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Welcome to the Fourth Quarter 2018 Harmonic Earnings Conference Call. My name is Carmen, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.
Now, I would like to turn the call over to Evelina Kaufmann (ph) Investor Relations. Evelina, you may begin.
Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic’s fourth 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 the audio portion of webcast, we’ve also provided slides to this webcast, which you’ll see by going to our webcast on our IR site.
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 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’ve posted on our website and filed with the SEC on Form 8-K. We will also discuss historical, financial and other statistical information regarding our business and operations and some of this information is included in the press release. But the remainder of information will be available on a recorded version of this call or on our website.
Well thanks, Evelina, and welcome everyone to our Q4 call. We are pleased to again be reporting a strong quarter with revenue growth and profitability driven by the ongoing success of our strategic transformation, CableOS and video streaming software. Specifically, continued CableOS momentum delivered 79% year-over-year revenue growth for our Cable Access segment. Well a combination of over-the-top streaming and ultra high definition wins drove a record 14.2% operating income for our video segment. Putting it all together, combined corporate Q4 results were 12% year-over-year revenue growth, 11.2% operating income, $0.11 EPS and $6.6 million cash generated from operations.
So taking a closer look at our Cable Access segment. We continue to expand the combined number of commercial deployments and field trials, now with 29 global customers. Among these we’re growing list of industry heavy hitters, including four of the top eight North American and European cable operators and sixth of the named cable operators, leading the new 10G or 10 gigabit initiative announced recently at CES. Focusing first on our commercial deployments to date, CableOS is now powering high speed data service for over 535,000 residential and business cable subscribers, demonstrating that our fully virtualized technology is being deployed at scale enabling substantial operational benefits relative to traditional hardware-based solutions. These initial CableOS deployments are primarily in a traditional centralized CMTS architecture, with a typical application as DOCSIS 3.1 upgrade and virtualized software economics and future distributed network migration flexibility underpinned our competitive advantage. We expect continued momentum during 2019 for these more traditional applications.
Turning next to the heavy trial activity, we’ve been involved with. Based on challenging, the groundbreaking progress made over the past several months, we expect the volume 2019 deployments of new distributed access architecture or DAA networks with multiple Tier 1 operators. During this quarter, Q1, we were still be on the on-ramp, continuing support of lead customers who are now in the process of implementing specific trial informed improvements to their deployment plans, not to the CableOS core, which has been solid for some time, but rather to ancillary networking and orchestration elements of our customers’ end-to-end DAA implementations.
For example, in one case, the customer has decided to pivot from 40 gig to 100 gig compute and networking infrastructure improving the economics of their planned large DAA rollout seamlessly supported by CableOS’ software-based architecture. While impacting the pace of deployments in Q1, we see enhancement such as this is further bolstering the scalability, resiliency and return on investment to these pending DAA rollouts, hence our conviction in the successful 2019 ramp. Indicative of this growing DAA momentum, during the quarter we shipped over 1,000 new DAA nodes which we expect to be physically deployed in the field along with still to be purchased software licenses in the coming months.
The combination of these DAA node shipments and continued centralized CMTS architecture sales drove another quarter of financial growth. As Sanjay will detail momentarily, segment revenue was $24 million, up 79% year-over-year. Segment gross margins again improved and operating profit was breakeven. So the big picture here is over $90 million of revenue we delivered in 2018, was really just the beginning. Our ongoing expansion of design wins, our deployment planning intimacy with bellwether customers and growing consensus among global cable operators, but the time is now to begin seriously working on multi-gigabit network upgrades and the cloud native and distributed access technologies pioneered by Harmonic, all the way to go, all uniquely position Harmonic for sustained growth. We remain confident and determined, that CableOS is poised to have a major impact in the global cable market, in 2019 and beyond.
So turning now to our video segment. Here also it’s clear that our strategic transformation has created a business, that is now better positioned strategically and stronger financially, driven by both competitive and new customer acquisition momentum. Video segment revenue was up sequentially and year-over-year. Gross margin was a solid 57.5%. And operating income was a record 14.2%. Central to this video strategic transformation has been the move from historically broadcast centric appliance business to more profitable and predictable over the top streaming software business.
Harmonic has now deployed over 37,000 high-quality live over-the-top streaming channels worldwide, up 5% sequentially and 20% year-over-year, a testament to truly industry-leading technology in an increasingly strong competitive position in streaming media. We’re pushing this transformation further through our nascent Video SaaS business, where the number of active customers has grown to 19, up over 170% year-over-year. Among these customers are both established and new streaming players, representing and expanding addressable market. But we’re still in the early adopter phase of our SaaS journey. Our streaming market positioning and SaaS credentials are steadily improving. Hence, consequently our 2019 business plan anticipates accelerating recurring revenue business.
One final pillar of our rejuvenated video story. We continue to see growing demand for Ultra High Definition solutions. UHD related sales in the fourth quarter were up 58% sequentially, which continues the strong sequential UHD growth trend we saw throughout the year. Frankly, it’s been a long time coming and we’re pleased to be finally taking advantage of the growing worldwide investment cycle, the deploying and monetizing, high quality, ultra high definition programming. So look, our video business has come a long way. I believe we stand head and shoulders above our competitors in terms of technology and market reputation, particularly when it comes to streaming high quality live content, and we are now establishing a corresponding track record of consistent financial performance.
So in summary, we are broadly looking at both our Cable Access and Video Business segments. After an extended investment cycle, we’ve done something really unique in transforming to industry leading cloud native technologies and empowering our customers with these new solutions. As a result, we’re delivering substantially improved financial performance, despite considerable market turbulence, and have positioned the business for a new phase of value creation.
And on that note, I’ll now turn the call over to you, Sanjay, for more detailed discussion of our financial results and our outlook.
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 fourth quarter performance was solid. We are pleased that we delivered another profitable quarter with strong results across a number of key financial metrics.
Total revenue was within our guidance range. Gross margins exceeded the high end, while our operating expenses came in at low end of our guidance range. This resulted in a profitable quarter with stronger EPS, than we have seen in several years. This was coupled with a strong balance sheet and working capital and another sequential improvement in cash. This is the sixth consecutive quarter of solid financial and strategic execution.
As we turn to slide six, to review our Q4 results. Revenue was $113.6 million. This compares to $101.4 million in Q3 ’18 and $101.1 million in Q4 ’17, resulting in a 12% quarter-over-quarter and year-over-year growth. The sequential revenue growth was primarily driven by our Video segment and year-over-year growth was primarily driven by our Cable Access segment. Cable Access revenue was $24.1 million compared to $28.1 million in Q3 and $13.5 million in the year ago period, reflecting a 14% decrease quarter-over-quarter, but a 79% year-over-year growth. This quarter brings Cable Access segment revenue to $90.9 million for the full year 2018, compared to $38.9 million for 2017, an increase of 92% after adjusting for segmental reporting change we made last year.
As you have seen, we’ve been steadily ramping the activity in our Cable Access segment over the last four quarters and are leading a fundamental capability upgrade in access architecture for cable operators. As Patrick discussed, the opportunity is a substantial global upgrade that will take time to ramp up as Tier 1 customers get rolling. As a result of both the scale and extent of these upgrades, we expect to experience some near-term ups and downs during the transition. Still there is no doubt, that we are at the forefront of driving these cable operator transitions. Of particular note, in Q4, we continue to see shipments of CableOS nodes for new distributed access architectures, underscoring and expanding addressable market opportunity for our Cable Access segment.
We are very pleased that our execution in our Video segment, reporting revenue of $89.5 million compared to $73.3 million in Q3 and $87.6 million in the same quarter last year. This reflects a 22% quarter-over-quarter growth and 2% year-over-year growth. In Q4, we had two greater than 10% revenue customers. Comcast, which contributed 15% of total revenue, and Charter, which contributed 14% of total revenue. Gross margin was 54.5% in Q4 compared to 52.1% in Q3 and 50.1% in Q4 ’17. Cable Access gross margin was 43.6% in Q4 compared to 38.7% in Q3 and 29.9% in Q4 ’17. The sequential improvement in gross margin is the result of favorable product mix and improving DAA node costs.
Video segment gross margin was 57.5% in Q4 versus 57.2% in Q3 and 53.2% in Q4 ’17. We are particularly pleased that we delivered record video margins concurrently with strong video revenues during Q4, indicating our market leadership position, our associated ability to command product pricing premium and our ongoing favor to more software and SaaS. Total subscription ARR for our SaaS deals was $9.6 million at the end of Q4 ’18 compared to $8.6 million at the end of Q4 ’17. This 12% increase in annual ARR reflects both an increase in SaaS customer base, which increased from seven customers in Q4 ’17 to 19 customers in Q4 ’18, growing 171% year-over-year and increased usage of our SaaS offerings.
We are still in our early stages of our SaaS evolution and continue to grow and expand our installed base. We believe that as both the number of customers and user grows, we will see accelerating growth in ARR. We maintain strong expense control during the quarter, without compromising of strategic growth investments. As a result, our Q4 operating expenses were $49.3 million, marginally higher than our recent operating expenses of $47.2 million in Q3 and comparable to $49.1 million in Q4 ’17. The sequential increase is primarily reflective of higher sales commissions and other incentive compensation associated with our strong results.
Please note that as a percentage of revenue, our total OpEx was only 43.4% in Q4 ’18 compared to 46.5% in Q3 and 48.6% in Q4 ’17. In fact, this was our lowest quarterly OpEx as a percentage of revenue in more than five years. Q4 operating income of $12.7 million, was driven by our Video segment, which contributed to the entire $12.7 million and the record 14.2% segment operating margin in the quarter. This marks sixth consecutive quarters of video operating profitability and full year segment operating margin of 8.3%. Also we are pleased that our Cable Access segment was breakeven this quarter, down slightly from the marginal $400,000 profit in the prior quarter. Our strong Q4 operating income of $12.7 million compares to $5.7 million in Q3 and $1.6 million in Q4 ’17. We ended Q4 with a weighted average diluted share count of 89 million compared to 87.8 million in Q3 and 82 million in Q4 ’17. The sequential increase of approximately 1.2 million shares is primarily due to 0.6 million shares of previously granted RSUs and options becoming dilutive as a result of an increase in our average stock price during the quarter. Approximately 0.5 million shares added as a result of weighted average impact of previously issued RSUs and options and approximately 0.1 million shares of additional Comcast warrants becoming in the money during Q4 as a result of an increase in our average stock price.
Q4 EPS was $0.11 compared to Q3 EPS of $0.04 and a breakeven EPS in Q4 ’17. The sequential and year-over-year improvements in EPS are a result of stronger margins and higher revenues from our new products coupled with vigilant cost management. Q4 bookings were $92.8 million compared to $79.5 million in Q3 and $122.9 million in Q4 ’17, resulting in a book-to-bill ratio of 0.8. This booking result was in line with our expected range as mentioned during our previous call. In particular, we experienced a delay in significant annual service contract renewal bookings of approximately $9 million which we booked in early January 2019. These specific bookings have historically been received in December each year. We ended with a book-to-bill ratio of 0.95 for the full year 2018, compared to 1.09 for 2017. This ratio is marginally lower than last year, primarily due to delayed annual service renewal bookings of $9 million, I just mentioned.
We will now move to our liquidity position and balance sheet on slide seven. We ended Q4 with a cash of $66 million. This compares to $61.7 million at the end of Q3 and $57 million at the end of Q4 ’17. The sequential increase in cash of $4.3 million reflects cash generated from operations of $6.6 million and net cash outflow for purchases of fixed assets of $2.3 million. Our days sales outstanding at the end of Q4 was 65 days compared to 70 days in Q3 and 62 days at the end of Q4 ’17. Our days inventory on hand was 45 days at the end of Q4 compared to 43 days at the end of Q3 and 46 days at the end of Q4 ’17.
We are pleased to share that our cash and DSO are improving sequentially and we have made material improvements in our working capital. Our working capital of approximately $60 million as of Q4 ’18 has increased 21% compared to Q3 ’18 and over 100% compared to Q4 ’17. At the end of Q4, backlog and deferred revenue was $186.4 million. This compares to $207.6 million in Q3 and $224.4 million in Q4 ’17. The backlog and deferred is down 10% sequentially and down 17% year-over-year.
Please note that ASC 606 adoption this year did not have a material impact on net revenue for the year. But it did have a significant impact on backlog and deferred revenue. Most specifically, upon adoption on January 1, 2018, we lost $10.1 million of 2018 revenue, $1 million of 2019 revenue and the corresponding $11.1 million in backlog and deferred revenue. However, under the 606 rules, we also recorded an additional $11.1 million in revenue in 2018 and reduced our backlog by the same amount. As a result, the combination of these two adjustments had a net impact of increasing total revenue by $1 million in 2018, while reducing our backlog and deferred revenue by $22.2 million. This 606 related impact combined with the $9 million in delayed SLA renewal bookings that I noted a moment ago, reduced our total backlog and deferred revenue by $31.2 million compared to prior year.
In summary, while we have work ahead of us in both of our business segment transitions, overall, I’m reassured by our solid Q4 results and full year performance in both the segments. And we remain committed to our mid and long-term value creation opportunity.
Now let’s turn to slide eight for our Q1 ’19 non-GAAP guidance. For Q1 ’19, we expect revenues in the 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. As a reminder, Q1 has historically been seasonally down from Q4. Gross margin in the range of 52.5% to 54.5%. Operating expenses to range from $49 million to $51 million, operating income to range from a loss of $9 million to an income of $0.1 million. EPS to range from a loss of $0.11 to a loss of $0.01. And effective tax rate of 12%. Our weighted average share count of 88.2 million. And finally, cash at the end of Q1 is expected to range between $60 million and $70 million.
Turning to our full year outlook on slide nine. We expect revenue in the range of $390 million to $440 million with Video revenue in the range of $290 million to $310 million, and Cable Access revenue in the range of $100 million to $130 million. Gross margins 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 $10 million to an income of $40.4 million. EPS to range from a loss of $0.16 to an income of $0.33. And effective tax rate of 12%. Our weighted average share count to range from 89.5 million to 91.1 million shares. Year-end cash to range from $65 million to $85 million. We are pleased with our continued execution, and we have a solid momentum heading into 2019.
I will like to conclude by stating that we have delivered six strong consecutive quarters, both strategically and financially. And the outlook for full year 2019 remains positive. We remain focused on executing our strategic initiatives and delivering long-term profitable growth and shareholder value.
So with that, thank you. And back to you Patrick.
Okay, thanks, Sanjay. And we want to wrap it up by reviewing our strategic priorities. For Cable Access business, objective number one is to further scale our first wave of CableOS deployments. Leveraging this growing CableOS market momentum, our second objective is to secure new design wins with additional operators with international expansion becoming a key theme in 2019. And as cable operator deployment plans in DAA solidify, objective number three is to leverage our DAA technology and market-lead to further accelerate growth.
Turning to our Video segment. Our first objective is to continue to further grow our over-the-top streaming market share across both 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 our third objective is to deliver consistent segment profitability, just as we’ve done over the past six quarters. Our commitment to these priorities enabled material strategic and financial progress throughout last year. And we entered 2019 with continuing confidence in driving growth, profitability and shareholder value. I want to close here by thanking our amazing team members and our customer partners for the results we drove together in 2018. And our stockholders for your continued support.
With that, let’s now open up the call for your questions.
Questions and Answers:
Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Simon Leopold with Raymond James.
Great. Thank you for taking the question. I wanted to see if maybe we could parse some of the trends in the Cable Access side of your business, and maybe update what may or may not have changed. And just to sort of lay it out, I tend to think of the Distributed Access Architecture is in the virtual CCAP initiatives, as different but sort of cousins kind of related. And my impression is DAA, you sound more upbeat and that looks like it’s ramping in the spring, whereas maybe virtual CCAP might take a little bit longer, that’s part one.
Part two, just by my rough math, you’re Access business needs to deliver $25 million to $30 million per quarter in the second through fourth quarters. I’m wondering if you can give us some thoughts on what kind of linearity you expect? I appreciate for your guidance, but just looking for a little bit more detail on how it plays out? Thank you.
Well, thanks, Simon. Appreciate the thoughtful questions. First, yes, I would agree that the idea of virtualization in DAA are cousins. I mean virtualization does not require DAA. In fact, as we’ve noted several times, the majority of our deployments to date are not DAA but they are all — by definition with us are virtualized. We actually see continued good momentum of — let me call them centralized deployments of just with a virtualized CMTS. I think the issue or the fact is, Simon, that the largest operators who are involved with, I’d say are turning their chairs hard toward DAA. So it’s not a lack of good competitive momentum with just pure virtualized, it’s just that right now most of that activity I would say is with the smaller and medium size operators.
Whereas, the larger ones, I really locked into, I’d say the battle with 5G and really pushing their broadband businesses further aggressively. You saw that in the so-called 10G announcement at the CES show. And so indeed, just because of the nature of the Tier 1 customers themselves and their increasing focus on DAA, we see, let me say over the next 24 months, probably greater volume opportunity with those kinds of deployments.
To the second part of your question about ramp, I also appreciate you kind of doing the rough math. And indeed, we anticipate a pretty busy year in total, and after a pretty slow start in Q1 and it pretty good pickup. It remains to be seen exactly what the pace is. We’re basing our full-year numbers on a fairly detailed plans that to multiple operators have shared with us and we are involved intimately with crafting those plans in the feasibility to rollout — the rollout. Exactly what Q2 looks like versus Q4, it’s too soon for us to give that kind of a detail. It will be a ramp, it will be an accelerating pace through the year.
That being said, we don’t see this as big bang in Q4, we do see a ramp, a lot of this is outside plant work but that frankly needs to begin in earnest in Q2. So I hope that helps a little bit with the qualitative picture. And all I can say beyond that is we’ll certainly keep you posted as the next level of detail of these DAA deployment plans get more solidified.
That is helpful. Just as a very quick follow-up then if there’s more DAA and less virtual CCAP, I assume that’s margin unfavorable in terms of just that the mix for you?
Well, let me back, I’m little uncomfortable, I mean you probably get it, but I’m little uncomfortable with the characterization less virtualized. All of this DAA stuff, everything we do, has got a virtualized CCAP at the core. Okay? And so, from that point of view, I mean, think about our business in two distinct blocks, there’s the centralized software piece or maybe we sell the servers with, so let’s say the pure software or let’s say high north of 60% margin stuff, if we sell servers with it. And that scales with bandwidth. And so whether it’s DAA or centralized, that doesn’t change.
I’d say DAA brings additional revenue dollars, admittedly at lower margin with these nodes. And so, yes, the blended margin goes down, but the revenue is kind of on a per subscriber or per gigabit basis, the revenue was up because we’re delivering this hardware capability out into the field, at a higher price, albeit at a lower margin than we are in the centralized scenario. So yes, in DAA blended gross margin is a little bit less. Nothing what we’ve seen historically, we still think as Sanjay said we’re in upward track there. But it is less than it would be, if we were all exclusively centralized and shipping only pure software. Does that help?
It does. Thank you very much.
All right. Thank you.
Thank you. Our next question comes from Tim Savageaux with Northland Capital.
Hi, good afternoon. Maybe first question kind of addressing that margin issue from a different direction. You did have a very strong quarter in Video and strong margins as well as in nodes, very high operating margins, I wonder you look to be guiding sort of flat to down a bit from a revenue perspective. I wonder if you can comment on what sort of margin compression — direction, sorry, not compression, you might expect from a gross and operating perspective on the video side or what’s contemplated in your annual guidance relative to what you did in ’18?
Sure, Tim. So I’ll start with Video. Video margins, we ended at 56.8% for the whole year. But, if you look at all the quarters, Q2 was 55% and Q4, we got 57.5%. So, although the mix is improving, but there is a range we have seen more recently 55% to 57%. So that’s in our guidance we baked 55% as low end and 57% as high-end for Video. And that’s similar to not only Q1 but for the whole year as well.
Coming to Cable, this year, for the full year, we ended at 44% approximate margins on cables. And the mix — and as Patrick has discussed because of the DAA and virtualization, so the mix could change quarter and for the whole year. So, while we did end at 44% for the whole year, but we have seen mid 30s to mid 40s in the year. So, for guidance purposes for Q1, we are keeping a range of mid 30s to 40s, and for the whole year we are keeping approximately 35% to 45%. We believe, by the end of the year we will catch up with what we saw this year. And blended both if you see both the margins we end at 54.5% for the whole company for both segments for the full year. And hence, 52.5% to 54.5% for Q1, again high end is exactly what we found for the whole year. And for full year 2019, the guidance is 50% to 53.5%. I hope that provides some insight.
Yes. And any follow-up on, you seem to have a fair number of tailwinds in the Video side, from streaming, from UHD. Any comments on the growth potential there, the puts and takes driving that? Can we assume that on the Video side, you would look to hold OpEx steady or maybe decrease it a little bit?
Well I should may I’ll jump in here. Tim on the — look, just like in the last part, yes, we think that we are scaled and in good shape in terms of the amount of investment we’re making in the business. And so, I wouldn’t expect any material change in OpEx as we go forward. Regarding the overall trends, as you mentioned, there is favorable things happening, market dynamic wise or competitive positioning, technology trend. I’d say that the one headwind although is the transition to SaaS. And we — to be clear, we think that overall, this is a good thing.
And frankly, it was a somewhat slower year than we expected in ’18 in terms of seeing opportunities with the sales, although the number of customers grew. And here, what’s really interesting is we’re bringing on customers that we never worked with before. So we really feel as though we’re in building almost a 20, we’re really expanding the addressed market. And the other thing we’ve seen with each of those customers although they’re modest in size at the outset, we’ve seen almost across the Board a ramp in spending, we’re kind of there on the ground floor with a lot of these guys as they’re getting going with new business models. And so we’re committed to this is the right long-term strategic business direction. That being said, when we sign up a new deal with — either with an existing customer or a new customer is a SaaS deal, that’s less revenue upfront, than it would have been in the past and that’s more in backlog that will be recognized ratably over the contract term. So, that creates a I think a positive thing strategically, but indeed a little bit of a headwind. And we do expect the pace. I don’t want to overstate it, but we do expect the pace of business tipping over to SaaS to increase somewhat in ’19. And I’d say that is a consideration that plays out on the top line for us. So keep that in mind as you look at the year-over-year comparisons.
Yes, I just add to that for video overall the way our focus is shifting to manage the video business is not only purely top line, but together with managing the SaaS transitions looking at the two key metrics, which is the gross margins as we discussed earlier, at the same time, the OpEx. So, overall, the profitability of video business is our focus. And as you saw this quarter, we received a very good operating margin on that Video segment. Similarly, our plan is to in over a longer period of time, we believe our operating margin should be in double digit and that’s the path we are marching on toward. So I think the focus is not only just top line, but OpEx as well and margins and the right mix of both.
Got it. And last quick one for me, maybe I’ll pass it on, spin on. I think quite a while since we’ve seen Charter on the 10% less. Wonder if you can comment, I mean, I’m going to — I would guess that’s likely focused on the video side. But if you had any color on kind of what brought Charter up to join Comcast, and the 10% customer list in the quarter?
I regret, we can’t give any more color on the makeup of it but I — let me just take the opportunity to concur that it’s a — we’re happy to see them there, it’s a — it’s certainly critically important to cable account. And I don’t think one can overstate the imports of the value of having a strong strategic relationship with them as well as we do with Comcast. And it’s been a little bit slow as we saw Charter and Time Warner go through an M&A process and we stayed focused closed to the account and it’s good to see the relationship paying dividends.
Thank you. And our next question comes from Steven Frankel with Dougherty. Please go ahead.
Good afternoon. Patrick, wonder if you could give us any insight on how you get better visibility into the pace of these nodes getting installed in the past moving from nodes to high margin software. And in that vein, I want to make — I wanted to ask if that 2020 guidance assumes that this business does have a material software component in 2019? Or do you expect that to come next year after you get through these installation issues?
Look, I want to acknowledge that it’s been a road to get here that has had more twists and turns than we anticipated. And frankly more of those out of our control than in our control. So we’re a little bit conflicted if I’m really transparent. On one hand, we think we have quite good visibility. And we think that the vast majority of issues are behind us and behind our customers. That being said, we’re very cognizant of the — he appearance for the unexpected, this gotten us to hear. So I would acknowledge that we’re straddling a line on one hand, we’re confident that these things are going to move forward.
But the exact pace and the exact volume is something that we’re, — we don’t want to get too far ahead of our skis. I think we’ve given pretty good full-year guidance, particularly when you consider the slow start in Q1. So we see even in a slow scenario, a pretty healthy ramp. And included in that ramp is probably with the volume DAA stuff is hardware first but absolutely there’s corresponding software, maybe not quite in proportion but corresponding software that this follows and gets deployed in the course of 2019. I think we have to wait and see a little further before we’re more granular or more aggressive about the exact mix of that.
And is this a ramp that begins in Q2, is that driven out of backlog with better visibility on timing or this is more about conversions of trial activity to deployments as we go through the year?
Well, it’s a little bit of both. We have shipped several thousand nodes out there that do not have companion software licenses shipped within yet. So those nodes are to be — and there’s no question is, I think we discussed on this call last quarter, they’re not much used without buying that software. So we see companion high margin revenue that is still to come with what’s already been delivered, Steve. And we see that as kind of the first shoe to drop in terms of the next phase of substantial deployment. But, frankly we think of the several thousand that have been shipped to date is really the tip of the iceberg when you think about the plans of multiple Tier 1 operators.
So, behind that is additional hardware purchases and additional software purchases coming behind that kind of in a cycle. There’s no doubt in our mind that that flywheel starts to move in Q2 and picks up pace the rest of the year. And as discussed a little earlier on this call, the exact pace of that and the timing, we’re not in a position to give precise second quarter guidance here. But we did feel comfortable giving a full-year view of what we think our customers are determined to achieve by the end of the year.
Okay. And then look back quickly on Q4. You would — had hoped to get a $100 million in Cable Access, you fell a little short of that. Would you say that shortfall really related to this issue of some of the major customers are rolling out more slowly as they — they work on issues not directly related to your business? Are you part of the puzzle?
Yes. So, essentially, yes. And again, I want to emphasize that the — I think that they are very close. But as often is the case with very complex deployments with particularly with Tier 1s who want things just so. And basically want to get something that is done right and it’s going to be scalable on a big reproducible on a massive scale. We have a couple of customers who came across things. I noted one change, 40 gig to 100 gig hardware as an example that they decided kind of 11th hour. You know what, we want to change this and it’s — and it’s the better interest of the long-term scalability of the program.
So, yes, that created a headwind on deployment in Q4. We expect that to continue through Q1 as that stuff gets worked through. But none of these things that I’m referring to the specific changes are decisions that have been made kind of late in the game, regarding deployment, none of them involve real rocket science. So we are not praying that anything is going to work out. We wouldn’t be able to give the guidance that we’re giving if we didn’t have a I think a very comprehensive understanding of the nature and the complexity in the basically the confidence in achieving what is currently being worked through.
Okay. And the margin improvement in Video, how much of that is the transition of your traditional customers from a bundled hardware, software approach to licensing pure software? Or is that benefit still to come as we work through this year and next year?
So, Steve, we have not traditionally broken out the margins that for this particular segment within video is improving, but I can tell you overall, if you look at the mix for entire gamut of our video products, overall, we see that software mix in the entire product value is increasing composition. And you know marginally every quarter, you’re seeing that improvement and they’re glad to see a very high percentage in Q4, 57.5%. But I’d say it’s spread across all of our products and we are able to actually demand market premium as I mentioned in the prepared remarks and having us strong competitive position on pricing and that’s building up because of software mix.
Okay, great. Thank you.
Thank you. Our next question is from Simon Leopold with Raymond James. Please go ahead.
I appreciate you letting me back in for — and just hopefully maybe a quick follow-up and maybe you did explain in the prepared remarks. But just wanted to look back at the actual fourth quarter. The gross margin in Cable Edge segment was particularly strong, and you upside it in the quarter. So it does look like video has been very stable throughout 2018, but we’ve seen a lot of volatility in the Cable Edge. Could you just help us understand what actually happened in your December quarter to help the Cable Edge gross margin? Thanks.
Well, so, you’re right, Simon. We’ve experienced margins in Cable at the beginning of the year versus now like for example, Q1 47%, Q2 50%, Q3 we saw 39% and Q4 coming back 44%. I think the mix delay explains among various product lines in Cable which is a mix of the nodes, the mix of software together with services we provide to the Cable customers. The mix is playing and that is just a result of that, it’s nothing which is particularly exceptional to call out. I would say it’s purely mix and that’s baked into our guidance as well.
Okay. Thank you for the follow-up.
Thank you. Our next question is from George Notter with Jefferies. Please go ahead.
Hi, this is Kyle on for George. Thanks for taking the question. Of the Distributed Access Deployments that you’re currently working on, I guess specifically those 1,000 DAA nodes that you shipped in Q4. Is there any regional focus to that deployment activity like is this US, Europe broad based, any additional color you can add there would be great?
The biggest opportunities we see right now that we’re working on are in the North America and in Europe.
Okay. In that 1,000 nodes…
I mean, to be clear, global cable industry is, I think it’s captured the imagination of the global cable industry. But in terms of those who are, say, furthest along and pursuing it most aggressively that we think will see deployed first. It’s in Europe and North America.
So there’s some subset of those 1,000 nodes that were in each of those regions?
Well, we don’t want to go — get that specific. I mean, we announced substantial nodes in Q3 as well. So, we’ve shipped several thousand nodes to-date and yes, I think we’ll keep it there.
Fine. And then, do you see Distributed Access decisions across operators holding up the cycle or the opportunity for you? I appreciate the commentary that virtualization aspect of your product is not necessarily tied to DAA, but big architecture decisions across your customers could understandably be something that takes some time. So, anything you’re seeing there across your customer engagements would help.
Well, in my prepared remarks, I noted that we are closely engaged with four out of the top eight operators in North America and in Europe. And I would say, I mean, the best of our understanding, those four are — if not working exclusively with Harmonic are — have decided to work very closely with Harmonic kind of at least a substantial part of what they’re doing. That being said, the other four are still as you’ve suggested in a discussion and a decision process and engaged to, I think with multiple of potential technology suppliers.
So we think we’ve carved out a very strong position, but it’s not across 100% of the customers. Where we’re most — where we’re most involved, we think a choice has been made and really it’s kind of operational and deployment planning, that’s going on in the sequence of advanced lab and field trials to get ready for volume deployment. Elsewhere, I think there’s customers who just not as far along in the process and yes, there is a lot of, I’d say the next wave of operators who are trying to make decisions about architecture, as well as, who their technology partner is going to be.
Okay, thanks, that’s helpful. And one last one on the video side of the business in terms of the full-year guidance. Is there something you’re expecting in terms of the headwind from the further transition to SaaS models like is there a headwind that you have baked into that guidance?
Yes, Kyle, we have. As you see there, if you take the midpoint of our annual guidance range, we are marginally down then this year, around 3% or 4% and that’s what we’ve experienced when we transitioned to SaaS. We’ve experienced it a little bit in ’18 and in ’17 we did experienced it for sure in the first half. So, yes, you’re right, SaaS transition marginally is going to impact the top line.
Okay. And consistent with the headwinds seen last year is essentially what you’re expecting?
Okay. All right, great. Thanks a lot. Thanks for taking the question.
Okay. Listen, I’d like to thank everyone again for joining the call today and for following our business. I hope it comes across that we’re pleased with the progress we’ve made last year but we see good opportunity ahead, and we’re excited about pursuing it. We look forward to talking with you all again soon. Thanks very much.
Okay, thank you.
And thank you, ladies and gentlemen, this concludes today’s conference. Thank you for your participating. You may now disconnect.
Patrick Harshman — President and Chief Executive Officer” data-reactid=”188″ type=”text”>Patrick Harshman — President and Chief Executive Officer
Simon Leopold — Raymond James — Analyst” data-reactid=”190″ type=”text”>Simon Leopold — Raymond James — Analyst
Steven Frankel — Dougherty — Analyst” data-reactid=”192″ type=”text”>Steven Frankel — Dougherty — Analyst
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