Harmonic Inc. (HLIT) Earnings Call Transcript & Summary

Hello, everybody. Thank you for joining us this afternoon. Tim Long here, Barclays com equipment hardware analyst. Alyssa Shreves on my team is on the call with me as well. We're happy to have 2 members of the management team of Harmonic on the call with us here this afternoon. Sanjay Kalra, SVP and CFO; and Jeremy Rosenberg, SVP, Business development, will be here to talk to us about the company and the industry. Before we get into the Q&A, I'm going to throw it over to them to just give a little bit of overview on Harmonic, and then we'll dig into some more specifics.

Thanks, Tim. This is Sanjay. I'll give a brief introduction about the company. Harmonic has 2 business segments under -- both under one roof, which are closely related, but distinct. One, we call cable access, and that's specifically working with cable operators around the globe, enabling them to deliver the next-generation of gigabit broadband services. Services, which consumers like me and you probably know as the cable modern service. We think that there's tremendous growth opportunity there, and we've done some innovative things. And that's really the core of one of the business units, perhaps the fastest-growing and fastest-changing part of our business. The other segment of the business, which actually is the lion's share of our revenue today, we call video. And that has to do with everything around creating, originating and delivering particularly live video and television programming to consumers around the globe as well. And here, of course, we do business with cable operators, but also historically, other pay-TV kind of operators, IPTV, telcos, satellite, direct-to-home, broadcast and media companies. And increasingly, new streaming players. And this is a very international business, previously, approximately 2/3 of our video revenue was outside the U.S.

So with that, thanks for the overview there, Sanjay. I wanted to start with -- you guys did some good sessions about 6 months or so ago on the 2 businesses more of a deep dive and you had some longer-term targets in near market share and whatnot. Just curious how -- I mean, it's been 6 months. So curious what -- have you got any reaction from the industry at all from this? And curious if the changing times, it's early. I think it was a 3 or 4-year goal. So I'm sure nothing really changed. But some of those markets were a little bit more nascent, fiber to the home, cloud, edge. So just curious how you kind of feel about that. And if things have been impacted at all by everything that's going on? Or are you just plugging along with it?

Well, Tim, I'll say, overall, we say firm on march into our strategic priorities and goals for our 2024 targets, which we shared with the Street in June, early this year. In both the segments, we stay strong on those priorities. I would say definitely it's a changing landscape of supply chain and inflationary environment. While most recently, as we shared in our Q3 call, currently, the supply chain is a challenging landscape. And we've been maneuvering through it pretty well relative to what we have seen in the industry with others. I think our performance has been well. We've been able to capture additional market share. And of course, which helps more revenues and profitability. But this changing landscape is something which we are working on. We've had success. We've been able to manage the supply chain challenges with creating backup plans and whatnot, having investments in our inventories timely, proactively reacting to what we are seeing or what we are anticipating. I think there's an ever-changing landscape, which we'll have to, I think, manage further ahead. But so far, we've done well, and we feel strong and [ we stay far along ] march into our goals as you said.

Just a little more color there, Tim. So with Sanjay, yes, we're very much on target towards the goals we laid out. I would say we're -- and may be partially because of the supply chain, but maybe there's some other stuff going on in terms of competitors receding, shall we say, in the hardware side of cable access, some. And so we've been really outperforming on hardware percentage there versus our expectations. I think we laid out a long-term 30% hardware share. And we think right now, we're at about 60%. I think that's going to go down. We're going to watch that to see does it go down to the 30% that we expected or does it stay higher. So that's, I would say, one of the investor reactions, Tim, that they're looking at, but very much on track.

Okay. Great, great. Maybe one other kind of more corporate financial one before we get into the 2 divisions. So just on the profitability front, I mean, obviously, there's some of these headwinds that you guys have to fight through. But can you talk a little bit about how you're going to balance the R&D needs and some of these new businesses that you want to be more aggressive in with the goals around profitability. So how -- you talk a little bit about the puts and takes there and the opportunity set on the other side, balanced with the investment piece.

Yes, Tim. So I'll say, with our focus on the long-term profitability and growth, which we shared in June, we continue to invest as planned in the R&D initiatives we laid out. In terms of how we are managing, let me share a data point, which will be helpful. If I remind the guidance we gave for the full year for 2021 in February this year, it was approximately $447 million in revenue at midpoint and $0.2 EPS at midpoint for the full year. Our most recent guidance we gave at our Q3 earnings call. At midpoint, the revenue guidance is $504 million and EPS of $0.3 at midpoint. What this data tells us is that despite the strong supply chain landscape ever-changing and the inflationary environments we have seen, I think we did pretty well, and we can do well. So I think how we are managing this landscape, basically, in terms of being proactive and increased market share that Jeremy just mentioned, I think all that's contributing and the way we are maneuvering through this is what we are going to continue as our goal to meet those targets.

Yes. I'd also -- just to get sort of some tech color to that, I think the way in which we do R&D is very smart. So if you look at the underlying function engines that we do in our video division, those are all designed, what's called a microservices basis. So we use those same engines in traditional appliances in cloud servers and we can use them on virtual machines. We can use them on true cloud native. And so a lot of what we do is even scalable across all these different initiatives in video. And then in the cable side, the engineering is really geared towards applications on a compute fabric, which I think is generally misunderstood I think even maybe some of our competitors think we have software versions of things. But really, we have a compute fabric that we put these applications on top of we have an orchestration layer that allows us a kind of flexibility in attacking some of these initiatives, Tim, on a very efficient and effective basis and very future friendly. So there's both a financial consideration to your question that Sanjay laid out, but I think our R&D teams are very smart about how they're engineering.

Okay. That's helpful. Maybe just a quick follow-up Sanjay to you. You talked about -- you mentioned kind of inflation in there. Are you -- is the mindset that ultimately will be from price raises across some of your product categories to offset what we're seeing on the component side? I'm assuming if so, there's a little bit of a lag to that as far as hitting your numbers?

That's right, Tim. I think we'll have to maneuver through a couple of things, not only price increases, we are actively working with our customers for getting the price increases because you have to offset the prices we are seeing for our costs increasing. So that's a piece which we are working on. So definitely, we expect some of the offset coming from the price increases. That said, there is economies of scale as we grow, we should see more savings, which should be able to offset some of the increased costs we are seeing as well. So it's a mix of things. I think, overall, we are -- we have feel, as I said, steady on meeting our goals.

Okay. Great.

Just kind of diving into the cable access business. You spoke about the strength you've been seeing there. You had now record quarter last month, with revenue up over 40% year-over-year. You have new Tier 1 operator added to the customer count and you're kind of scaling ongoing deployments. So can you kind of talk about some of the competitive dynamics around your CableOS solution and kind of how that's driving growth?

Alyssa, we have really not seen competition in the software space of cable, I mean for Dell'Oro, Harmonic has 100% software market share in virtualized CMTS. We are the only company which has active deployments powered by these CMTS software. On the hardware side, though, we have competition, but we still have the largest market share of 60% plus, which Jeremy just mentioned, and that comes from the Dell'Oro analyst report. So the competition in the past, since last few years, we've been hearing that the competition would come up. We have not really seen it on the software side. I think the lead we have today is significant. With the number of cable operators we have and the progress we've seen since the last 3 years, every quarter in the number of deployments, number of Tier 1s, it's really impressive, I would say. We exited Q3 the total 9 Tier 1s. From the competition, we have not heard at least in the public information we don't know of any Tier 1 customer with any of our competition on the software side. So I think with this current dynamics and the current data we see from Dell'Oro, we think we are in a pretty good position in terms of the competitive landscape.

Just touching on DAA and the ramp there. What are you kind of seeing from customers as far as more broad adoption for DAA?

Well, we are seeing the customers -- the broad adoption continues. The ramping is happening as [ bad ]. I would say, 4 out of 9 Tier 1s, which I mentioned, they are deploying at scale. And our other Tier 1 customers who are not deploying at scale, we expect them to grow as well in the outer years, maybe starting in 2022. So we see -- we have a very good visibility of how our deployments of our customers will be [ applied ]. Basically, we have to plan for the supply chain much early given the scenario we are all in. So I think with this visibility, we expect the DAA ramp to continue, and we don't see any changes there.

Okay. Maybe if we head over to the video side, can you just talk a little bit about the kind of transformation here towards more software-based model, maybe if we start off kind of at the high level there, and then we could drill down into it a little bit.

Sure. So we've really been mostly software in the sense for a very long time and maybe not appreciated as such because that was going out on COTS hardware. The big transform push we're going on lately is really into SaaS and virtualizing cloud. And where we're really pushing out and in front is on sort of high-quality live and that combination. But our leadership in this industry has always been based on quality and innovation. And I think we're out in front on that. So more specifically, we're cloud agnostic. We're cloud neutral. And a lot of, especially the bigger customers want optionality to be able to move things between public cloud or between maybe their private cloud and public. We actually do that in a seamless way. So we have something that's hit with failover between clouds. We think thus far, that's quite unique and very much at the high end of performance. And we're actually driving a quality of service through cloud playout. That's higher than typical on-prem, on-prem typically shoots for 5 [ nines]. We're shooting 6 nines in the cloud. So it is very high-end performance, very high-end engineering. And that's backed by an orchestration layer that's, again, a very different approach than a lot of other players. So we don't simply put functions on to virtual machines, we manage the whole fabric so that we can do things like hit list failover. We can give 6 nines. And as the industry, Tim, moves to more and more high-profile things going to the cloud, more and more high-performance video going to the cloud, that's really coming to our sweet spot. And cautious optimism, we are not only looking at tremendous TAM growth but also over earn on market share in that TAM growth as the industry really shifts into more performance demand in these cloud SaaS environments.

Okay. Just kind of following up on where you see the video opportunity moving. Can you talk about some of the opportunities you have that you can offer smaller operators? I know you have a partnership with Jackson Energy Authority. And just kind of how large is this opportunity in working with smaller operators, especially in light of some of the government programs now around rural broadband.

Yes. So Alyssa, it's a great question. And I think it might be helpful also to tie that back to the cable access business. And also, interestingly, perhaps for understanding what some people are calling the C-band spectrum. There's a tremendous number of small operators beyond the metro environments, especially in the United States. And a lot of them have not had very high capacity connections. And they haven't necessarily been able to offer OTT, rich OTT kinds of services the way some of the more urban operators have been able to bundle in. And so we look to enable that in conjunction with Jackson Energy Authority and their offering. There's thousands of small operators in this country who can benefit from that. It's not -- obviously, the majority of the population, but it's a very important segment of the population that has been underserved. So helping with that, that then also, as they build that up, that then also drives a need for increased capabilities on their network, which we can help with our other division. And interestingly, it also helps to transform for getting all the wholesale video off of satellite onto terrestrial. One of the biggest barriers to -- for some of these networks to move, not simply to use less spectrum but to move off satellite. So we announced this last quarter a deal, nothing to do with the FCC, where a network is a significant name network is going to come off satellite and go terrestrial. Now most all of those receipt points from that network are urban. But for lots of networks, lots of programming networks, a lot of their receipt points are rural, and they don't have good connectivity that they can necessarily easily pick up. So as these programs roll out Alyssa, and you have art off and other things, getting richer broadband out, not just the consumers but to their providers, then the ability for the programmer to say, I don't have to be on satellite anymore to make sure that I can hit those points, also drives the other part of our business where we have these solutions to allow people to move from satellite to terrestrial. So it's a great question, and it's a really multifaceted opportunity for us.

Alyssa, I'd like to add some color to your earlier part of the question in terms of how are we seeing the opportunities for smaller operators on video. I say when we compare the pipeline and what the pipeline entails versus what we've seen historically, I think there is an extremely long tail of opportunities in the market, much bigger than the traditional broadcast industry, where a large amount of capital was required by any entrant to start a service. But in today's cloud and streaming world, the barrier to that is substantially lower, that enables a wider range of services and the opportunities could be material. And it's not only is limited to the traditional media and entertainment, but it could enter other markets, which are very nascent right now, for example, gambling and esports. So the opportunities could be big, the number of opportunities are much more. And I think overall, we see streaming market definitely growing and helping our video business.

And just to follow up on that. I think, Jeremy, you touched a little bit on it when you're talking about these operators moving from satellite to terrestrial, is the -- is what's making it difficult and why we've only really seen one so far, operator kind of voluntarily do this? Is this due to a lack of receive points? Or is it something else? Just given the operational and economic efficiencies that come from moving from satellite to terrestrial, kind of what is the driving force kind of making these satellite operators. So -- are these operators so reluctant to switch?

So the programmers, and I was actually a programmer who was a customer of Harmonic once upon a time. But I understand it's fairly well. The programmers have really 2 things. One is that they don't want to lose their rural affiliates. And so having those rich connections terrestrially enables them not to lose. And the other is, typically, you're on very long-term satellite contracts 10 years, 5 years. And so you're looking at for when the end of that contract is to -- when you do the transition. So these are not -- most of these are nothing like any kind of month-to-month decision. These are very long-term planning cycles. And so I think in the next few years, we'll see a lot more of this as contracts turn over and as rural broadband builds out. And I think we'll also see this in other countries, the same dynamic.

I just wanted to get back to some of the adjacencies that you guys have spent some time on in your presentations 6 months ago. Just curious as far as kind of synergies and how you get the ramp going in some of these other businesses, fiber to the home, edge, cloud services. Anything you can tell us about kind of what that you do, what are you doing now and where you're successful now? And how do you think that will help translate into success into some of these other verticals?

Sanjay, you want me to start or? Okay. So -- well, I'll start with the PON, the fiber. And I think we've tried to make clear to the community, we're not attacking pure fiber play, Tim. We're really going after the hybrid environment for operators who are doing both coax and fiber. And we think that that's a rich opportunity for us to super-serve our customer set. So that the same platform is not only the same software platform, but even our hardware is capable of doing fiber and coax simultaneously. And so that may be for somebody who's planning to transition completely to fiber, maybe for somebody who's just doing it for greenfield build-outs could be for business parts. It could be -- maybe your neighbor is a power user, and they want to get them off the neighborhood with everybody else, and they give them fiber and I don't know what they charge them for that power user. But it gives all kinds of optionality, Tim, to and a sense of future compatibility. There's a lot of our customers are taking somewhat different approaches for fiber sooner, fiber later, fiber now, fiber never. But we think everyone's going to do a little bit and at a minimum, and some will do a lot. And so there's an enormous opportunity there. And so our platform really then super serves our customers that way. And so it helps us at base, in a sense, also pick up market share. And because you have that optionality, even if you're not sure if you're going to use it in the next year or 2, if you think you might, you may just simply want it for that feature set from us. And for those who are doing, then it's additional spend with us. So we laid out a TAM of hundreds of millions of dollars on that for long term. It's a small, small set of the overall fiber to the premise. We may someday get to overall fiber to the premise on a pure play, but that's not the play right now. And we're deploying right now. I'm sure Sanjay would not reject the PO. If we got one that came over the transom, that was a pure fiber. But it's just not -- that's -- we're just super-serving our segment. And then on the edge, we did announce at SCTE that to take edge applications from Google Cloud out to the edge. And again, I think if you understand what we're doing in our software platform as an orchestrated compute platform, we can take compute in the head end. We can take compute at a switch. We can take compute at the edge, and we can coordinate and orchestrate that for its own special purposes. And we think that becomes increasingly interesting over time for our customer set. So that's also giving optionality. We'll see how much more of that grows how quickly, but we've architected to be able to really help our customer set exploit that to the fullest extent. You're on mute I think.

Sorry about that. Yes. Very helpful there. Yes, it's always good to see new TAMs coming in and particularly large ones. I think we are up against the end of the time here. So Jeremy, Sanjay, thank you very much for the time. Thank you, everybody, for joining. We look forward to catching up with you again soon. So thank you.

Tim, that's a pleasure.

Thanks, Tim. Thanks, Alyssa. Bye.

Thank you.