HARMONIC INC. Q4 FY2024 earnings call

• 2024 Achievements: 2024 was a record year with strong growth in the Broadband segment driven by DOCSIS 4.0 technology leadership and market share growth, and the Video segment returned to profitability. - 2025 and Beyond Outlook: 2025 is expected to be a below trend year for broadband revenue due to Unified DOCSIS 4.0 rollout timing and ecosystem dependencies, but technology leadership in Unified DOCSIS 4.0 remains clear; 2026 and beyond anticipate return to above trend growth. - Broadband Market: The broadband industry is in transition with service providers facing competition and needing to modernize networks with DAA and virtual CMTS. Unified DOCSIS 4.0 offers an upgrade opportunity with symmetrical speed boosts and advanced capabilities. - Broadband Strategic Imperatives: - Customer diversification: Rest of World segment saw Q4 revenue grow over 50% vs prior quarter and secured five new customers, with expected substantial growth in 2025. - Technology leadership: Progress with DOCSIS 4.0 rollout featuring Unified Core and new unified remote devices, cOS platform orchestrating DOCSIS and Fiber. - Fiber growth: Over 30% of current DOCSIS customers purchasing fiber solution, second-generation remote switch JD-2 available and shipping, and LATAM Tier 1 operator using Harmonic's solution. - Cloud services: 47% year-over-year revenue growth in 2024, with continued expansion. - Video Market: Demand for hybrid solutions as broadcasters move some channels to cloud and streaming providers seek broadcast-like reliability; Harmonic excels at both broadcast appliances and cloud native platform. - Video Strategic Imperatives: - Appliance profitability: Focus on core XOS and Spectrum product lines, with growing pipeline of larger deals and improved backlog. - SaaS transformation: Strong momentum in SaaS streaming, with partnership with Akamai and expected growth in 2025 and beyond.

Broadband: In 2024, broadband revenue reached record levels at $171 million, with Q4 broadband gross margin at 52.7%, up 440 basis points sequentially and 1,030 basis points year-over-year, driven by a higher mix of cOS licenses partially offset by inventory provisions related to the Unified DOCSIS 4.0 transition. Video: Video revenue was $51.1 million, with Video EBITDA at $7.8 million. Q4 video gross margin was 67.4%, up 280 basis points year-over-year, due to a favorable product mix and restructuring efforts. Video SaaS revenue in the quarter was $15.1 million, up 15% year-over-year. Broadband revenue contribution and Video revenue contribution are part of the overall company revenue structure.

• 2025 Q1 Guidance: Broadband expected revenue between $80 million to $90 million, gross margins between 52% to 54%, adjusted EBITDA between $9 million to $15 million. Video expected revenue in the range of $40 million to $45 million, gross margin in the range of 64% to 65%, and adjusted EBITDA to range from zero to $2 million. - 2025 Full Year Guidance: Broadband expected revenue between $400 million to $450 million, gross margins between 51% to 54%, adjusted EBITDA between $77 million to $106 million. Video expected revenue between $185 million to $195 million, gross margins between 63% to 65%, and adjusted EBITDA to range from $8 million to $17 million. Total company EPS for full year 2025 is expected to be in the range of $0.43 to $0.68. The guidance is prudent given recent market developments around Unified DOCSIS 4.0 with customer deployment timing shifts.

• Industry Transition Uncertainty: The transition to Unified DOCSIS 4.0 may result in short-term headwinds for broadband revenue due to deployment timing and ecosystem dependencies. - Foreign Exchange Risk: Unrealized non-cash foreign exchange gain/loss as a result of intercompany balances that may not settle in the short-term, impacting financial results.

Q: How much is broad market trends and how much of your outlook, specifically in the Cable Edge segment is reflective of market share shifts? How are you thinking about market share versus market trends?

A: Nimrod Ben-Natan said this is mostly a market trend. Believes market share on virtual CMTS remains very strong north of 90% and on remote devices north of 60%, and expects to increase market share with strengths in Unified 4.0. Walter Jankovic added they feel good about market share position from recent quarters.

Q: With regards to maybe what's changed in your comments around ecosystem readiness, and you've mentioned before about the Full Duplex amplifiers that are a real challenge for the industry. Can you kind of reflect broadly on what you see happening across the broader cable industry as it relates to making these Full Duplex amps work versus moving forward in an ESD model or even in DOCSIS 3.1 for now and then coming back and doing the DOCSIS work cleanup later?

A: Nimrod Ben-Natan said no dependency on customers rolling out DOCSIS 3.1 or extended spectrum in DOCSIS 4.0. Full Duplex amplifiers require significant ecosystem integration and take time. Volume of these devices is a factor, but partnership with Sercomm is helping the ecosystem move faster.

Q: You quoted, I think, 1.3 million new cable modems served, which is the lowest in a few years, but yet also reported record revenue in Broadband. Can you help us kind of true that up in terms of what's happening there? Is this -- are these hardware shipments in advance of activations or some kind of other rev recognition going on in the quarter?

A: Walter Jankovic said cable modems getting activated come after folks are picking up equipment and licenses.

Q: When do you think there will be availability of chips to go into things like amplifiers?

A: Nimrod Ben-Natan said the silicon is available. It's more about putting the product together, firmware, software, and deployment teams mastering deployment and troubleshooting rather than silicon availability.

Q: Could you give us any more color about these recent inventory or order reductions that you've heard about in the last month? And is there any rationale for that, that you could share?

A: Walter Jankovic said those demand push-outs are related to market dynamics around transition to DOCSIS 4.0 and ecosystem dependency, and forecasts are now settled out with prudently guiding based on those dynamics.

Q: Looking at the increase in gross margin forecast or guidance, for calendar ‘25, I assume that's a result of well, maybe a higher mix of Video overall. But within Broadband, it would appear to be a higher mix of routing versus nodes. Is it would you confirm that and it would be fair to say that substantially all of the revenue declines that you're forecasting for broadband next year are in on the node side?

A: Walter Jankovic said yes, shift in mix is most significantly related to cOS platform as compared to nodes, and revenue declines in broadband next year are related to lower mix of nodes and increased mix of licenses.

Q: If I can just dig in on that a little bit more, increased mix, would it be fair to say that the rounding of the license size looking about flat?

A: Walter Jankovic said it would be slightly up even at a nominal dollar basis.

Q: You mentioned kind of managing the business prudently, although it seems like you're forecasting a pretty solid increase in OpEx on the Broadband side despite the revenue declines. I wonder, if you could give us a little more color on what's driving that?

A: Walter Jankovic said on the video side, cost optimization benefit in 2025, and on broadband side, rest of world customer growth in 2025 and supporting those customers building up support structure requires incremental OpEx. Nimrod Ben-Natan added about Rogers deploying towards second half of the year and sizable opportunities in pipeline requiring engineering, integration, and support effort.

Q: Talking about broadband, I guess on a medium-term basis, I mean, you’re kind of revising the growth profile. I think you said double digits or low double digits. I mean, I know we're looking solidly over 30% -- sorry, 20% before. I mean, is that a function of what you're seeing this year and factoring that in or is there something changed in the market to alter your overall sense of growth rate?

A: Walter Jankovic said overall market for relevant cable access part has a 13% CAGR from 2023 to 2028. Managing business with low double-digits growth rate from that span, focusing on growing market share, cost control, and capitalizing on customer deployment plans. Market analyst revisions have led to managing business cautiously with focus on controllable factors.