Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Harmonic Inc  (NASDAQ:HLIT)
Q1 2019 Earnings Call
April 29, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Q1 2019 Harmonic Earnings Conference Call. My name is Gigi, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference 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 first quarter 2019 earnings conference call. With me today are Patrick Harshma, our CEO; and Sanjay Kalra our CFO.

Before we begin, I'd like to point out that in addition to the audio portion of the webcast, we've also provided slides to this webcast, which you can see by going on the webcast portion of our IR site. 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 files with the SEC, including our most recent 10-Q and 10-K reports, and the forward-looking statements section of today's preliminary results press release. These documents identify important risk factors, which can cause actual results to differ materially from those contained in our projections or forward-looking statements.

And please note that unless, otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP basis. These items, together with corresponding GAAP numbers, and 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 also discuss historical, financial and other statistical information regarding our business and operations, and some of this information is included in the press release, but the remainder of the information will be available on a recorded version of this call or on our website.

And now, I'd like to turn the call over to our CEO, Patrick Harshman.

Patrick Harshman -- President and Chief Executive Officer

Thanks Nicole, and welcome everyone to the Q1 call. Starting with our financial headlines, revenue was $80.1 million, gross margin was 54.5%, EPS was minus $0.05 and we generated $4.2 million cash from operations. Strategically, there was a lot of positive activity that we're looking forward to updating you on today. At the top level, our CableOS initiative continues to progress. Our lead Tier 1 customers made good progress in preparing for Q2 and Q3 launches, in multiple global cities. While, our first wave of midsized cable customers further expanded their CableOS deployments with total cable modem served over 670,000 at quarter end.

In our Video segment, we saw material step up in both SaaS deal pipeline and in new SaaS, and we delivered our seventh consecutive quarter of video segment profitability. But taking a closer look at our cable access segment, there is no question, CableOS momentum is strong and building.

We've continued to expand and diversify our customer base. The global number of commercial deployments and field trials was 32 at quarter end. Among these, are several bellwether Tier 1s, including four of the top eight North American and European cable operators. As anticipated, this activity is not going unnoticed by other operators, and during the quarter we signed an important new agreement with a national cable television cooperative to jointly offer CableOS to the co-ops over 750 cable operator members.

Through the end of Q1, paid CableOS deployments were powering DOCSIS 3.1 broadband service, for over 670,000 residential and business cable subscribers, up 24% sequentially, demonstrating that our fully virtualized technology can and is being deployed and operated at scale. We've also continued to extend our competitive advantage through new innovations. Since the beginning of the year, we've made eight, new, unique, patent filings, further strengthening our already strong intellectual property position in both Virtualized CMTS and Distributed Access architectures.

And turning now to the outlook, we're incredibly focused on our ongoing work with several Tier 1 operators, each of whom are planning to roll-out CableOS this year, as the core of their new Distributed Access Architecture or DAA initiatives. Now, we acknowledge that this process of both getting our CableOS technology fully qualified, and also jointly with these lead customers, designing and integrating the full end-to-end Distributed Network Architecture has taken longer than originally anticipated.

However, we see light at the end of the tunnel. With one Tier 1 customer beginning volume deployments to this quarter, Q2 where two other Tier 1s are driving hard toward aggressive Q3 rollouts. One of these is the international operator we told you about last year, when we announced having signed a greater than $50 million contract.

During Q1, this operator was our company's largest booking customer and our supply chain has now been further ramped up to support them. Although Sanjay will discuss momentarily, we don't expect recognizing much revenue from this customer, until the second half of the year. So big picture; our view continues to be that these Tier 1 operators together with previously announced mid-sized customers Com Hem and Buckeye, and now several NCTC member cable operators, really are the industry trendsetters.

Collaborating this view, the latest market research presented at the Light Reading Cable Conference, just held in March, shows unequivocally that the market is pivoting our way. That is, on a path to become dominated by Virtualized CMTS and Distributed Access technologies, growing to just under $2 billion by 2023. And we therefore maintain our positive financial outlook for our Cable Access segment, specifically our full year guidance is unchanged, powered by both scaling Tier 1 deployments throughout the second half of the year, and by a rising tide of business from smaller and medium sized operators.

So in summary, on Cable, public market data, our own recent orders and backlog and our visibility into our customers' detailed deployment plans all cause us to remain confident that CableOS is poised to create real value for our customers and our company in 2019 and beyond.

So, turning now to our Video segment, here also, a strategic transformation to a new value enhancing business model is taking hold. The central to this video transformation has been the move from our historically broadcast-centric appliance business to more profitable and predictable over-the-top streaming business, where we provide our technology as either software running on (inaudible) servers or Software-as-a-Service running on public, private or hybrid cloud. In the story, the first quarter was a significant step up in customer dialogue around our SaaS. For the end of the first quarter, over 6.5 million consumers worldwide were receiving live 24/7 video services created and delivered to our VOS SaaS, up 70% year- over-year. This is impressive operational scale, steadily transforming the market's perception about the quality of service possible from a cloud based 24/7 live video SaaS.

And behind this consumer scale statistic, is a growing base of video service providers using our SaaS. Number 25 at quarter end up 32% sequentially. Recently announced video SaaS customers include, PCCW and Hong Kong, Siminn and Iceland and INDYCAR, who went from start to on-air with a beautiful live sports picture in an amazingly fast five weeks.

To help us further accelerate the SaaS growth, we recently announced a compelling new partnership with Akamai and Microsoft Azure. Through this partnership, our VOS 360 SaaS, which has run mostly on AWS to date, will now also run on Microsoft Azure with Akamai as a CDN delivered partner. Giving media companies both best in class and easy-to-scale services and therefore enabling them to efficiently capitalize on growing consumer demand for high-quality video streaming.

Azure's global footprint provides us access to data centers worldwide, aligning well with our global over-the-top streaming strategy. And not surprisingly, SaaS sales deal pipeline has grown substantially, in terms of both absolute dollars and percentage of total video business pipeline. What is the good news from a strategic point of view, positioning us for an increasingly rich mix of recurring revenue, growing SaaS deal pipeline also creates a short term booking and revenue headwind, evidenced in the first quarter because refining the SaaS sales cycle is taking longer, as the industry is still climbing the SaaS learning curve. And that said, our first quarter video segment financial performance was solid. Our combined SaaS and service revenue, that is the recurring portion of our video segment revenue was $24.1 million accounting for 36% of total segment revenue.

Segment gross margin was again a healthy 57.5% and despite the transformation activity and associated near-term headwinds, we kept the business profitable for the seventh consecutive quarter. So, in summary, considering both our cable access and video business segments, we've invested and innovated for the future, transforming our business with industry-leading cloud-native technologies and services that are now beginning to empower our customers in new and strategically important ways.

And consequently, we believe our business is well positioned for long term growth and value creation. And on that note, I'll now turn the call over to you Sanjay, for a more detailed discussion of our financial results and outlook.

Sanjay Kalra -- Senior Vice President, 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. For the first quarter of 2019, revenue was $80.1 million at low end of our expectations. However, this was balanced by strong gross margins of 54.5% at high end of our expectations, and lower operating expenses of $47.5 million resulting in a $0.05 EPS loss, which was at the midpoint of our guidance range.

These results were coupled with a strong cash of $69.9 million and book-to-bill ratio greater than one, positioning us well for the rest of the year. Turning to slide six, to take a closer look at our Q1 results. Revenue up $80.1 million compares to $113.6 million in Q4 2018, and $90.2 million in Q1 2018. The sequential decline reflects typical seasonality, while the year-over-year decline reflects broad and customer transitions in both segments, which I will cover momentarily.

We will now turn to our segment revenue and results. Cable access revenue was $12.9 million, above the midpoint of our guidance range compared to $24.1 million in Q4 2018 and $18.5 million in the year ago period. While we steadily ramp the CableOS and DAA activity in our cable access segment over the past four quarters, you'll recall that our Q1 guidance anticipated a pause by a couple of Tier 1 customers, who were temporarily slowing to implement trial-informed improvements to their system architectures before volume deployment.

As I will explain momentarily, when I discuss guidance, we expect this delay to be resolved during the second quarter. In our video segment, we reported revenue of $67.2 million compared to $89.5 million in Q4 and $71.7 million in the same quarter, last year. The sequential comparison reflects typical seasonality, while the year-over-year comparison reflects the combined effect of a shift in timing of certain deals.

From the first quarter to later in the year, and as Patrick just mentioned, growing customer interest in SaaS. As we put more emphasis on SaaS, we are seeing that SaaS opportunities are taking more time to close, relative to our traditional appliance-based video processing opportunities, thereby creating a near-term impact on bookings, backlog and upfront revenue.

To be clear, we are pleased that our SaaS pipeline has significantly improved, sequentially. And we understand the initial revenue delays are an inherent short-term impact of our fast transition journey. Gross margins were 54.5% in Q1 compared to 54.5% in Q4 and 55.3% in Q1 2018. Cable Access gross margin was 39.3% in Q1 compared to 43.6% in Q4 and 46.7% in Q1 2018. The sequential decline was a result of product mix. Video segment gross margin was a healthy 57.5% in Q1, consistent with both Q4 and Q1 2018. We are particularly pleased that we have maintained strong video margins, despite softer video revenues in the quarter. The sustained high 50s video segment margin is due to a consistently higher mix of software and services.

I want to highlight a revenue classification change, we made in the income segment this quarter. To provide more transparency in to our recurring revenue. We had previously classified our total revenue in two categories, products and services. To better reflect the nature of our business, and sharpen the focus on our revenue priorities, we have updated our revenue categories to appliance and integration and SaaS and service.

The appliance and integration revenue category comprises of non-recurring hardware, software licenses and professional services revenue. The SaaS and service category consists of ongoing usage based fees from our SaaS subscription offerings and support revenue from our appliance-based customers and reflects our recurring revenue streams.

We have continuously -- strengthening our recurring revenue base, focusing on innovative new support services for our traditional appliance-based solutions, and as just mentioned expanding our new cloud-based SaaS offerings. During the first quarter, our SaaS and service revenue represented 34.6% of our total revenue compared to 26.8% in Q4 2018 and 29% in Q1 2018. Our recurring revenue category had higher gross margins than our appliance and integration category, thereby setting a stage for long-term margin expansion as we expand our SaaS and services revenue.

Our total gross margins on SaaS and service were 61.3% in Q1 2019, 64.5% in Q4 2018 and 56.3% in Q1 2018 demonstrating solid year-over-year margin expansion. The modest sequential decline in SaaS and service margins was primarily a result of timing delays of closing certain renewals, and going forward, we may experience similar fluctuations between quarters.

Our SaaS customer base increased from 13 customers in Q1 2018 to 19 customers in Q4 2018 and now to 25 customers in Q1 2019 growing 32% quarter-over-quarter and 92% year-over-year. We are still in the early stages of our SaaS evolution and expect to continue to steadily expand our installed base. We are replacing our ARR metric, which was purely limited to new SaaS customers with a measure called recurring revenue, because of our SaaS and service revenue. We believe this change will provide a more complete view into our total recurring revenue stream.

Coming back to the income statement on slide seven, we maintained strong expense controls during the quarter, and as a result our Q1 operating expenses were $47.5 million, below our guidance range and lower than our operating expenses in both Q4 and Q1 2018 which were $49.3 million and $49.4 million respectively. The sequential decrease is primarily reflective of continued expense management, seasonally lower sales commissions and recovery of certain previously reserved receivables. Our Q1 operating loss was $3.8 million, this is a net result of our video segment, which contributed $2 million of operating income, offset by our investment in our CableOS program, which resulted in an operating loss of $5.8 million.

Our Q1 operating loss of $3.8 million compares to an operating income of $12.7 million in Q4 and $0.5 million in Q1 2018. We ended with weighted average shares of 88.2 million compared to 89 million in Q4 and 83.9 million in Q1 2018. That year-over-year increase in basic shares is due to issuance of ESPP and performance-based compensation shares during the quarter. Q1 EPS was a loss of $0.05 compared to $0.04 EPS income -- excuse me compared to Q4 EPS income of $0.11 and a loss of $0.01 in Q1 2018. Q1 bookings were $81 million compared to $92.8 million in Q4 and $102.6 million in Q1 2018, resulting in a book-to-bill ratio of 1.01.

Bookings were down modestly year-over-year for the reasons mentioned previously, our improving efforts to convert historically appliance-based video customers to cloud-based SaaS and an anticipated temporary pause in DAA roll out activity by a couple of Tier 1 cable customers. While not visible in bookings and backlog yet, due to the inherent headwinds, I mentioned earlier, our pipeline of SaaS opportunities has grown significantly both quarter-over-quarter and year-over-year. We are looking forward to seeing bookings rebound as our customers understanding of benefits of SaaS offerings mature and SaaS deals' time to close reduces.

We will now move to our liquidity position and balance sheet on slide eight. We ended Q1 with a cash of $69.9 million, this compares to $66 million at the end of Q4 and $52 million at the end of Q1 2018. The sequential increase in cash of $3.9 million is a reflection of cash generated from operations of $4.2 million, offset by net cash used in investing in financing activities of $300,000. Our days sales outstanding at the end of Q1 was 66 days compared to 65 days in Q4 and 75 days at the end of Q1 2018.

Our days inventory on hand was 72 days at the end of Q1 compared to 45 at the end of Q4 and 56 days at the end of Q1 2018, as we get ready for increased shipment activity in both segments for the second quarter.

At the end of Q1, backlog and deferred revenue was $187.2 million. This compares to $186.4 million in Q4 and $224.4 million in Q1 2018. While the backlog in deferred revenue appears to be very similar to the 2018 year-end, there is a significant shift in the backlog of Cable Access segment. Cable Access backlog increased by 38% quarter-over-quarter.

In summary, the start of the year was reasonable in terms of overall financial performance compared to our expectations. Strategic progress was solid and therefore we expect our remainder of 2019, particularly the second half to deliver improved financial performance.

Let's turn to slide nine for our Q2 2019 non-GAAP guidance. The second quarter is expected to be critically important to our business and to set the company up for a strong second half. In Q2, we expect video bookings to rebound as SaaS pipeline conversion improves and cable access begins to rebound as our Tier 1 cable operators prepare for CableOS deployments, ramping up in the second half. In terms of our guidance for Q2 2019, we expect revenue range of $80 million to $90 million with video revenue in the range of $70 million to $75 million and cable access revenue in the range of $10 million to $15 million. Gross margins in the range of 52.5% to 53.5%, operating expenses to range from $51 million to $52 million, operating income to range from a loss of $10 million to $3 million. EPS to range from a loss of $0.11 to $0.05 and effective tax rate of 12%. Weighted average share count of 88.9 million. And finally cash at the end of Q2 is expected to range from $60 million to $70 million.

Turning to our full year outlook on slide 10, we expect revenue in the range of $385 million to $430 million with video revenues in the range of $285 million to $300 million and cable access revenue in the range of $100 million to $130 million. As you can see, for our cable segment, our original full year expectations are unchanged and with even greater visibility into our largest customers' deployment plans, we are quite confident in reconfirming our previous annual guidance.

Regarding video, having seen through the first half and the trend of more than expected traditional opportunities, moving to our SaaS pipeline. We believe it is prudent to modestly decrease our full year segment guidance. So, we are taking the video guidance down modestly by $10 million at high end and $5 million at the low end.

Gross margin in the range of 50% to 53.5%. Operating expenses to range from $195 million to $205 million, operating income to range from a loss of $12.5 million to an income of $34.6 million, EPS to range from a loss of $0.19 to a profit of $0.27. An effective tax rate of 12%, a weighted average share count to range from 89.3 million shares to 91 million shares. Year-end cash to range from $65 million to $85 million. In summary, this is a critical year for our business and we remain very focused on execution.

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

Patrick Harshman -- President and Chief Executive Officer

Okay, thanks Sanjay. Perhaps echoing your final comments there, we want to wrap it up by highlighting our strategic priorities and expectations for the remainder of the year. For our Cable Access business, our objectives are to further scale our current CableOS deployments, to secure new design wins with additional operators such as the National Cable Television co-operative members and most importantly for this year to ensure Tier 1 customers' volume DAA deployments through the second half were successful. For video segment, our objectives are to continue our journey to becoming the leading live, over-the-top streaming solution provider, to leverage our SaaS offerings and associated relationships with Microsoft Azure and Akamai, to expand our addressed market, tapping into new higher growth customers and business models like the recently announced INDYCAR relationship and to deliver consistent segment profitability, just as we've done over the past seven quarters.

So, I want to close by thanking our strategic customers, and partners, our talented team members and our stockholders for your continued support.

With that, would now like to 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's from John Marchetti from Stifel. Your line is now open.

John Marchetti -- Stifel -- Analyst

Thanks very much. Just wanted to jump in real quickly here Patrick, on the guidance and the outlook, particularly in the CableOS segment. Not surprisingly, you've given the guide for Q2. It implies obviously a very, very healthy ramp. Just to even get to the low end of the full year outlook, and you mentioned one customer coming in a little bit in 2Q, seeing that hopefully expand into Q3 and Q4, as we go through the year. Just curious if -- from your perspective, if that visibility, relative to where we were this time last quarter, has actually improved -- if you're actually seeing some of that momentum or if it's more still just dialogue at this point? Just trying to get a little bit more comfortable with that implied second half ramp.

Patrick Harshman -- President and Chief Executive Officer

Yeah. Thanks John. The visibility has definitely -- has improved substantially. Frankly, we had good visibility in the fall, as we mentioned and Sanjay just alluded to coming out of a couple of significant scale -- trial activity. So, there was a couple of major architectural change decisions made by our lead customers, and going into the beginning of the year frankly, there was a little bit of uncertainty about the exact timeframe that those could be implemented and how we would kind of get back on track.

Well, the good news is, is all that work is just about done and we feel as though we're largely -- currently getting back on track. And as a result of that, we've got extremely detailed insights into plans for the remainder of this quarter and the remainder of this year, and our reconfirmed guidance is based on those detailed plans. So, we're not just talking about verbal dialogues here, but we're talking about very detailed spreadsheets and frankly plans that we're investing in, putting our money behind and our customers know that in terms of our supply chain, et cetera, as I think Sanjay also referred to, I mean I can tell you that I've been in personal contact with senior executives of our lead Tier 1 customers, all within the last several weeks or months reconfirming my team's understanding and our joint expectations, us together with our customers for what we're going to achieve together.

So, this is not a broad-based statistical ramp we're talking about, indeed it is a real step up as you suggested or have noted and instead it's a couple of very big guys turning on an in a significant kind of way. It doesn't say that there's no risk, but our confidence around that or visibility into that is quite high and consequently there's a lot of determination and excitement right now within our company.

John Marchetti -- Stifel -- Analyst

Oh, I'm sorry go ahead Sanjay.

Sanjay Kalra -- Senior Vice President, Chief Financial Officer

Sorry. Go ahead, John.

John Marchetti -- Stifel -- Analyst

No, I was just going to say, maybe as a follow up to that there's obviously some concern that if these do continue to delay out or push out a little bit, that it has the potential to change the competitive landscape a little bit. And I'm just wondering, Patrick if you could comment for a minute or two just on sort of what you're seeing there, particularly in light of some of these delays that seem to be taking a little bit longer, than some of us had hoped for?

Patrick Harshman -- President and Chief Executive Officer

Listen, I still -- I don't know -- we don't know what we don't know, but everything we do know -- these aren't just DAA deployments, they are deployments in architectures that depend critically on the virtualized -- actually cloud-native aspect of our CableOS offering. And we have not heard of anything else being even demoed in the lab successfully competitively. So, it's hard to imagine frankly, I think it's not prudent to ever be overconfident, but it's hard to imagine that there is a -- that there is a serious threat in the near term, competitively around the cloud-native or virtualized aspect of this. Again, doesn't mean we're over competitive -- over overconfident I hope. But it's not something that we see as a realistic risk in the near term, John.

John Marchetti -- Stifel -- Analyst

And then maybe if I can just sneak one last one in, on the video side real quick, Sanjay. Could you quantify at all maybe what the actual sort of revenue headwind that we're facing as SaaS has ramped up? It seems a little bit quicker than you had anticipated, certainly in the first half of this year and it looks like that's expected to continue, just given the reduction to the full year outlook.

Sanjay Kalra -- Senior Vice President, Chief Financial Officer

Yeah John, so you know let me tell you that for the first quarter we expected approximately 5% of our bookings to come from SaaS and you know for the whole area, we are planning to 5% to 10%. In Q1, we were slightly behind the plan and for the reasons which I discussed in my prepared remarks, but all the opportunities are still in the dust (ph) and still in the pipeline and as the year progresses, we should be able to close them. And the headwinds in terms of SaaS are actually of two categories. One is just a ratable recognition versus upfront, which is kind of baked in our plan. But the second headwind, basically is the delay of the ratable revenue itself. And as booking expectations are now being based on longer sales cycles, so they'll take more time to close versus appliance.

So -- and the SaaS bookings are getting delayed versus our planned timing. We will see modest headwind for that -- for recognition. And if the impact is also coming on appliance booking as well for the same reason. So, the impact is modest as of now in Q1, but as the pipeline's time to close improves, we will be able to get back and hence we have taken a prudent approach for the video business for the year.

John Marchetti -- Stifel -- Analyst

Thanks. I'll jump back in the queue.

Patrick Harshman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Rich Valera from Needham & Co. is on line with a question.

Rich Valera -- Needham & Co. -- Analyst

Thank you. Looking at that back half ramp Patrick, I'm wondering if you could give any color on your expectations for kind of the hardware/software mix there. Clearly, if it's hardware that would require a very significant production ramp for you, but if you could give any color on how you think about that in terms of kind of nodes versus licensing that you can kind of turn on with a key?

Patrick Harshman -- President and Chief Executive Officer

Well, it's going to be really the first real volume of the whole package. So, we do expect to (ph) cease our DAA, we do expect it to be node rich and frankly heavier than on average in the past and I think that's what is behind some of the margin trends that Sanjay communicated. But, we expect to go along with that to the CableOS some software licenses. So, as we've noted in the past, at least qualitatively, you can expect and we expect more hardware revenue than license revenue, but probably more gross profit associated with the software licenses, giving us on balance the target margins the other CableOS business that we've talked about. So, we think it's going to be the things that we've been looking forward to for a while, the balanced mix of the two. Sanjay anything else to elaborate on that?

Sanjay Kalra -- Senior Vice President, Chief Financial Officer

Yeah, I'll just give some more color in terms of the guidance. If you look at the guidance for Cable segment, the margins we used are in the range of 35% to 45%. And I think midpoint close to 40% is what we would expect, depending upon how the product shift mix changes. But, we'll see both in Q3 and Q4 how it shapes up, but I think having an average of 40% is the right mix, and if you see it like last year, we got close to 44% as well and we had a decent mix of hardware and software. So, I think the mix is going to improve in outer years, and as the DAA rolls out completely, we may shift more licensing coming on later, but this year 35% to 45% is the range we've used. And from our experience of most recent quarter Q1, which was primarily hardware dominated, we came at 35% in our guidance for purely Q2. So, I think that gives a shape for the mix for the second half.

Rich Valera -- Needham & Co. -- Analyst

Got it. And one more if I could around your Tier 1 customers, Patrick it sounds like from your comments that there are three total Tier 1s you expect to ramp in the second half, just wanted to clarify that. And then I was hoping you could repeat and or add to the comments around your international Tier 1 customer that sounds like you're expecting significant bookings from in Q2, if not I think you expect to be your largest bookings customer so if you could just elaborate on those two points I'd appreciate it. Thanks.

Patrick Harshman -- President and Chief Executive Officer

Sure. So, at the beginning we've highlighted among our customers, we've said there's four of the top eight operators. So, what we're referring here specifically to Tier 1 is four out of the top eight across if you look at North America and Europe combined. So, there's domestic and international in there. And indeed, three of the four, we expect to really get rolling with significant volume before the year end. One of those three is on the cusp of getting -- going here in Q2, and the other two, we expect to be kind of the light to turn green in Q3. So, that's I guess I think that's one part of it.

The fourth Tier 1 I think, we're a little less confident about when real volume starts. They were perhaps a little bit behind the other three. So, one of the first three is I just wanted to just tie back to something we've talked about before. One of the three who is going to get going in a high volume way is the same international operator, unfortunately still unnamed that we referred to a couple of quarters ago when we said we signed the largest contracting company history, over $50 million deal.

And the point that I wanted to highlight here is although we've yet to recognize revenue, and in fact although they have yet to start deploying in the field and volume, their confidence has risen to a level, where against that contract now they've started a significant flow of orders to us. And in fact, in terms of order input, they were our largest booking customer in the first quarter, and we've already had a strong start to the second quarter with this customer as well. And so, we're convinced enough that we have ramped up our pipeline additionally from where it was in the fall to accommodate this additional value -- volume, excuse me and so, we're looking forward to that activity really being a big impact as part of the combined Tier 1 activity between now and your end. I'll pause there. Rich, does that answer the question?

Rich Valera -- Needham & Co. -- Analyst

Yes. That's exactly what I was asking for. Thanks Patrick.

Patrick Harshman -- President and Chief Executive Officer

All right. Well, thank you.

Operator

Thank you. Steven Frankel from Dougherty. Your line is now open.

Steve Frankel -- Dougherty -- Analyst

Good afternoon. Patrick, I'd like to go at this visibility question, maybe a little different way and maybe you can help me connect the dot. So, you've mentioned that you have increased visibility, you have a customer that's going to ramp in Q2. Now, we don't see that ramp in the revenue, is that because the ramping queue is actually that customer putting the remote five nodes that they purchased last year, out in the field and starting to ramp up deployments or are you saying there's a revenue ramp at that customer that's not in the guidance, you gave us today?

Patrick Harshman -- President and Chief Executive Officer

It's mostly the former, Steve. As you do recall, clearly, we booked and we shipped a pretty heavy volume of nodes in the back third of last year, in anticipation of this ramp starting really the end of the year. We had that pause, and some of them have been consumed, we now expect the consumption to really grow. So, the Q2 part -- the biggest part of the Q2 ramp with this customer is consuming stuff that's already been purchased and delivered.

Sanjay Kalra -- Senior Vice President, Chief Financial Officer

Steve to that point, I like to point out some data points, which are very clear to us -- from the numbers. And if you look at our total backlog, as I pointed in my prepared remarks, cable backlog is up 38% quarter-over-quarter. If you look at inventory it's 72 days versus 45 days or 56 days in incompatible periods. And this number of days is up primarily because of our DAA nodes, which we've been manufacturing. And not only just the inventory if we look at our off balance sheet per share obligations, including inventory, for total cable business, is up 24% quarter-over-quarter and actually 60% year-over-year. And the trend we see in the Q1 bookings and also the Q2 bookings till date, for cable are in a very similar ratio of what we expect the ratio of annual video and cable revenue to be.

So, the bookings -- our current bookings are aligning in the same fashion as we expect the revenue to shape up, which gives us a lot of confidence that it's coming back in shape. And as Patrick pointed out, we have this more than $50 million deal with a large Tier 1. We received significant piece of bookings in this quarter, and that's approximately $9 million we have received of that, and the revenue of that is very minimal at this point. So, all these facts give us the confidence for second half.

Steve Frankel -- Dougherty -- Analyst

Great. And then on the video SaaS transition, and where do you expect this new metric of SaaS plus service to be by -- for the full year?

Sanjay Kalra -- Senior Vice President, Chief Financial Officer

So, you know we had 35% recurring revenue for Q1 as I pointed out approximately, and -- but there is a split, you know, video is approximately 36% and cable is 28%. Our expectation of a full year is total around to be 30% plus, but again for video and cable, the ratios are different. So, let me tell for video, for the whole year it's going to be a little higher than Q1, because of our growing SaaS portion, say it's going to go to 36% plus, but for cable as second half ramps for CableOS, that revenue will mainly qualify for appliance and integration category and i.e., the non-recurring category.

So, we should expect SaaS and service revenue not as high as we saw in Q1. So, it could drop to 10% to 15%, but overall for the whole company, we expect it to stay at 30% plus, and we believe this is a very strong indicator of significant and stable income and cash generation, especially when we are in transition in both the segments.

And if you leave the percentages apart, if you just look at the absolute dollars, we believe the total absolute dollars have to grow. We expect the absolute dollars to go from -- to exceed from high 20s million to at least mid 30s million.

Steve Frankel -- Dougherty -- Analyst

Okay. And then on this SaaS move, would you characterize these as new or new customers like an INDYCAR or are you also seeing increased demand from your traditional broadcast customers that are now potentially moving away from appliances to SaaS, as they bring up incremental applications?

Patrick Harshman -- President and Chief Executive Officer

It's definitely both, Steve. For example, recent press releases covered both INDYCAR is absolutely a new kind of customer and in particular, we think -- increasingly, we think that there's a real sweet spot around new players dealing with live sports. That being said, we also announced PCCW, who is the incumbent telecom operator in Hong Kong and a real mind share leader in the broader Asia theater. And that's a case where there are traditional -- historically they've been an traditional appliance customer, and they're pivoting now to SaaS. So, we're dealing with both. And in particular, the latter, the traditional guys I think it's where I'd characterize it as a headwind where traditionally where we would close a new appliance deal quickly. Having that dialogue around OK, what are the new economics, what's the new operating model, if they pivot to a SaaS platform, it's -- there is a learning process there, and I think it's understandable. But ultimately, it's a very positive trend that more and more of incumbents are looking at this, and it's also a positive trend that we are expanding the addressable market to new over-the-top players.

Steve Frankel -- Dougherty -- Analyst

Okay, great. Thank you so much.

Patrick Harshman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Simon Leopold from Raymond James, is on line with a question.

Victor Sze -- Raymond James -- Analyst

Hi guys. This is Victor Sze in for Simon. Thanks for the detail and the insight into the expectations for the second half cable growth. I was just wondering if you could help us understand the dynamic, maybe a little bit of the expected growth from these three or four cable customers. Are they replacing entire chunks of legacy footprint, are they adding virtual CCAP for new deployments or a mix of both?

Patrick Harshman -- President and Chief Executive Officer

It's a mix of both. Let me just make two comments. DAA is all about pushing fiber deeper, and significantly stepping up the capacity of the network to deliver kind of a quantum step up in broadband data rates to consumers. Some operators have already started that with legacy and are now going to pivot and that's a case of one of our lead Tier 1 customers and others are kind of waiting for this to begin the initiative of pushing fiber that much deeper.

So, it is a little bit of both with these particular Tier 1s. But Victor, by focusing so much on the Tier 1s, I want to make sure it doesn't get lost. If you'll allow me the fact that it's not just about that. I know there's been a lot of interest, and we put a lot of focus -- we have a lot of focus on scaling our Tier 1 customers, but at the same time I don't want to -- I hope it's not lost, but even before we get to a Tier 1, we're just under 700,000 connected cable modems at the end of the quarter, and that whole -- that part of the customer base is growing and frankly, most of that is not DAA at all. That's just been a rip and replace of legacy DOCSIS 3.0 systems and replacing it with virtualized DOCSIS 3.1, and we're seeing, even more so than we would have thought initially that, let me call it, the small and medium sized operators with an upgrade is turning out to be an interesting market on its own, not contingent on DAA. So, just want to make sure that is not lost as you think about the total opportunity set that we're pursuing here.

Victor Sze -- Raymond James -- Analyst

Yeah, that's definitely helpful, yeah that's definitely helpful. And I just wanted to shift really quickly to the video business, outside of the changing shift in the consumption model and the move to software, I guess thinking more broadly, how should we think of the state of this market in general? Should we think of it as a unit in harvest mode rather than growth, and if it's the latter, can you remind us what some of the key catalysts are that we should be looking out for that are most impactful to the video business like for example, traction with 4K, streaming proliferation et cetera?

Patrick Harshman -- President and Chief Executive Officer

Well look, that I have to say, that's a loaded question, I mean, you don't have to look any further than some of the -- our customers' earnings announcements last week, to understand that the Pay TV arena or pay video service arena is turbulent to say the least. We have several large customers who are in the midst of a variety of M&A activities, all fighting ferociously with each other as well as a whole host of new players. And indeed, as you said, one of the dimensions of that competition is around quality of service.

So, we -- for us, the most interesting area is around streaming and here we see both the incumbents as well as new players as we discussed a moment ago, making significant investments in new streaming capabilities a big theme is personalization both of the content and of the advertising, and the promotional material.

And quality is also a big deal, particularly around live sports consumers more than ever are expecting high quality services resolutions to their big screens as well as to their small screens. So, I'd say it really is an opportunity-rich area, where you see some of our customers on the defensive, some of the on the offensive. And by going to SaaS, we think that we're able to arm our customers, both historic as well as new with more flexibility than they've ever had to go to market with in this really rapidly changing environment.

Victor Sze -- Raymond James -- Analyst

Thank you.

Patrick Harshman -- President and Chief Executive Officer

Thank you.

Operator

Thank you. George Notter from Jefferies is online with a question.

George Notter -- Jefferies & Co. -- Analyst

Hi guys, thanks very much. I guess I wanted to dig in a bit here on CableOS, If I go back 2.5 years ago, I mean you signed this warrant arrangement with Comcast, and we know that nine months ago, you completed field trials there, we can see that certainly in the vesting of the warrants and the differential between GAAP and non-GAAP revenue, I guess I'm just curious if this whole narrative now we're talking to multiple Tier 1s ramping up, does this include Comcast or are we talking about other operators in the mix here?

Patrick Harshman -- President and Chief Executive Officer

Well, George I can't comment specifically on Comcast. Other than -- in terms of relating it back to any of my comments about timing. The Comcast relationship stemming back from that original agreement continues to be extremely important to our company, and it is a top priority of our business in general and of our CableOS initiative, in particular to be a successful technology partner, deployed in volume by Comcast.

Other than that, I won't say more about Comcast in particular, but I think it's of course, by highlighting that there are several Tier 1s, four out of the top eight across North America and Europe; the point there is that no matter how you cut it, there's others involved besides Comcast. We think that what we're working on and what we started working on with Comcast a couple of years ago, is just the right idea. And particularly the forward -- most forward looking of the operators, we think that they've come around to that kind of thinking and it's not just they've come around to it -- there is now substantial investments and activity there.

So we -- our aspiration is that Comcast is an important contributor to revenue and gross profit going forward, but by no means the only contributor. And our ambition over the next several years is to be number one in this space -- I mean I'll be clear about it. And if you take a look at that market research, or perhaps you were there at the Light Reading event in Denver, a couple of weeks ago. But that research is clear that the majority of the spend is going to be on virtualized CMTS and associated to DAA components.

And so our view is that the company that is number one in virtualized and DAA is going to be number one in this market, and that is our ambition. It's turned out to be a longer journey than we thought, particularly the end-to-end DAA system involves a lot of other components, not just the virtualized CMTS. So what's happened is, is the pie has gotten larger, but also more complex, that complexity manifests itself as more time to market. But the good news is the resultant opportunity, and the resultant resonance with more than just one operator have both moved in a very positive direction from our perspective.

George Notter -- Jefferies & Co. -- Analyst

Got it. And then, I guess maybe that's an interesting segue. You mentioned that you're not seeing competitive products in lab trials. It sounds like anywhere I guess I'm wondering, you know why do you think that is, just your opinion? I mean, it seems to me that virtual CCAP has been kind of in the forefront, I think of the conversation around this industry for a number of years now -- I mean two, three years certainly, I mean, why do you think there aren't competing products in the labs that you're seeing and any views there? Thanks.

Patrick Harshman -- President and Chief Executive Officer

I don't really know George. I mean, I will tell you that we've invested a lot and it's non-trivial, it's taken a long time, and frankly we had a head start because we also had experienced with cloud native coming from the video side. So, even before we started this initiative, we had already started at the corporate level to pivot ourselves into a software and cloud kind of company. So, I think that was a little bit of wind in our back. And I think that there's also been a -- until relatively recently, I think, you'll recall this, but there's been a lot of skepticism or questions out there; is software scalable? Is it going to work? et cetera, et cetera.

So, I think it's -- I think that there's been some doubters or naysayers out there, and so it may be the case that some of our competitors legitimately -- viably didn't really believe that this technology was going to be the right answer until more recently.

Now listen, I'll emphasize again, I don't know what I don't know and maybe they're just about to release something new and exciting that we're completely unaware of, and that could be the case too, but I think yeah -- but I think I'll stay on the fact that it's difficult, it's time-consuming, it takes a unique skill set, which is quite distinct from what I would say the traditional CMTS development capabilities are, and that takes some time to assemble from the time when you actually believe that this is the right architectural direction.

George Notter -- Jefferies & Co. -- Analyst

Got it. Great. Thank you very much.

Patrick Harshman -- President and Chief Executive Officer

Thank you George.

Operator

Thank you. Tim Savageaux from Northland Capital is online with a question.

Tim Savageaux -- Northland Capital -- Analyst

Good afternoon, quite a numbers swimming around in my head here, so a quick question on that kind of backlog in bookings and then kind of a broader question on cable access. You mentioned a 40% sequential increase in backlog on cable subscribers. Yeah right. And, was there also a comment about bookings sort of from a proportional standpoint being kind of more in line with where you expect a year to come out from a revenue standpoint or (inaudible) other factor.

Obviously, the backlog increase implies a book-to-bill above one, I guess to make it quick, how far above I guess would be one question, and given the ramp that you're expecting in the second half, I'd imagine you talked about a rebound in bookings, but it's not as if they were down for cable in Q2. But I guess further growth, would you expect that backlog growth to accelerate in Q2?

Sanjay Kalra -- Senior Vice President, Chief Financial Officer

Yes, we do expect the backlog growth to accelerate in Q2 for both segments, but what I was pointing earlier was 38% is the increase only in cable backlog, we have seen in Q1 compared to prior quarter Q4. And bookings in Q1, as well as the bookings in Q2 to date, which I had mentioned was the new bookings happening are in the same proportion of revenue expectation i.e., in the same proportion of video and cable. So yeah, these are giving us more confidence in terms of how the year should be shaping up.

Tim Savageaux -- Northland Capital -- Analyst

Great. And the cable access question is I think coming out of last quarter, at least part of my takeaway might have been that it may not have necessarily been Harmonic's Technology per se, but challenges on the customer's part and operationalizing that technology, which is around a pretty large scale project and as you've seen the last -- the year develop, I guess how would you distinguish between those two issues, which is to say the maturity of your hardware and software technology relative to the customer's capability to operationalize it? And has that -- to the extent you comment about increased visibility, is that part of it or what kind of visibility do you have on that front?

Patrick Harshman -- President and Chief Executive Officer

Operationalization is certainly a part of it, Tim, but the bigger issue is -- I would say, falls under the umbrella of integration, particularly the DAA architecture is broad. It involves, not only the CMTS component, it involves a lot of additional external networking equipment. It's tied in, because it also carries legacy video services as well as new video services over IP. There is integration with both new and legacy set-top boxes, other video devices et cetera. So, it becomes a pretty big, broad integration project, specifically around DAA.

So, sometime around last fall really, the pivot for us -- it's never 100% black and white, but I'd say pivoted away from kind of getting the virtualized CMTS ready and was more end-to-end integration, and then working through issues, some of which touched us, others which were really independent of us. And it shows integration and system level issues that have been, I think taken a little bit longer than anyone expected over the past several months, and that we actually think that we're now just nearly clear off.

And of course that ties into the -- well -- that's just maybe another way of saying operationalization, what you just said. So that said, and that's one of the other reasons Tim if I could -- why we continue to hammer on the fact that, where we have kind of just a clean, let me call it the centralized deployment of CableOS is a centralized CMTS, we're nearly 1 million or we're trending toward 1 million connected cable modems, and the systems are stable, working well and performing from a business metric point of view, just as good as the -- just as reliably as the CMTS systems that they replaced.

So, we're more confident than ever that the core CableOS as a CMTS is increasingly, I would say rock solid. And now we're really getting there, together with our customers in these broader end-to-end systems DAA systems, and it's going to be exciting to see these things launched here over the next several months.

Tim Savageaux -- Northland Capital -- Analyst

Okay. Thanks very much.

Patrick Harshman -- President and Chief Executive Officer

Okay. Well thank you Tim, and thank you everybody else for joining the call today. We're excited about where we're headed with the business. We're going to make good progress this quarter, and toward the rest of the year and we're looking forward to updating you all on our continuing progress. Thanks very much.

Sanjay Kalra -- Senior Vice President, Chief Financial Officer

Okay, thank you.

Operator

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 61 minutes

Call participants:

Nicole Noutsios -- Investor Relations

Patrick Harshman -- President and Chief Executive Officer

Sanjay Kalra -- Senior Vice President, Chief Financial Officer

John Marchetti -- Stifel -- Analyst

Rich Valera -- Needham & Co. -- Analyst

Steve Frankel -- Dougherty -- Analyst

Victor Sze -- Raymond James -- Analyst

George Notter -- Jefferies & Co. -- Analyst

Tim Savageaux -- Northland Capital -- Analyst

More HLIT analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.