Harmonic Inc. (HLIT) Earnings Call Transcript & Summary

Hello, Everybody. Thanks for joining. Tim Long, Barclays IT hardware comm equipment analyst. Happy to start this session on Harmonic. Walter, thanks for coming. Appreciate it.

Thanks for having me.

A lot of news recently. So we have some things to talk about here.

Absolutely. It's been full week.

Yes, yes. So maybe we'll start off on the Video business. Maybe talk a little bit high level about -- I mean, obviously, this was a process that was looked at a year or 2 ago, didn't materialize. Now it did. So just kind of walk us through the logic behind the deal.

Yes, certainly. Yes, back in November of 2023, we had kicked off a strategic review of the Video business. At that time, we exited out of that process back in the spring of 2024, and we had looked at selling that business. And at that point in time, we did not find an appropriate buyer that we felt we could execute and close a deal on. After that process, we actually went forward and restructured the business. We got the business performing quite strongly and consistently over the last 18 months. Obviously, folks saw the performance of the Video business, both the video SaaS as well as the appliance side of the business and saw that strong performance. And very recently, we had MediaKind approach us and put an offer in front of us that we felt was compelling, compelling to us, our shareholders, but also our customers and our employees. MediaKind is a video infrastructure and cloud streaming organization and are focused entirely on video. And now with the Harmonic Video piece, they'll be very much #1 in the industry as an agnostic provider of video streaming services and infrastructure in that market. So we think it's great for employees, great for customers as well because we want to ensure our customers are well supported and that, that technology is continued to invest in. From the Harmonic standpoint, we have, for quite a while now, stated that our focus is on taking advantage and growing the broadband business with our clear market leadership position in virtualized CMTS in terms of the DOCSIS environment as well as on fiber. And so we want to take advantage and even further accelerate that growth. So now as a pure-play broadband provider in terms of the company's focus, we can now go and focus in on continuing to grow that business, looking to leverage the installed base that we're building up across all of our customer set. And I think that's really exciting for the company as well with the capital infusion, it allows us a little more flexibility, both to invest in that business as well as to return capital to shareholders.

Okay. Great. Was MediaKind involved in the process the prior time or didn't really...

Well our prior process was public.

Yes.

So we opened it up to everybody in terms of looking at the business and determining who was all interested. Obviously, they are a big player in this market as well and no doubt follow us very closely.

Yes. Okay. And was there -- I mean, Video businesses, but you had the streaming part and the appliance part. Was there a thought in the first process or this time around to sell them discretely? Or did it make more sense for them to be packaged?

Well, this time, it was -- we were approached for the entire business. I think you've heard us over the last few quarters talk about hybrid solutions and video, where we've got a lot of customers that are acquiring appliance technology, leveraging that in certain parts of their network and then doing cloud streaming as well. So we've seen more and more customers approach us that want to use both. And so I think from a customer standpoint, the assets belong together. Could we have dissected them? Certainly, if that made sense, we would have went through and did that. But there's definitely a lot of commonality across the technology stack, but also across the customer base as well.

Right. Okay. And then I think you mentioned this, but the R&D and products pretty separate from what you do on the cable and broadband side. So I assume from a organizational structure and a finance standpoint, it's quite easy to -- it's not that complicated to divest this business.

Certainly, we've run both businesses independently across sales, R&D, everything segregated from that perspective. From a corporate infrastructure, IT infrastructure perspective, there's things we need to take care of in terms of splitting up the business. So that part of it has some complexities, and that's why when we announced the deal, we said it will take -- we expect to close it in the first half of '26 because there are certain things and processes we need to go through in addition to the France works council consultation process, which is a process takes some time as well as some other steps. It's going to take several months before we're ready to close the transaction.

Okay. Great. Maybe let's pivot over to the broadband business. Maybe talk a little bit about timing for DOCSIS 4.0 and kind of what you're seeing from customers and readiness to keep moving down the technology.

Sure. Absolutely. About a year ago, we had indicated to the market that Unified 4.0 DOCSIS was going to become available for all customers in the market, not just a few customers. And at that time, we had indicated that in 2025, that was going to be a headwind for us. But our expectation at that point was that there was going to be a rebound in 2026 as the technology gets out to that wider set of customers. And that's, in fact, what's happening right now is we're seeing the readiness there. We're seeing a lot of customers. And when we talk about our rest of world customers, it's the non-top 2. It's everybody, excluding the top 2, Comcast and Charter. And so as we had indicated previously, we felt that the technology will be ready, customers will have had an opportunity to try it out as well as some key final components of the ecosystem to make sure that it's ready for a launch through 2026. And so we're seeing that as readiness for the broad market. Obviously, there are certain customers like Comcast who gone 4.0 FDX. And we had indicated back early this year that as part of their rollout, they need these brilliant amplifiers. And so now those amplifiers are available at scale in the market. And so that's a key element of the ecosystem continuing to push out DOCSIS 4.0 in terms of rollouts in the marketplace.

Okay. Obviously, the broadband business, you have some customer concentration. There's been, let's say, lumpiness to it. The acceleration next year, I mean, it seems like all the technology components that you're looking at are lining up for next year to see acceleration. What kind of visibility do you have into the 2 large customers in their ability to and desire to move aggressively?

Well, we're now in December. So there's a level of visibility in terms of expectation, forecast, et cetera, for the following year. I think you've seen, in our results, the level of spend with Comcast because we indicate every quarter, at least at the total company level, the percent of sales related to Comcast. I think with Charter, they've publicly talked about their -- what they call the Step 2 DAA plan. That's the part that relates to our spend and that they're underway now in terms of moving forward with that upgrade across their network. So that is something that's starting that will take a certain period of time to go and accomplish. And then we've talked a lot about this year about the new wins we've had in other customers beyond those top 2 that are going to be tailwinds for us as we go into 2026. We've had certain publicly announced wins with folks like Mediacom and Mediacom has publicly talked about their network and their DOCSIS 4.0 rollout. So there's some real key things that are happening that give us visibility towards 2026. We also recently had a press release with Comcast specifically talking about our partnership with them in fiber. And specifically, as Comcast goes out every year and rolls out to more than 1 million new homes passed, we're providing that solution. And that's another proof point of where our fiber solution really plays in well with our current set of customers, with the cable operators as they look to expand into new regions, but also eventually migrate down the road in the years to come to fiber. Our solution plays very well there in terms of our software architecture, in terms of the orchestration as well as the nodes that we have out in the field, coupled with the fiber optionality to either do DOCSIS or to drop in an OLT and do fiber-to-the-home. So we're really excited about that because it not only talks about our excitement around 2026 or the indication, but really over the longer-term period in terms of how we're working with customers in terms of their longer-term network spend.

Yes. I was going to ask about that your fiber at Comcast, maybe how material do you think that can be? What kind of ramp are you expecting? And is this the type of win that could scale that business further and be a good reference design for other larger players?

Absolutely, yes, in terms of being a reference to other operators out there, and we've gotten traction with a lot of cable operators in terms of fiber optionality and their plans down the road in terms of what they're going to do from a fiber perspective. I think the scale, it's already adding revenue in 2025. We expect that to grow further in 2026. And it's just part of that envelope of spend. As you think of any operator out there, they're going to spend a certain amount every year in their plans of CapEx. And for a cable operator, that might be, hey, I'm going to spend this much on DOCSIS, I'm going to spend this much on fiber. The good news for us is we've got our hands on both.

Okay. And getting fiber into maybe traditional telcos that are more fiber, how could that develop?

That's an expansion of TAM for us. So once you break out of the cable operator spend and you start looking over at the telco, that spend is significantly higher. And our focus initially has been more around the Tier 2, Tier 3 type of customers in the telco space. And we've come out there with a differentiated solution, still leveraging our core capabilities around the -- our COS platform, the software orchestration platform, but also with the flexibility of devices and form factors out in the environment in OLT to ensure that we can fit into various different use cases for telcos. One of the -- couple of the differentiating factors for us. First of all, we're open ONU. So you don't have to use the same provider for the ONU that you use for the OLT. And so that allows customers to have more flexibility. The second element is that we've also introduced recently a product called SeaStar back in the spring of this year, and it's for low-density MDUs. It's to service a specific use case that's challenging today for telcos based on the economics of putting in a solution in a low-density MDU. And that product is getting a lot of traction, a lot of customers asking for demo kits of that product. And we see that as another beachhead for us in terms of getting more penetration into the telco market. And I think with the deal we announced earlier this week in terms of our sale of -- our pending sale of the Video business, that's just going to give us more capital to go out there and hit some of those TAM expansion areas more significantly. That's one area we're going to focus on, is fiber. The other area is with regards to our installed base as we look at other things that we can do for our customers as we've got the orchestration software with COS. There's also tools. We call them tools. They're like cloud services, where we can help our customers in terms of operating their network and actioning their network. And that's really an exciting area for us. We demonstrated some of our capabilities at the recent SCTE conference in terms of the cable show there. And so that's another area of investment for us where we could see building up more of a recurring revenue stream.

Okay. Great. Maybe talk about like BEAD and what you're seeing there? And do you see any other federal impacted stimulus that could help or hurt maybe given what's going on with shutdown and DOGE. What's your view on BEAD specifically, but anything else to help the customer base fund a lot of these upgrades?

Well, certainly, BEAD is a program that's going to help fund development of networks. Rural, I think one of the areas that was in question was, is it going to be more fiber? There was some discussion about satellite. So far, and I'm sure you've all seen what's out there in the marketplace, it looks like fiber is still going to be a big part of that. And when people are given the choice, building a fiber infrastructure seems real future-proof, right, for speeds and capabilities. And so that looks like it's moving along. In our plans for next year, that's not really factored in. We see it more of an upside. Obviously, we're encouraged to be working very closely with Comcast in terms of what I talked about earlier, and we stand ready. We are set up with BEAD compliant solutions so we can take advantage of the opportunities that are going to be ahead of us. But I think that's more of a late '26, '27 story. But it looks like it's going to happen out in the marketplace, and we want to be a benefactor of it.

Okay. I think last quarter, you also talked about some new business with Charter kind of expanding their product set with them. Maybe walk us through that. And do we think your second customer can ramp? You have a lot of concentration with Comcast now. What's the outlook for the second customer? And particularly, will it be aided by newer programs with them?

Yes, certainly. We originally announced our deal with Charter in the spring of 2023 in terms of the upgrade and then moving to our virtualized platform. The announcement we made at our last earnings call, the press release that came out the same day was around an expanded relationship with them. And so this is across our COS platform that it will cover their entire subscriber base as well as tools. So when we say tools, we're talking about the cloud services. We're talking about some of the feature sets that we're putting in to our software as a kind of an add-on service. So that's across the entire portfolio. It's an expanded offering. So we're really excited about that. The other element was the 4.0 RPDs in terms of the next-generation product that's going out to them. So obviously, they have a plan. They've talked about that publicly in terms of how long to upgrade their network. So certainly, that's in our view in terms of going forward. But the other part about concentration is all the other customers that we've announced and won and some of the more recent ones over the last few quarters and as we see their plans for 2026 and beyond. And they're just getting started. So you had customer 1, early adopter and pioneer. You've got other large customers coming on board and now upgrading. And then you've got all these other, what we call rest of world, non-top 2 customers that are just going from this point forward. So this is multiyear in terms of upgrade of networks. I think the OBBBA impact in terms of cash savings, in terms of the taxes is going to weigh in over the next few years as well with our customers and their ability to invest in their networks, but they need to invest to be competitive. They've got -- if you're in cable, you've got the fiber providers, you've got fixed wireless access providers competing. So there's a lot of competition out there to upgrade speed, latency, quality of service to customers, that's why folks must upgrade their networks. And we're seeing all of that coming into our purview as we had expected it, and it's kind of playing out as we had expected.

Okay. And then when you talk about these other operators out -- rest of the world, I think there was a time you would give like an installed base of the cable subs. So when you kind of add them up, how do they scale relative to the big 2 that you currently have?

Well, certainly, once you -- if you look at the list of subscribers across all MSOs across the world, once you get past the first couple, then it drops down and then you've got this long tail of Tier 2s and Tier 3s as well in the fold. We've won over 140 customers that are on our platform and are ramping up. And so when we look at how much of the whole world, like we had a metric that we've quoted before, excluding China, is about 180 million [indiscernible] out there. And you think about the top 2 cable operators, over 60 million. So there's a lot of other customers that make up the rest of the market. And obviously, with 140 customers, we've won a lot of customers, won a lot of the market. And it's just a matter of the upgrade cycle, the number of years for them to upgrade their networks, and that's kind of what's driving that growth, but also reducing our concentration over time. But we'll make no bones about it. The top 2 customers, we're in a very good position with, and therefore, they will still have a considerable amount of spend with.

Okay. You mentioned this early on about you get some capital infused from the sale. Obviously, the concentration is going to be very high, particularly with Comcast. Maybe touch on when you're looking at the business, ex the Video portion, you have a little bit more capital to invest, and we should be going to an accelerating growth year. So talk a little bit about margin structure, and I think you have the nodes versus license payments and mix. So maybe walk us through the moving parts there.

Sure. Last couple of quarters, we've commented during our earnings call that the mix of hardware versus our COS licenses has been high. And therefore, the margins have been in the ranges and specifically in broadband here. As we move forward and we're adding more customers, and customers are upgrading, the mix of the business, we expect to move a little more favorably towards licenses. And therefore, our targeted margin structure is to be above 50%. I mean that's been our target. We've talked about that previously. And that's why the last couple of earnings calls, we've actually called out that the mix of the nodes versus the COS licenses has been a little bit higher. Now this year, at least for the back half of the year, we've also been impacted because of the tariffs, but that's a 1% impact, 100 basis points impact. So it's not that significant, and we're living with that, and that's kind of built into our expectations going forward. But definitely, as we see more customers coming on the platform, you've got SLAs that become recurring revenue for us. And then also, we talked a little bit about tools and our cloud services, building up some recurring revenue streams as well. So thinking longer term in terms of what does this business look like beyond the initial deployments that we're seeing out there in the field today.

Okay. Maybe just one last one. If you could talk a little bit about capital return framework. You've been buying back stock. Will there be M&A opportunities? You have more cash, you will have more cash soon. So how does that evolve after the deal?

Yes, certainly. Even before the deal, we're in a really strong position in terms of our liquidity, in terms of our expectations based on what we've won, what we see ahead of us in terms of free cash flow over the next 3 years or longer. And then with the impact of the cash tax savings from OBBBA as well as other things that impact how we handle R&D, we saw a lot of cash to be able to facilitate all our capital allocation priorities. Obviously, with this week's deal that we announced, that's just going to infuse even more cash into the company. And so our general allocation priorities have been to continue growing the business organically. Now they'll be all focused around broadband going forward and scaling up that business. And there's things we can do organically. We already see opportunities to do more for our customers. So that's one avenue of expansion. The other thing from an investment standpoint, and that could be organic or inorganic, is to look at other capabilities in our wheelhouse that are going to be very complementary to what we do for our customers. And then other areas that will improve our -- or lower down our concentration, impact fiber in terms of our fiber solutions. So those now, obviously, we can open the aperture up a little bit, but we're still going to be prudent about what we do in terms of anything from an acquisition standpoint. And then obviously, the third element of it is around the buyback program. We have a $200 million share repurchase program. We've executed, this year, $66 million at the end -- to the end of Q3 of this year, and we're in a great position to continue on that -- executing on that program. So I think we're in a great position to hit it on all of those different priorities as we move forward.

Okay. Great. I think we're close to bumping up against time. So Walter, really appreciate the time.

Fantastic. Thanks for having us.

2 days for you, [indiscernible].

Yes, absolutely. Thank you.

Thank you very much.