $102 million.

Before I conclude, I would like to inform you that with our proactive planning around potential tariffs, we do not expect any significant impact from tariffs to or financial results.

I would like to conclude by stating that we have delivered five strong consecutive quarters, both strategically and financially, and the outlook for Q4 remains positive. We remain focused on executing our strategic initiatives and delivering long-term profitable growth and shareholder value.

So with that, thank you all and back to you, Patrick.

Patrick Harshman -- President and Chief Executive Officer

Okay. Thanks, Sanjay. I want to wrap it up by again highlighting our strategic priorities. For our Cable Access business, objective number one is to continue to successfully scale our first wave of CableOS deployments. Leveraging our growing CableOS market momentum, adjusted number two is to secure new design wins with additional operators, both Tier 1 and mid-size customers, such as Buckeye Broadband. And as cable operator investment plan to DAA solidify, objective number three is to establish ourselves as the clear technology and market share leader in DAA.

Turning to our Video segment, objective number one is to continue to grow over the top streaming solutions across media and service provider verticals. Objective number two is to leverage our SaaS offerings to expand our addressed market, tapping into new higher growth customers and business models. And objective number three is to deliver consistent segment profitability as we have done over the past five quarters. Our commitment to these priorities has enabled clear strategic and financial progress for the first three quarters of 2018 and continuing confidence in driving renewed growth, profitability and shareholder value.

I'd like to thank our global employees for their creativity and commitment, our strategic customers for their partnership and our shareholders for their continued support.

Let's now open up the call for questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from James Kisner of Loop Capital Markets. Your line is now open.

James Kisner -- Loop Capital Markets -- Analyst

Hi. Thanks so much for taking my questions. So just want to clarify first your comments regarding the guidance for Q4 and Cable Access in that wide range. Is that wide range more related to just besides of inter-quarter bookings or are there some significant slugs of revenue in there that are awaiting revenue recognition? I just want to kind of understand those dynamics.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

So James, thanks for the question. I think there are two things which I have pointed out in my prepared remarks, and I'll provide little bit more color. The range of 10 million entails two things, which we are going to get clarity on as we progress in the quarter, but we believe it's going to fall within this range. One is the quantity of nodes, which we will ship for the DAA nodes we talked about. We have seen sequentially the quantity is going up from Q1 to Q2 and Q2 to Q3, Q3 to Q4 also we expect that to go up, but how much that's going to go up is that something which we are still trying to nail down to the precision. At the same time that's also dependent on the way our customers are going to deploy those nodes in the field. And once the deployment continues at a certain pace, we will ship more nodes, and then the corresponding software licenses, which will follow it would also come after that. So this range of 10 million entails both these things, the quantity of nodes as well as the CableOS software which will kick in only after deployments are completed.

James Kisner -- Loop Capital Markets -- Analyst

Okay. That helps. Also just sort of, (inaudible) I'm wondering to what the gross margin petition? It seems like kind of modeling the video margin flattish that you could have something sub 35% and in the Cable Edge business, and it sounds like that's really temporary given that you don't have a lot of experience in CableOS. I mean it seems like this should be an anomalous quarters that correct, like from here, could this state this level for several quarters into CableOS and how should we think about that Cable Edge gross margin given your guidance for Q4 just sort of in a longer-term basis.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

Yeah, Jim. So you're right. In terms of total margins for the quarter, we are guiding 49% to 50% and you know video is close to 55% in that calculation. And as you have seen throughout Q1 to Q3, getting 57.5% to 57.2% and 55% in Q2, I think a range of 55% for video is totally reasonable. But in terms of cable, you know the mix shift and together with the guidance range of revenue we entailed which includes nodes as well as software. Currently, we are anticipating close to high '30s because that's what we experienced in Q3 as well. And you're right, this is temporary we believe as far as software component is not in this. But as software component starts kicking in over period of couple quarters, we would expect the gross margins to return or rebound and get back to what we had shown earlier in Q1 and Q2.

James Kisner -- Loop Capital Markets -- Analyst

Okay. That helps a lot. Just a couple more quick ones and I'll pass it. Do you have any thoughts on just, and this is a brand new cycle for you with any thoughts about Q1 seasonality at this point might it be more or less seasonal than typical. I mean, nodes I think a pretty weak usually seasonally in Q1, do you have any thoughts at all on seasonality?

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

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

James Kisner -- Loop Capital Markets -- Analyst

Okay, just last one. I guess on this 25 trials, it's a nice increase that five more within that 25, do you see more about kind of how some of these are progressing toward actual wins? I mean, does it feel like there's any kind of quantity but you should can give us some number of trials that have been completed or just this number it's just hard to understand the meaning of that and maybe talk about our conversion rate to accept insist and then also just in this -- in terms of cable moments deployed, how much have you recognized? And is there a point you think some point you're going to see a pretty significant inflection in number of modems supported or is that just going to smoothly grind high rated has less couple of quarters, and I'll pass it. Thank you.

Patrick Harshman -- President and Chief Executive Officer

Yes. So, James, I'll read it. It's a little hard to generalize, so every operator -- cable operator kind of goes about things a little bit differently. But to be clear, we think nearly 0.5 million on live apps and consumers or business customers are being sold through CableOS is a pretty material milestone. Indeed that volume is actually being addressed by less than half of the 25 deployments and advanced trials that we've talked about here. So under the umbrella of 25, assuming they all move to volume deployment, we see a significant amount of business latent there in the pipeline.

In some cases, I mean we talked about a large customer contract of over 50 million, I think a quarter or two ago, I can't even recall, that customer we're still working toward our initial deployment and that reflect at all in the 480,000 consumers. On the other hand, we -- Buckeye Broadband as I said come along and it's pretty exciting that they flip to 100% of their footprint in volume deployment to CableOS. So it's a little bit of a mixed bag in terms of the different approach, different cable operators have to evaluating, testing and then deploying in the field CableOS.

I think the real thing to take away is that number one, it's working at scale, that's for sure. And number two, that the number of customers who is getting deeply engaged with us, either in terms of full on deployment or whether it's advanced field trials is growing to be a significant number and what after all is a fairly concentrated industry. So where we continue to be excited by the uptake, the real-time energy that our customers are putting into evaluate and early deployments of CableOS and we -- as I said earlier, we think that this pipeline of activity where Sanjay said, we're not giving you a quantitative view on 2019, but we definitely, I think that the future continues to look bright for CableOS.

James Kisner -- Loop Capital Markets -- Analyst

Thank you so much.

Patrick Harshman -- President and Chief Executive Officer

Thank you, James.

Operator

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

George Notter -- Jefferies -- Analyst

Hi, there. Thanks very much guys. I guess I wanted to keep going on CableOS. I think one of the marquee opportunities for you guys there's with your largest customer, you got a warranty all out there as well. Any new milestones, obviously you guys talked about the one back in August with I think you called it field trials, but anything more to say there in terms of the progress with that customer or potential for breaching additional thresholds and milestones coming up through the balance of the year. And then also wanted to go back to the deferred revenue and backlog figure. I think you said $230 million which I think was down versus $206 million. Can you talk about what drove that delta sequentially in deferred revenue and backlog? Thanks.

Patrick Harshman -- President and Chief Executive Officer

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

I would say though that the Comcast as well as a number of other operators who were the recent cable show in Atlanta and for us and several other executives spoke at some length as part of the conference, and I think you'll find a lot of interesting commentary about what they're aiming for, what they're doing technologically. In fact, just today there is a pretty interesting right up in FierceTelecom, Comcast executives reflecting on lessons learned from deploying virtualized CMTS, so this is a situation where we're going to have to let them speak for themselves. But the good news is, I think there are some interesting stuff out there to be gleaned from. And I will turn the second part over to you Sanjay.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

Yeah. So, George, I'll get back to your question on warrants. So the two milestones, one was originally when we signed the deal, and the second one feel acceptance harvested (ph). The remaining other milestones which were detailed in the 8-K we filed in September 2016 are not at all technology acceptance related, they are all commercial lead -- based on commercial business, so technology risk is behind us, it's all about deployment. And other remaining warrants have not been vested yet, and once they vest we will make a public announcement for that as well as we did for the previous vesting.

I'll also -- color on the other part of the question on backlog. The backlog actually was $207.6 million at Q3 and it has dropped from Q2. Q2 was $230.4 million. But this drove a backlog is totally within our expectations. Q3 seasonally has been a low bookings quarter as I mentioned in the prepared remarks. We do generally eat up from backlog in Q3, but the book to bill ratio has usually been more than one, and we actually build it up, but in Q3 we eat it up. So it's a part of the normal seasonality we have seen. And in Q4, we are expecting that trend to continue as well.

George Notter -- Jefferies -- Analyst

And the back log (inaudible) is up year-over-year I think is an award metric.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

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

George Notter -- Jefferies -- Analyst

Okay. I'm sorry. And in the deferred revenue backlog you would anticipate would be up sequentially of course in Q4 seasonally.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

Well, seasonally there, it could be -- the book to the ratio would be 1 or 0.9 (ph) usually fluctuate and we will have to see, but it's going to be between 9 -- 0.9 and 1.1.

George Notter -- Jefferies -- Analyst

Okay, got it.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

We generally don't guide to the bookings number, but it's in the range of 0.9 to 1.1.

George Notter -- Jefferies -- Analyst

Got it. Fair enough. Thank you.

Operator

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

Simon Leopold -- Raymond James -- Analyst

Great, thanks for taking my question. I wanted to touch on the mix expectations on the Cable Access business. You've talked about the wide range and I just want to get a better understanding of the gross margin implication for that, because I think when you're suggesting gross margin by segment, you talked about Cable Access being high 30s again, and I'm sort of struggling with what would be on the high end. So if you do get to that $35 million, is that the assumption that you have more licenses and therefore that should be a higher gross margin or if you get to the $35 million of Cable Access in the fourth quarter, should we think of it as net gross margin dilutive? I'm just sort of trying to think about the mix within the mix question.

Patrick Harshman -- President and Chief Executive Officer

Well, I'll tell you what -- I'll give you the CEO answer and then, I understand the struggle in terms of building a model, but the truth is, there is not just one answer to that assignment. There is a scenario where the node -- the node demand really takes off and we could imagine getting the $35 million largely on nodes. So there is a scenario where we're high end on revenue, yet the margin is low, because it's still tilted toward hardware. There is a different scenario. Let me call it kind of modest upside in nodes, but were modest upside in hardware, but then actually good progress is made deploying those nodes and so we also see incremental approaches of the associated software licenses. So there is a slightly different mix formula for getting to the high end of the range and that would give a different gross margin result. And what we're trying to be very transparent about is that, I think it's still early days and I think you see this again also from our customers own statements, they're working out a lot of the operational issues associated with DAA, and so there's a number of different mix scenarios that can play out. And so we are acknowledging that it's still early days. There's a couple of different scenarios -- deployment scenarios that can underpin this range, and yes, those different scenarios actually correspond to slightly different gross margin ranges as well. So I think it creates a little bit of a challenge for all of us and precisely model in Q4, and I think we just want to acknowledge that, but take a step back. I think it's all goodness. I mean frankly it's not that long ago that people were saying DAA it's still several years off, it's not possible and the fact that we're sitting here today talking about ramping shipments of DAA being a reality, that our customers are talking about it being a reality at this recent trade show. I will take the uncertainty of the next quarter or two any day in exchange for the fact that the train feels like it's leaving the station.

Simon Leopold -- Raymond James -- Analyst

And that actually dovetails nicely into my following question which is that last earnings period for the June ending quarter, one of your competitors talked about the DAA opportunities sliding out into 2019, and it sounds like you're probably more upbeat about DAA happening. I'm wondering to what extent you can look at the industry overall, and to what degree are you seeing yourself gaining share or would you characterize this is simply your customer mix might be different than your competitors customers? How do you think about the sort of company-specific versus industry trend? Thanks.

Patrick Harshman -- President and Chief Executive Officer

Yeah, I think all good questions and candidly not ones that we have super crisp answers for Simon. But I mean I'll take a step back. There's no question, but the DAA is coming and as coming industry ride. And for those who want to dig deeper, I'd point to a recent CAGN (ph) modeling that is been done by the industry and a couple of our customers, specifically referenced. And there we see a non-trivial proportion of the new people access spend projected over the next couple of years lush into DAA. I do think underneath that different customers are progressing at different paces. So we have one large customer who I think kind of recent heavy reading webinar. So they're going to be beginning rolling out in volume in the fourth quarter of this year. We don't think that's every MSO by any means. But certainly there are some who are leaning into it and leaning into it heavily.

So I guess you also asked about market share. I mean to me this is kind of, it's a brand new blue water kind of scenario. So it's -- I don't think the best analogy, but I mean, it's a little bit from our perspective, it's more of a question of land grab initially than it is kind of market shares sloshing around. We think this is a new space. So we think we've got a significant technological advantages and we also think we've got an operational deployment experience head start with at least a couple of the early adopter operators. So it's a new space, it's growing, it's not growing as kind of uniformly across all the operators, but there's a couple of big ones who are quite aggressive and we think that we're positioned at the right place to be capturing a kind of a pole position, kind of from day one here. And it doesn't mean our visibility is perfect, but it does mean that we can see it moving in the -- I think our Q3 results speak to the fact that we're pushing product out the door, specifically in the service of this activity.

Simon Leopold -- Raymond James -- Analyst

Great. Thank you for taking my questions.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

Thank you, Simon.

Operator

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

Steven Frankel -- Dougherty -- Analyst

Good afternoon. Patrick, I'd like to go back to CableOS and this notion of you have 25 customers in some form of deployment or field trial and maybe if you could give us a feel for how many customers have completed their field trials and have there been any cases of a customer doing that and not talking to you about moving forward with the deployment?

Patrick Harshman -- President and Chief Executive Officer

The answer to the last part of the question is, no, but to be clear there some who are moving more quickly and aggressively than others. Nobody has said yeah, that's not for us, but I think the question is out there for several operators exactly with what pace they'll be rolling out. We talked about 480,000 and consumers being fed, Steve. And that's a -- the majority of that is a minority of the 25 that we're engaged with so far, so there's only a couple that have really deployed in real volume, but we're encouraged by a number of engagements, both those that have hit volume in the field and those that are like say building toward that. So it's a little bit all over the map with the different operators, but as I said earlier, we're encouraged by the logos if you will, and the encouraging progress we're receiving across the board, as well as having hit this volume milestone of nearly 0.5 million consumers being fed active commercially right now.

Steven Frankel -- Dougherty -- Analyst

And you've obviously talked a lot in your guidance about this visibility issue around nodes, how do you get a handle on that intra-quarter? Are you getting any feedback or any visibility into node actually being deployed or your feedback is simply going to be they call up in order software and that's how you know you've kind of move from one milestones to the next.

Patrick Harshman -- President and Chief Executive Officer

No, we're working very closely with our customers on this. I mean it is new technology, and so, I think we and our customers are learning as we go. I know if you call it the bleeding edge, but it's certainly the leading edge, and I think we will be open about the fact that there's a lot of learning and discovery going on. I mean, it's a little bit painful, but I think that's what happens when you're leading this. The good news is we're acquiring those experiences that I think are operationally part of the value proposition, we're breeding -- we'll be bringing to the next round of customers. So now we're actively engaged in what's happening in the field, across all of our customer accounts and so there is a heavy dialog between our deployment team, our support -- field support team, our account management organization and the rest of the company.

Steven Frankel -- Dougherty -- Analyst

And if I go back to beginning of the year, I had some discussions with you and others that Harmonic and there was this notion that nodes or commodities and we don't really care in the end, if we get the node as long as we get the software. But it sounds like you've really captured a lot of mind share in the node business and you're talking some good numbers here, has that changed over time, and now you want to sell nodes in every case that you can ?

Patrick Harshman -- President and Chief Executive Officer

Well, we are looking to grow the business however we can. There's no doubt that the nodes are a lower margin, lower gross profit, element of the solution. That being said, particularly in early days and although that we've been involved in a lot of inter-operability testing, the early customers just wanted to work, so I think there's a lot of value and bringing the whole NON solution, so that's one piece of it.

And, but certainly another piece of it is for every node that we deliver, we believe that there is a virtualized CMTS or software license that's going to come. And so from that perspective, we're happy to get them out. They are into and to get to these early DAA systems going not only because of the gross margin profit associated with the node itself, but also because of the companion a license, and as Sanjay was saying earlier, if you think about this business on a blended basis, the blended margin point is quite interesting. And early days we see the about node volume curve out in front of the software license piece of it, but the licenses will come and on a steady state going forward business, it's an attractive blended business.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

I just add to it that the nodes are very much feel accretive to our margin dollars as well as to the bottom line. And you know, like for example, in Q2 for Cable Access we saw a margin of approximately 50%, this time is 39%. So it's always a mix of nodes and software. And as far as they are accretive and adding to the bottom line, we will go for it. And as we scale the more, we should improve those margins as well. So I think it's a good business to be in.

Steven Frankel -- Dougherty -- Analyst

Okay, great. And then Sanjay, I don't want to leave you out. So in terms of your cash guidance for Q4, in what scenario gets to the low end. It would seem to me like Q4 would be a cash generation quarter but that's not necessarily implied in your guidance if I have the numbers correct.

It should be Steve. What we are seeing is, as there is this 10 million range and how much of cash we would need to give for working capital changes, that is something we are keeping a reserve for. Otherwise, if that equation goes well, we should be in the middle close to the high end, but there is a working capital piece which we are not very clear on, that's what the reason is.

And then you mentioned that you kind of engineered your way around the tariff, has that come at any gross margin cost or you kind of -- you had enough visibility to this, you're able to do this without sacrificing gross margin.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

Not at all, no impact on gross margin.

Steven Frankel -- Dougherty -- Analyst

Okay, great. Thank you.

Patrick Harshman -- President and Chief Executive Officer

Thank you, Steve.

Operator

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

Tim Savageaux -- Northland Capital Markets -- Analyst

Hi, good afternoon, and glad I made it on busy call.

Patrick Harshman -- President and Chief Executive Officer

Good afternoon. Thanks, Tim.

Tim Savageaux -- Northland Capital Markets -- Analyst

Hey Patrick and congrats on the ongoing cable ramp kind of way being focus of my first question which is to say, if you look at what you saw sequentially in terms of Cable Access growth, that was a pretty sharp increase. It looks as if Comcast overall at a customer was just up slightly. So I wonder if we could look at those two facts and conclude that your Cable Access business is diversifying a bit, and what are your expectations there for how important large Tier 1 operators will be in the overall mix of business over time versus what seems to be a growing number of Tier 2 and even Tier 3 type operator opportunities that in the aggregate look like they could be pretty material too.

Patrick Harshman -- President and Chief Executive Officer

I think it's a good question or a good observation. We were quite clear that early on the focus was on Tier 1 not only because that's like the bank robber, so that's where the biggest volume is, the money is, but also because in this industry the Tier 1s are influential. That being said, we have expanded out and I think the Buckeye case study is a great one. A medium size operator who very forward-looking and absolutely great to win for us and highly respected operator and engineering team here in the US in particular and influential. So we were definitely spreading our wings. And I mean maybe it's an easy answer, but longer term, I expect our revenue to somewhat be proportional to where the subscribers are. Certainly in the concentrated industry with a couple of big players domestically a couple of really big players in Europe, et cetera, our aim is to do well with the biggest players. But equally half the market is -- at least half the market is what I'd call the mid-size and smaller operators. And in many instances those smaller operators are -- can be more aggressive about embracing newer technology, taking advantage of real efficiencies, and in many cases, they are the ones who have to fight the hardest in terms of competitive dynamics of competing against a telco services coming 5G, what have you.

And so we're actually impressed by the residents we're seeing with what I'd call the medium and smaller sized operators, both in this country and in other countries. And so it's over time we're excited about not only the Tier 1 opportunity but the other guys as well as your question suggests.

Tim Savageaux -- Northland Capital Markets -- Analyst

All right. And let me maybe focus more back on the Tier 1, and I think you referenced an article today and that's certainly been my observation in the weeks setting up to the Cable Show in at the show itself. The Comcast has been, I think more vocal with regard to their commitment to this technology and really making a lot of noises around accelerating deployment. How do you contrast that with your -- the range of your guidance in Q4 for Cable Access and you sort of commentary there is it really, I guess maybe -- should we distinguish between a pretty significant commitment to roll the technology out versus kind of operationalizing that on a quarter-to-quarter basis is the real swing factor here.

Patrick Harshman -- President and Chief Executive Officer

Yeah, I mean, I guess two comments. One, if you do checkout this, this FierceTelecom article, I mean as you say, am I reading of it is two fold. Number one, a strong commitment to the architecture, but at same time candid acknowledgment of the broader operational challenges of doing something new and I think we all understand that. And so look, I don't understand those executives are frankly executives at any one of the other large MSOs is being too focused on just the coming quarter. They're talking about where their focus is over the next a couple of quarters to couple of years. And I think from that -- obviously we're highly focused on executing quarter to quarter, but we shouldn't lose sight of the fact that this is an opportunity that is ramping and we'll be ramping over the arc of the next couple of years. And I think the recent commentary from cable operators really speaks to that. So our objective is obviously to manage the business quarter to quarter, but make sure that we not miss the forest for the trees, if you will, and that is the broader opportunity that is clearly building. And as you say, I think that the commentary of several cable operators at the most recent Atlanta event and some kind of press and webinars leading up to that makes it clear that they are tooling up for I'd almost call a broadband 2.0, areal step-up in terms of the service capability that they're rolling out not only to residential customers, but also to business customers.

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

Tim Savageaux -- Northland Capital Markets -- Analyst

Okay great. And I'll finish up with one question. Moving back to bookings and order trends, and I just want to make sure I understand something you said Sanjay, but to preface that you've had pretty strong to very strong order bookings really for the last five quarters or so book-to-bills above one including what I think was in Q4 '17, a very strong video bookings driven number, and you also looked back to your point, historically you've been a down about 20% sequentially in Q3, back when there was no CableOS business. So should I infer from that most of the booking weakness decline that you saw in the quarter, is that historically seasonally on the video side? And do you have any comment about kind of the cadence or a seasonality of bookings on the Cable Access side. And the question I had is, so do you think the -- you expect that trend to continue. I don't know if that trend was working through a backlog in Q3 building it for the previous five quarters. I heard your book to bill question, but I just wondering come back -- answer, but I just want to come back to that.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

So the trend we saw in 2017, and as just -- because the 2017 first half was very different than the second half. So 2017 per se is not like, I would say, is directly representative of what the trend should be, but if we leave last year and go back to prior years you will see that's the range we fall in Q4 which I mentioned earlier. While at the same time, I'll also acknowledge that as the CableOS businesses ramps up, the ratios of historical trends for our total bookings to total revenue may not exactly make sense going forward, so there is a little bit of adjustment needed for how the cable business is playing in the entire book to bill ratio and the conversion. So it's not very clear, hence the reason we don't guide for it in -- for Q4. But for Q3 what we saw is definitely more on the video side, which was seasonal, which I mentioned earlier.

Tim Savageaux -- Northland Capital Markets -- Analyst

Great, thanks very much.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

I will add some color on the booking.

Tim Savageaux -- Northland Capital Markets -- Analyst

Yeah. That's right.

Operator

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

Patrick Harshman -- President and Chief Executive Officer

Well, (inaudible) just not for us to thank you all for joining us today. We appreciate the support and we look forward to speaking with you all again soon. Good afternoon.

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

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

Duration: 60 minutes

Call participants:

Nicole Noutsios -- Investor Relations

Patrick Harshman -- President and Chief Executive Officer

Sanjay Kalra -- Senior Vice President and Chief Financial Officer

James Kisner -- Loop Capital Markets -- Analyst

George Notter -- Jefferies -- Analyst

Simon Leopold -- Raymond James -- Analyst

Steven Frankel -- Dougherty -- Analyst

Tim Savageaux -- Northland Capital Markets -- Analyst

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