My name is Simon Leopold, Raymond James Data Infrastructure Analyst, and pleased to have you joining us at our Technology and Consumer Conference here in New York. For our next session, we've got with us from Harmonic, the newish CFO, I guess. How long do you call yourself new?
I think after five or six months, you're no longer new.
Okay, Walter Jankovic. Walter, thanks for joining us today, and we've got sort of a fireside chat format, so Q&A, but folks, if you've got questions, wave at me. I'll check in with the audience before we run out of time. But the way I like to sort of structure these discussions is to give something to folks who are new to the story, and then to kind of drill down into details for folks who are more familiar with it. So first one is: How do you like to introduce Harmonic to a new investor?
Yeah, so when you look at Harmonic, it's really two key businesses that we enable. First of all, multi-gig, high-speed broadband, and then secondly, video streaming. Those are really the two areas that we focus on. Both of those businesses have great growth potential ahead of them in terms of the market trends that support them. And in terms of Harmonic specifically, we've created a very differentiated position in both of those markets, in the broadband access market, in terms of our virtualized CMTS platform and the market position that we hold there, and then also in video streaming, especially in live events, sports specifically, we've got a great product that's enabling growth in that area as well. So we're a bit of a disruptor out there when you look at some of the things that the team's done over the last few years.
We've come into markets, we've disrupted status quo, and we're now the benefactor of that as these markets grow.
So I think it's quite unusual for technology companies to reinvent themselves, and Harmonic, to me, is one of these very rare cases. So from a historical perspective, maybe talk about what the company used to do and how you got into the position the company's in today.
Yeah, certainly. The company has had a history of, you know, supporting both cable access markets as well as video, and video was predominantly appliance-based, on-prem equipment, leveraged by broadcasters. And as Simon points out, the c ompany reinvented itself a couple of times along the way, but made some pretty significant bets in terms of a couple of key areas that have really changed the trajectory of the company over the last couple of years. As I just mentioned, in the cable access space, it was a company that made a big bet and stayed with it for multiple years in terms of investment in virtualizing the CMTS platform.
So there was a lot of legacy providers in that marketplace, and Harmonic stood out in terms of actually going down a different path, making a multi-year investment, and doing something what I think is really smart, was teaming up with one of the largest, the largest service provider in the cable cos space to help perfect that solution over the last few years. So I think it's that innovation engine, it's that attitude of, "Hey, I'll disrupt myself." And in the video space, it was, "Hey, let's disrupt the video appliance business and go to a cloud SaaS offering." And so I think that's really one of the key, I'd say, North Stars or driving forces of the company, is that innovation mindset.
So let's dig into the Cable or Broadband segment as it is now, a little bit, in that, what now makes your advantage sustainable? So if I sort of, I can look at a scorecard. I think on the last earnings call, you said you had 104 cOS-
That's right
Which is your virtualized solution. The closest competitor is probably Casa Systems, where it's single digit, somewhere between three and nine. We know it's more than three, we know it's not double digits, so three to nine, probably closer to three. CommScope has said repeatedly, "We're in labs and evaluations. We feel really good about our prospects," but that would be zero relative to your 104. So, I think Vecima's talked about entering this market. T alked about. So how do we sort of think about the competitive landscape in that environment, where I would say, potentially, maybe somebody acquires an asset from somebody else or invests in it? Customers tend to want multiple sources. So how do you think about that dynamic of potentially not having as strong a position as you have today?
Yes. So first of all, in the broadband space that we participate today, our cOS platform, which is our software platform, I think the last Dell'Oro report was 97. something% share. So basically, it's that investment for multiple years, working with the largest provider out there in terms of customer, to really perfect that solution. As we like to say, we're on, like, the fifth generation of that software now, and I know that there's competitors that claim to have something in the lab, but when you look at what have we done over the last several years after introducing that platform, we've unified the platform, so now the platform can run with DOCSIS 3.1, DOCSIS 4 in either the FDX or ESD standard, as well as 10G fiber, so it's a unified platform.
Additional features and functionality that we've added on to the platform, like hitless upgrades, for example, that improve the quality of experience for the subscriber, for the end customer. And this is where we differentiate and say it's not an apples-to-apples comparison. When you've gone through multiple iterations, multiple learnings, and you're so far ahead, there is an advantage you have in the marketplace. And then, Simon, I would say to, you know, the second point where, you know, your customers may want dual source, you know, the analogy is back to ERPs. CFOs select one ERP. Once we go and we, you know, basically link it all up to the back office, we continue down that path. So I think we've got a sustainable advantage, a huge lead in the marketplace in terms of what we've done from a cOS perspective.
Now, talk edge devices, and we think about the nodes that are out there. Now, the nodes are CableLabs standardized, so those are agnostic in that they that you can mix and match, and up to now, we've had majority share, even in the node space specifically, and I think that's because we scaled first. We've got a level of differentiation within our node products. You look at FDX, 4.0 FDX, we've probably got over a year lead on anybody out there in that particular space. So we continue to innovate, continue to leverage our lead on the software element, but we're also doing things around edge devices that are gonna keep us in good stead in terms of our market share and our position in that space.
So your cable customers are sort of facing a number of options of ways to upgrade their network, and I think the beauty of the standards, they don't have to do all at once. They can sort of do parts. But we've talked about virtualization, you just mentioned the nodes, which is this DAA architecture, and then there's just the different generations of standards, right? The DOCSIS 3, the DOCSIS 4. From your perspective, what is the sort of way your customers think as to how do they decide what to do when? What stimulates those choices?
Well, you know, first of all, it starts with, you know, why do I need to upgrade my network? And I think in terms of, you know, customers, over 100 have voted virtualizing the network has huge benefits. In terms of the core, you reduce the space by 90%, the amount of equipment, 'cause we're putting the software on standardized servers and switches versus the legacy iron, the heavy iron equipment. So you're saving on power and space. But one of the other advantages, as you push out higher speed service, broadband service to your customers, you're also getting the benefit of doing it more efficiently, more cost-effectively, but also improving the quality of experience for the subscriber.
One of the examples is that with the virtualized solution, you can ping the modem every few seconds, so we know how well we're performing at your house, for example, in terms of your bandwidth and your speed. Whereas legacy platforms ping every 10-15 minutes, so you could have major interruptions and not even know about them. So there's all these different factors that are influencing the market to move to the virtualized solution, to do the higher bandwidth and the speeds in a more efficient, much more efficient manner. But I think the quality of experience is often forgotten in terms of one of the key reasons. And so it all starts with competitive position, having to do something, and then for the operator, it's what's their competitive environment?
If, is there fiber players that are competing in that space? Fixed wireless access through T-Mobile and Verizon have been another factor that are pushing people to have to move and, you know, virtualize and move their network investment, forward. You talked about all the different standards, so this is where it gets interesting, 'cause we've seen some of the big players make declarations on where they're headed.
I think as you look at the longer list of customers, they're sitting there trying to decide, "Okay, do I start with 3.1 DOCSIS , and then do I evolve to 4.0, and when do I evolve, and then eventually evolve t o fiber?" What we've, you know, highlighted during SCTE recently is with the unified cOS platform, and we provide all the various devices for all those different formats, you can move on the path that makes most sense to you based on where you are in your evolution. A customer may go 3.1 and later go to 4.0, or decide they're gonna do 3.1 with a Boost D, and that'll give them enough speed until they go eventually to fiber.
So we're trying to create a platform so that customers can more easily influence and decide when to spend, how to spend, and how they're gonna, you know, evolve their network, and it's not a one-size-fits-all solution.
Right. And one of the questions we've gotten in the past is the idea that this is sort of a flash in the pan, right? It gets done, and then nothing else ever happens again. Now, I think Comcast had made some disclosures at the SCTE show about being about a third of the way done.
Right.
Now, you've talked some metrics more broadly about how penetrated the market is, but what's your thinking? Because sort of our argument has been we're really in the very early innings, but what metrics can you share to help support that?
Certainly. First of all, in terms of our deployments, we've deployed across 23.5 million modems and worldwide, global modems, excluding China, and so we're 13% of the way there. Customers comment, as you just pointed out, in terms of how far along are they in deploying the architecture, and there's even the lead customer, the earliest adopter at scale, is still in their early innings in terms of in terms of adoption. And then obviously, we know another large tier one is, you know, been public with their statements about moving forward, which is gonna benefit us.
You know, that's just starting, and so we're still very much in the early innings, and then we see the rest of the landscape in terms of all of those other customers that have signed up and other customers we're pursuing. And we see how that is going to play out over several years in terms of, you know, starting to roll the architecture out, starting with 3.1 for some customers, and then upgrading later to 4.0 or doing precision fiber builds-
That's my next question.
In terms of over builds, right?
So that term, precision fiber, I think is a nice one that maybe you can help describe it because you announced fiber to the home products, and then I get questions about, "Oh, what about Adtran and Calix?" It's a different animal. How do you sort of explain what you're doing with fiber to the home or maybe equally important, what you're not doing?
Sure. So there's two elements to the fiber story. The first element, and most importantly for us right now, is in the cable company space, in terms of specifically what we call precision fiber, where you can deploy the network out on an HFC, so where you've got still coax out to the end user. And in certain circumstances, the cable co can actually decide with precision where to drop fiber. So they can go into a neighborhood and decide that they down the street are gonna lay a fiber down to a particular house. Why? Maybe because of an ARPU improvement. Maybe that one house is congesting the network, and therefore, it would be advantageous to do that. Maybe it's a retail outlet at the end of the street, and they want to provide the higher bandwidth service.
But this is the opportunity for the cable cos . It comes with, you know, our, our typical cOS platform with the nodes. Within a node that we sell, the DAA equipment, you can have DOCSIS on one side of it, you can do fiber on the other. That's how precise a cable co can get in terms of delivering out fiber capability to the end market, and that's a big part of our value prop 'cause it's all part of that unified network and solution that we're providing out there in the market. So that is part one. Part two is around providing our solution in a pure play fiber environment, going to a telco or a greenfield and providing the solution. So our cOS, you know, branded as our core operating software, works in a fiber-only environment.
We've announced our pure OLT product out in the market recently, and we announced back at our last earnings call that, you know, we had about 14 fiber wins. Four of them were to pure plays out there. So it also plays in that market. Different set of competitors, as you've pointed out, in terms of the telco space, but it's a market where our solution as well plays out, and it's something where we're putting investment in. We're adding some resources to the team in terms of focusing in on that market to help expand our TAM, but also diversify our customer base.
In light of some of the government programs like RDOF and BEAD, how do you see those as opportunities? And I want to ask this both as a positive and a negative. The negative here is sometimes when there's government money coming, customers stop spending their own money waiting for the government money, so we get this pause before the good stuff starts. So how are we thinking about that?
Yeah. You know, I think for our core business, where the cable cos have, you know, committed and are, you know, rolling out their networks in terms of 3.1 and 4.0 DOCSIS, really doesn't have a major impact. I know there's one customer out there that said they may reprioritize some short-term investments, but over the medium to long term, doesn't change the picture in terms of what they're gonna do, what they're gonna spend on, and who that spend's coming to in terms of the share we have and the expectation we have of the growth.
But in regards to some of that money that's coming out there, when we announced that pure OLT product, we said it's manufactured in the U.S., so specifically targeting some of that money whenever it comes, but that's not a big determining factor for our business. Right now, our business is focused on the portfolio we've already created, the customers in the cable cos space, and the rollouts of those networks in terms of driving our multi-year growth plan.
On your most recent earnings call, your forecast for this Broadband segment calls for growth on the order of 40% sequential rise after a pretty soft quarter, so kind of getting back to normal. What sort of... build a bridge, help us understand what informed that forecast. What are the sort of key assumptions behind it?
Sure, sure. And, you know, as we've highlighted before during our most recent earnings call, Q4 represents the confluence of a couple of things. First of all, at the end of Q2, we had orders that got pushed out to late in the year, and that's true for Q3 as well. We saw orders that were lined up in Q2, Q3 timeframe. That would've been the normal take rate for that product, got pushed out towards the end of the year, so customers conserving their CapEx, pushing out their cash CapEx metrics so that they're not paying till the new year. So it's created this roll-up of spend into Q4. Second point is, we've got another tier one, large tier one that's starting to spend, and it's gonna be material in Q4.
So that's why you've got these two factors that are lifting up that Q4 number. So if you think about the first comment I made around that customer pushing orders, otherwise that revenue would've, you know, normalized across a couple of quarters, versus pushing it all into a higher number in Q4.
Now, I know you're not quite ready to forecast 2024, but does this set up for a difficult sort of Q1 seasonality because of a strong Q4?
Well, we're still working through. We're not guiding at this point for 2024. Our teams are working very closely with our major customers in terms of mapping out all the spend and doing it by quarter for next year. I think two things that we've, you know, continued to highlight and are important points is, first of all, we've got one large customer that's doing a transition from 3.1 to 4.0, and they've been public about that. And we have stated numerous times that, hey, when we see people go through transitions, there's typically a, you know, some headwind that you can experience with that. So that's first point, and we're trying to map all that out and work through that.
Second thing is we've got another large tier one that's starting to ramp up, and working with them on what that ramp's gonna look like until they get into what I call a steady run rate kind of, kind of business. I think it's important to note, and we've highlighted this, is that, you know, second half, you know, definitely gonna be stronger than first half based on just-
Let me clarify that statement. Second half of 2023 versus-
Second half of 2024-
Oh, okay
Versus first half. Yes, yes. As I look forward, t hank you. As I look forward into next year, definitely we see that as a key element based on the information we have today, looking at how the ramps occur with customers, how transitions occur. So definitely we see that, but at this point, we're not yet guiding on 2024.
So I wanna pivot now to the V ideo segment, and last quarter, you formally disclosed that it's. You're undertaking a strategic review. So it's not as if, I think in the past, when you've been asked, "Would you sell this business?" You've said, "Well, if somebody comes and bids." What changed? What sort of made this a formal process, and what's the thinking?
Well, you know, I think at the end of July, during the first earnings call that I did with the company, you know, we highlighted some priorities around long-term planning, as well as capital allocation planning, and those were gonna be two key priorities for me and the team moving forward. So as part of assessing the growth trajectories of our businesses. We've got two great growth businesses right now. We've got the broadband side that's growing. We got on the video side, the SaaS piece, that's growing. So really assessing the growth and the opportunities of those businesses specifically, and looking at those scenarios and understanding that there's interest.
I think, you know, the team has done a fantastic job in growing the SaaS business and disrupting the status quo model of appliance business, or buy all the equipment on-prem, go to cloud SaaS model, and that's proven to be very successful for us. And that business has now grown to about, last quarter, we did $12.5 million in revenue, so think of it as a $50 million a year run rate business. So I think from a timing standpoint, that business has gotten to a certain scale, and as we look forward, looking at our priorities, we, you know, accepted that, hey, we'll put this business under review.
I think it's the right timing, and I think based on our priorities and, you know, our plans for the future, we're going to, you know, seriously go through that process, and we've, you know, announced it's a formal process that we're running.
So I think what you've said, and I just wanna make sure I'm paraphrasing it properly i s you, you opted to defer the analyst meeting until 2024, in part because of the strategic review. I think you sort of... What can we say? So I think the investment community interprets this as, well, they expect to conclude the strategic review in the first half of 2024, and then they'll be able to have an analyst meeting. Is that the right way to think about your logic?
The video review is a top priority right now for us. We're consumed by it, all of us at the senior level in the company, in terms of what we're, what we're doing. And so just out of pure bandwidth, we said, "Hey, push, push that out."
And I think I have the impression you've gotten an offer, and it's just now trying to figure out, is this the right offer? Are there alternatives?
Oh, we're not commenting on that.
You have not said that?
No, we have not said that at all.
Okay.
No, no. We've said that there's interest-
My imagination hard at work.
-interested parties, but we're not we haven't disclosed anything with regards to number of bidders, the timing, and we won't disclose that. Obviously, you know, internally, we've got certain milestones, but there's also factors that impact that are external to us. So we're working through it, but to your point, Simon, the reason for the pushout was we're busy with that right now. We'd like that to you know, work itself through, and then we'll set up a date for the, the Analyst Day early in in 2024.
Great. Then you did mention in the beginning, sort of live streaming sports as sort of a hot area. How material is that within the Video segment? How much of it is driven by live sports?
When you look at the SaaS part of our business, so put aside the video appliance side, but specifically around SaaS, you know, we haven't come out with specific metrics on how much is sports, but it's a significant driver. When we look at our logo of customers and what they're consuming from us, you know, that model, you've got people streaming TV Everywhere, kind of, you know, streamer models. You've got, you know, large logos that you'd all recognize in terms of, you know, engaging with us in that domain, as well as in the live events domain, and sports specifically. But it's really that sports element that we have a significant amount of differentiation on. We've got the lowest latency, by far, in terms of broadcasting sports.
The so what about that is when you're watching sports and somebody else is watching another feed and you're 30 seconds behind, it can ruin your viewing experience when you get the text well ahead of you seeing the actual event. So low latency, high quality video in terms of the video projection, and then also the ability to turn up tens of millions of subscribers in a very short period. I'm talking seconds, within the minute, as people all jump on. That's the difference between video on demand and streaming.
Everybody goes to the live event at the same time to get the start, to get the kickoff, if you're watching football or whatever, and so it's the ability to facilitate all that, and that's where we've done a terrific job and stand out in the industry in terms of our capability to actually do that.
Can we talk a little bit about the competition there? Sort of in the back of my mind, I remember when we first started talking about files, not live events, the biggest operators, like a Netflix, they can do that themselves. So your encoding was going to smaller operators, because Netflix has scale. When it comes to streaming, I'm less familiar with it. Is this something that some of the big operators do themselves, or are they all reliant on getting help, and sort of what's the competition like for you?
I think you've described it in terms of, you know, the non-live stuff, video on demand, streaming. Some of the big players do it in-house. When you look at our portfolio of what we do, sometimes people come to us that are big names. They want the live to be done because of the differentiation we have in the Live segment specifically. So these aren't just smaller; these are some big logo names. You'd all recognize them in terms of what they do in the space, both from a, you know, TV everywhere, streaming, as well as live sports events. And so what we're seeing in the sporting arena, and this gives us a lot of confidence about the growth of that business, is that we're seeing a lot more events moving to streaming.
And not just broadcast and streaming, we're starting to see streaming exclusive events. And so that is really starting to change the dynamic of the market on the importance of the streaming itself, because there is no backup, there is no other broadcast view, and hence, you know, the reason we're in the position we're in today with regards to that business. I think one of the other things that I may have not mentioned in terms of differentiation and why people go streaming versus, you know, the broadcast, the ability on the streaming is we have ad insertion capability, and so this allows to do customized to pull down a customized ad to each IP address.
So when you think about monetizing the ad money and the value of the stream, that capability and functionality is a big differentiator and a big monetization lever in terms of why people go with the stream versus the more traditional.
Yeah, I don't know if you saw this, but last week we published, our team, our regular, e very six months, we do these broadband video surveys, and consistently, the element that has dissuaded people from canceling their subscription services is sports. And so I think we are at a cusp that will accelerate as more and more people can watch sports on their streaming platforms, 'cause they're not quite used to that yet.
E xactly.
Feels like we're, I guess, I don't know whether inflection's too strong a word, but a transition.
It's a transition as people get more comfortable with it, as the quality of it improves. I think that's the proof is gonna be in the pudding, right? To give people confidence they can just cut it from one side and move to that, and I think it's a generational thing as well.
Yeah, and the streamers are advertising it. It's the first thing that pops up on any of them, so clearly-
Exactly
-they're trying to promote it. So I want to ask you a scenario question. Scenario is, you do arrive at an agreeable solution to sell off the video business. So whatever that is, what would be your priorities for what you'd do with the cash you raise?
Yeah, certainly. We've got a plan, a capital allocation plan, under either scenario. That's first and foremost, obviously, you'd only expect us to. Under a sales scenario, obviously, we'll be dealing with our 2024 converts. Those come due next September. You know, our plans around growth of the business are gonna require working capital, so there's an element of working capital requirements as you grow a business significantly. And then the third element is, you know, we have our share buyback authorization, $100 million. We've only used $5 million of it, so that all comes into play. I think the other thing to think about is, in a scenario where we do sell off that business, then we've become fully, you know, broadband focused, right? 100% broadband-focused business.
And l et me be clear, I mean, the current dynamics of the market that we talked about earlier, you know, positions us for multi-year growth. Now we're looking beyond that and saying, "What else could we do?" And so it opens up some optionality around some more organic investments, potentially doing some tuck-in investments, but that's more down the road in terms of, you know, how we look at the capital allocation plan and the multi-year growth that we have planned out for the future.
Great. So we're just about out of time. I'd like to close with just one last one, is what do you think is the least appreciated aspect of Harmonic's story?
Yeah, I you know, and it's probably where we sit today. I came in May, so it's only a few months in, and when we look at what's happening in the marketplace, and we talked about this earlier in terms of the customers that we've signed up, what the customers have said in terms of their network transformation and spend in terms of virtual CMTS, and our market position in that place. So when you look at everything from a medium to long-term perspective, you know, in terms of our placement in the market, the spend that's going to happen in that market, yet you know, a lot of times we're very focused on what's happening next quarter and the quarter after.
I think the underappreciation is more of sometimes you're getting caught up with all the other narrative, as compared to look at the facts on specifically our business, where we're positioned, what our customers are saying they're gonna do over the medium to long term. And so that's why we continue to highlight those key metrics, because I think we're in the early innings of, you know, a very, very long ball game here in terms of driving the company forward. So I'd say that's probably the underappreciated element of our story today.
Well, great. Well, Walter, thanks for joining us.
Hey, thank you, Simon.
Thank you.
Appreciate it.
Thanks, folks, for joining us. This is our session with Harmonic.