Harmonic Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 10, 2025

There are 8 speakers on the call.

Operator

Welcome to the Fourth Quarter and Full Year twenty twenty four Harmonics Earnings Conference Call. My name is Victor, and I will be your operator for today's call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press 1 on one on your telephone.

Operator

You will then hear an automated message advising your hand is raised. Please note that this conference is being recorded. I will now turn the call over to David Hanover, Investor Relations. David, you may begin.

Speaker 1

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's fourth quarter and full year twenty twenty four financial results conference call. With me today are Nimrat Ben Affton, President and CEO and Walter Jankovic, Chief Financial Officer. Before we begin, I'd like to point out that in addition to the audio portion of the webcast, we've also provided slides for this webcast, which you may view by going to our webcast on our Investor Relations website. Now turning to Slide two.

Speaker 1

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 filed 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.

Speaker 1

These metrics together with corresponding GAAP numbers and a reconciliation of GAAP are contained in today's press release, which we have posted on our website and filed with the SEC on Form eight ks. We will also discuss historical, financial and other historical information regarding our business and operation, and some of this information is included in the press release. The remainder of the information will be available on a recorded version of this call or on our website. And now I'll turn the call over to our CEO, Nimrod Ben Nathan. Nimrod?

Speaker 2

Thanks, David, and welcome, everyone, to our fourth quarter earnings call. I'd like to start today with an update on how we're executing on our long term growth plans. First, regarding our 2024 commitments. We delivered all time record fourth quarter and full year 2024 results with strong growth in our Broadband segment, driven by our growing leadership in DOCSIS four point zero technology and our increasing market share. At the same time, we returned our Video segment to profitability underscoring our operational focus.

Speaker 2

Next, as we look into 2025, we're navigating an industry wide transition to Unified DOCSIS four point zero. While this change is expected to result in a below trend year for broadband revenue due to the timing of the rollout and ecosystem dependencies, our technology leadership position in Unified DOCSIS four point zero remains clear. Despite the anticipated short term headwinds in broadband during 2025, we expect our robust operating model to continue to generate strong cash flow. At the same time, we've also set the stage for enhanced shareholder returns with a new $200,000,000 3 year share repurchase program. Looking ahead to 2026 and beyond, we anticipate a return to above trend growth driven by the full implementation of Unified DOCSIS four point zero and ongoing customer ramp ups.

Speaker 2

This trend has also been noted recently in an analyst report from Deloro reinforcing our positive long term outlook and I will expand on that shortly. Let's now move to slide number five, our 2024 highlights. 2024 was a record year and I would like to highlight four key achievements that set the stage for our future success. First, we demonstrated a strong ability to ramp up our operations in both the third and the fourth quarter positioning us very well for future growth. Second, we successfully delivered on our expectation for both the fourth quarter and the full year of 2024 with a growing footprint of DOCSIS four point zero and fiber deployments.

Speaker 2

Third, in the fourth quarter, we saw strong revenue growth in our broadband rest of world customer base exceeding 50% compared to the prior quarter. And we also added five new customers during the quarter. And finally, our Video Streaming SaaS segment is poised for growth, thanks in part to the momentum provided by our collaboration with Akamai that we announced earlier today. These highlights from 2024 underscore our strong performance and show how we have built a solid foundation for the next phase of our journey. Before we dive into our broadband update, I would like to start today with a big picture view of this business.

Speaker 2

We are recognized as a clear leader in next generation cable access technologies driven by a proven track record of innovation and successful execution over multiple years. Serving the world's largest operators has helped us secure a leading market share, underscoring the trust and confidence our customers demonstrate in our innovative solutions. So even with the near term industry wide challenges in 2025, the overall growth trajectory for broadband remains positive. We are guiding 2025 forecast prudently taking into account these near term factors and positioning ourselves to capitalize on market momentum in 2026 and beyond. Ultimately, our expertise, track record and strategic approach reinforce why we're well prepared to remain a leader in the evolving broadband landscape.

Speaker 2

The broadband industry is at the pivotal turning point. Service providers are facing increasing competition from telco and fixed wireless access providers, challenging both their market share and convergence opportunities. To stay ahead, operators must modernize their networks with DAA and Virtualas CMTS. These technologies drive business growth by improving network reliability, enhancing downstream and upstream speeds, lowering operating costs, reducing latency and ensuring fiber optionality. Harmonic is at the forefront of this transition helping our customers future proof their network for constantly changing consumer demands.

Speaker 2

Beyond competition from other service providers, cable operators must also contend with an ever growing demand for bandwidth and higher expectations for subscribers' quality of experience. The surge in live sports streaming, major gaming releases and AI driven applications and agents are prompting operators to accelerate network evolution towards a modern virtualized platform combining advanced DOCSIS with targeted fiber optionality where necessary. Unified DOCSYS four point zero offers a major upgrade opportunity for cable broadband networks, unlocking a range of symmetrical speed boost that put cable on par with fiber operators. In addition, advanced capabilities like low latency and AI powered by new unified silicon help operators stay one step ahead in an increasingly competitive market. At Harmonic, we are collaborating closely with our customers to optimize migration strategies tailored for each network's unique requirements and service goals.

Speaker 2

Fiber optionality has always been a core element of our platform strategy. We design our broadband solutions so that operators can easily add fiber services no matter their network topology or architecture by leveraging the COS platform and remote devices. This approach not only ensures flexibility, but also delivers significant financial and operational benefits. A key differentiator of COS is its ability to power both fiber and DOCSIS technologies simultaneously within the same network. This capability accelerates the evolution to fiber in existing footprints, while enabling a smooth shift to fiber focused expansion.

Speaker 2

Our customers are finding it a highly effective way to modernize and future proof their broadband networks. Let's now move to Slide 11. Our broadband vision, which is centered on accelerating the adoption of next generation virtualized broadband networks. By leveraging both DOCSIS and fiber technologies, we aim to deliver unparalleled speed, reliability and operational simplicity. This vision is perfectly aligned with our customers' priorities, equipping them with the services and tools they need to better drive growth and stay ahead in an ever evolving competitive market landscape.

Speaker 2

Now I would like to review the outlook for the cable broaden market according to a recent analyst report from De Loro. First, let's look at the dark blue line, which represents the virtual CMTS and DAA market. You will see it climbs steadily over time and captures nearly the majority of the total broadband cable market by 2028 when it reaches nearly $1,200,000,000 This clearly shows the industry's shift towards virtualized and distributed access architecture. Second, even with the strong long term outlook, this report recognizes that there are some headwinds in 2025. These are driven primarily by operator readiness and the transition to unified DOCSIS four point zero.

Speaker 2

As a result, we see a slight dip or plateau in spending while providers prepare for the next major technology upgrade. Third, these short term ups and downs are not unusual. The chart highlights similar cycles in the past, especially during previous DOCSIS technology transitions, while clearly illustrating the market's long term growth trajectory. Finally, even with the expected 2025 pause, the overall average CAGR for the virtual CMTS DIA market from 23% to 2028% is around 13%, a solid double digit growth rate that underscores the growth opportunity of virtualized and distributed access solutions. Turning to Slide 13, the broadband's strategic imperatives are built around four key areas: customer diversification, technology leadership, fiber growth and cloud services.

Speaker 2

Let's start with customer diversification. Our focus here is on expanding revenue beyond our top two customers. In the rest of the world market, we saw our fourth quarter revenue grow by over 50% compared to the previous quarter. We also secured five new wins including significant deals with Blue Screen Fiber in The U. S.

Speaker 2

And IPCO in the EMEA region. To help our customers speed up the rollout of the new DOCSIS technology, we are now offering our customers expanded professional services to help them more quickly operationalize their next generation broadband infrastructure. Looking ahead, we expect the rest of world segment to deliver even more substantial growth in 2025 as we win new accounts and see them expand the scope of their engagement with Harmonic. Now let's talk about technology leadership. We're making significant strides with the rollout of DOCSIS four point zero, which features a unified core and supports both full duplex and FDD through our new unified remote devices.

Speaker 2

Our COS platform plays a critical role by seamlessly orchestrating all formats of DOCSIS and fiber. Plus, our differentiated fiber offering, including our open ONU, high density and versatile OLTs and virtual platform ensures we remain ahead of the curve in innovation and market demand. Moving on to fiber growth. Our strategy is to help our cable customers migrate cost effectively and expand into fiber. Over 30% of our current DOCSIS customers are now purchasing our fiber solution, which validates our fiber optionality product strategy and positions us for future growth as they expand their fiber footprint.

Speaker 2

Looking forward, we see significant opportunity from our second generation remote switch, the JD II, which is forward compatible with 25G S PON and is now available and shipping imminently. This module is compatible with our deployed base of nodes as well as a wide range of third party nodes. Additionally, a previously announced LATAM Tier one operator launched our high density PIL remote OLT into production, leveraging their existing DOCSIS network and outdoor nodes. They use our solution to deliver GPON and DOCSIS for residential applications, while seeding their footprint with 10 GPON to address competitive pressure and enterprise opportunities. Finally, I want to highlight our cloud services, which provides our customers with network insights and telemetry to improve network reliability and subscriber satisfaction.

Speaker 2

This offering also includes our edge compute functions such as the Beacon Speed Maximizer, which is now rolling out. In 2024, we achieved a 47% year over year revenue growth with our cloud offerings. This robust performance underscores the strength and scalability of our cloud strategy and we will continue expanding the services and capabilities offered by our cloud services. Turning to Slide 14, I would like to share our video market update. Traditionally, broadcast workflows ran on dedicated appliances, while streaming dependent on the cloud for flexibility and scalability.

Speaker 2

Now those lines are blaring. Broadcasters are moving some channels to the cloud for disaster recovery and pop ups and streaming providers want broadcast like reliability and sometimes bring workflows on prem to manage costs. Although the cloud can be expensive for constant use and require specific expertise, it's great for occasional events, offers lower upfront costs and lets you spin up new technology quickly. That's why we're seeing a great demand for hybrid solutions. Keep core channels on prem while moving additional or short term workloads to the cloud.

Speaker 2

This demand for hybrid works well for us as Harmonic excels at both. We have deep experience with broadcast appliances and a robust cloud native platform. Our hybrid solutions give customers the best of both worlds providing seamless migration between on prem and cloud while meeting broad standards in any environment. Turning to slide 15, let's look at our two strategic imperatives for our Video business, appliance profitability and SaaS transformation. On the appliance side, we're executing with clear focus on our core XOS and Spectrum product lines.

Speaker 2

We're innovating around them to enable more functional consolidation, greater scalability and advanced use cases. This concentrated approach is already showing results. Our pipeline of larger deals in the fourth quarter of twenty twenty four and into 2025 is growing and we're entering 2025 with an improved backlog. Turning to the SaaS streaming, we're continuing to see strong momentum and are taking steps to increase this even further. We just announced a notable partnership with Akamai for video streaming and our fourth quarter SaaS revenue stands at $15,100,000 We expect further growth in 2025 with the real impact of these sales efforts ramping into 2026 as recurring revenue builds over time.

Speaker 2

Overall, these two pillars, appliance profitability and SaaS transformation are working together to create strong operating leverage and position us for sustained success as we move forward. Now, let me turn it over to Walter for a deeper discussion of our financials results and outlook. Thanks Nimrod and thank you all for joining us today. Before I discuss our quarterly results and outlook, I'd like to remind everyone the financial statements I'll be referring to on this call are provided on

Speaker 3

a non GAAP basis. As David mentioned earlier, our Q4 press release and earnings presentation include reconciliations of the non GAAP financial measures to GAAP. Both of these are available on our website. Looking at some of our fourth quarter highlights here on Slide 17. We delivered record quarterly total company revenue, adjusted EBITDA and EPS.

Speaker 3

Total company revenue increased 33% year over year to 222,200,000 EPS rose 246% to $0.45 and our cash balance reached $101,500,000 up $43,300,000 sequentially. Broadband revenue and EBITDA reached record levels to $171,000,000 and $64,100,000 respectively. Video revenue was $51,100,000 and video EBITDA was $7,800,000 as we continue to improve efficiencies in that business. Video SaaS revenue in the quarter was 15,100,000 up 15% year over year. Before we review our detailed fourth quarter financials and provide Q1 and full year 2025 guidance, I want to put our top line and profitability results in perspective by reviewing the past five years as shown on Slide 18.

Speaker 3

In this time span, we've delivered solid total company revenue growth and rapid broadband growth with similar trends in EBITDA during this same period. While we expect a decline for both total company and broadband revenue in 2025 due to recent market dynamics, we expect revenue growth to resume in 2026 for both of these. As Nimrod highlighted earlier, the overall market growth for our part of the Cable Access market is estimated to be 13% CAGR from 2023 to 2028. We are cautiously managing our broadband business based on a more conservative growth rate in the low double digits. Having said that, we are extremely well positioned with our strong market share and technology leadership to capitalize on expected growth in 2026 and beyond.

Speaker 3

I will now briefly review our capital allocation priorities on Slide 19. One of our priorities is driving organic growth. This includes investments to support broadband rest of world growth, new service offerings and funding anticipated working capital needs. Another priority is returning capital to our shareholders through stock repurchases. Today, we announced a new three year share repurchase program of up to 200,000,000 which doubles our previous program and reflects our extreme confidence in the business.

Speaker 3

We will fund these repurchases with expected free cash flow over the next three years and our strong liquidity position of $101,500,000 in cash and $82,000,000 in undrawn credit facility at the end of twenty twenty four. In December 2024, we increased our current credit facility by $40,000,000 to $200,000,000 which includes a $160,000,000 revolving credit line and a $40,000,000 delayed draw term loan. Therefore, we have ample liquidity to support our capital allocation priorities. During Q4, we did not purchase any of our common stock under our prior repurchase program. In 2025, we intend to opportunistically repurchase shares when we believe our stock is undervalued relative to the strength of our business, thereby creating value for our long term shareholders.

Speaker 3

As we said previously, the timing and amount of any stock repurchases will depend on a variety of factors, including the price of Harmonics' common stock, market conditions, corporate needs and regulatory requirements. Additionally, we will continue to prudently manage our balance sheet with the goal of maintaining overall net leverage of two times or less and available liquidity of no less than $100,000,000 going forward. And finally, we intend to explore inorganic expansion opportunities that complement and leverage our growing footprint in broadband. Turning back to our fourth quarter twenty twenty four financial results on Slide 20. In the fourth quarter, we had two customers representing greater than 10% of total revenue with Comcast representing 43% of total revenue and Charter representing 24%.

Speaker 3

Total company Q4 gross margin was 56.1% at the higher end of our guidance and significantly up both sequentially and year over year. Broadband Q4 gross margin was 52.7%, up four forty basis points sequentially and ten thirty basis points year over year due predominantly to a higher mix of COS licenses, partially offset by inventory provisions taken related to the current unified DOCSIS four point zero transition. Video gross margin in Q4 was 67.4%, up two eighty basis points year over year, the increase mainly due to a favorable product mix coupled with our restructuring efforts in this business. Moving down the income statement on Slide 21. Q4 20 20 four operating expenses were $61,500,000 down 3% year over year.

Speaker 3

In the quarter, we had an unrealized non cash foreign exchange gain of approximately 5,800,000 as a result of intercompany balances that we don't expect to settle in the short term. This is reflected in our other expense income line of the P and L and in our adjusted EBITDA. Turning to the order book, Q4 bookings were $150,000,000 The book to bill ratio for the quarter was 0.7 compared to 0.9 in Q3 twenty twenty four and one 0.2 in Q4 twenty twenty three. The 0.7 book to bill ratio was due to the sharp increase in broadband revenue in the quarter and the expected outlook for early twenty twenty five. As we stated previously, over time, we expect our book to bill ratio to normalize and approach the historical benchmark of greater than one, especially as unified DOCSIS four point zero and broadband ramps.

Speaker 3

Turning to the balance sheet on Slide 22. We ended Q4 with cash and cash equivalents of $101,500,000 dollars The quarter over quarter change was mainly attributed to strong positive free cash flow of $46,200,000 resulting from higher income, improved DSO and lower inventory levels. Day sales outstanding at the end of Q4 twenty twenty four was 72 compared to 80 in Q3 twenty twenty four and seventy six in Q4 twenty twenty three. The sequential decrease was due to strong in quarter collections performance and timing of shipments. Our days inventory on hand was fifty nine days at the end of Q4 'twenty four compared to 73 at the end of Q3 'twenty four and eighty '9 at the end of Q4 'twenty three.

Speaker 3

Inventory decreased $9,900,000 in the quarter due to lower receipts and higher inventory provisions mainly in broadband. At the end of Q4, total backlog and deferred revenue was $496,300,000 around 57% of our backlog and deferred revenue has customer request dates for shipments of products and for providing services within the next twelve months. Turning to guidance, as we've mentioned previously due to recent market developments around Unified DOCSIS four point zero, we have seen some customers pushing out their deployment timing plans for 2025. We believe this is mainly a timing shift and expect that these 2025 deployment delays to create a positive tailwind for us in 2026 as schedules are refined and unified four point zero technology deployments accelerate. Now let's review our non GAAP guidance for 2025 beginning on Slide '23.

Speaker 3

We're taking a prudent approach given the factors I just mentioned. For Q1, we expect broadband to deliver revenue between $80,000,000 to $90,000,000 gross margins between 52% to 54% due to product mix and adjusted EBITDA between $9,000,000 to $15,000,000 For the full year twenty twenty five, we expect broadband revenue between $400,000,000 to $450,000,000 gross margins between 51% to 54% and adjusted EBITDA between $77,000,000 to $106,000,000 dollars Of note, we saw reduced order forecasts from some of our broadband customers last month and our current conservative outlook reflects this and the ongoing unified Ford Auto technology transition. For our Video segment in Q1, we expect revenue in the range of $40,000,000 to $45,000,000 gross margin in the range of 64 percent to 65% and adjusted EBITDA to range from $0 to $2,000,000 dollars For the full year, we expect video revenue between $185,000,000 to $195,000,000 gross margins between 63% to 65% and adjusted EBITDA to range from $8,000,000 to $17,000,000 dollars On Slide 24, we have provided the total company guidance for Q1 and full year 2025. In the interest of time, I will let you read through the details. Please also note that our non GAAP tax rate for 2025 is 20%.

Speaker 3

I would like to highlight that the total company EPS for full year 2025 is expected to be in the range of $0.43 to $0.68 As mentioned earlier, subsequent to our Q3 earnings call, we have seen additional demand forecast reductions, which are factored into this guidance. Before closing, as you can tell from today's remarks, we provided more content on this earnings call than we typically do. We felt it was important to do so given the current industry dynamics and how they relate to our 2025 guidance and our outlook for 2026. We appreciate you giving us this extra time today and on future calls, we'll return to a more normal level of detail. In summary, our strong fourth quarter results, including record quarterly total company revenue and adjusted EBITDA reflect the substantial progress we've made.

Speaker 3

In broadband, we have proven our technological capabilities and ability to scale to our customers' needs. Our technology leadership position has never been stronger and we believe this puts us in a strong position to capitalize on the long term growth opportunities we see in broadband DOCSIS four point zero and fiber. Thank you everyone for your attention today. And now I'll turn it back to Nimrod for final remarks before we open up the call for questions.

Speaker 2

Thank you, Walter. So in conclusion, we had a record 2024, a testament to our technology leadership, strong operating model and proven execution. We are navigating the expected 2025 broadband headwinds thoughtfully and positioning ourselves for the growth rebound we anticipate in 2026. The short term challenges do not alter our long term trajectory. We remain confident in our market leading positions, the strengths of our products and our ability to execute on both our broadband and video strategy.

Speaker 2

Thank you for your attention throughout this presentation. Walter and I are now happy to take your questions.

Operator

Thank you. And at this time, we'll conduct a question and answer session. Our first question comes from the line of Simon Leopold from Raymond James. Your line is now open.

Speaker 4

Thanks for taking the question. I guess one of the things I'm trying to get my head around here is in terms of this outlook, 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? Thank you.

Speaker 2

Yes. So we think this is mostly a market trend. We believe our market share on virtual CMTS remains very strong, north of 90%. And on remote devices, north of 60%, we don't see any market share loss. I would say quite the opposite as we get into more, although this is going to be, I would say, developing slowly into the year and getting stronger at the second half of the year.

Speaker 2

The more we win on unified four point zero, more customers are going there. We're going to, in our mind, increase our market share given our strengths in the end to end solution for Unified. So the short answer is a market trend more so than market share. We feel very confident about our market

Speaker 3

share position. And just to add to Nimrod's point, I mean, you'll see it reported, I'm sure, shortly from Delauro in terms of the quarterly market share, but we feel very good in terms of where the last few quarters have gone in terms of our market share position.

Speaker 4

And then I guess the related question is then is how much of this is reflective of patterns among your two lead customers? Is one behaving differently or are they sort of moving in sync? How should we think about those behaviors? I'm assuming one is maybe slowing to a greater extent than another. Any color you could offer, I'd appreciate.

Speaker 2

We cannot provide the specific both of them reported recently, both of them discussed at some level, the development of their initiatives. One have specifically noted the increase in the overall CapEx category, which we are subset of that. There are many other network elements that they spend money on. The other one was talking about the expansion into DOCSIS four point zero and the kind of percentage of completion of their mid split initiative. They both have different dynamics.

Speaker 2

We cannot specifically comment on one versus the other in terms of the impact on what we see in 2025. We also have the rest of the world dynamics, which we provided details on expectation for that to kind of grow and expand during the course of the year.

Speaker 4

Thanks for taking the questions.

Operator

One moment for our next question. Our next question comes from the line of Ryan Kountze from Needham. Your line is open.

Speaker 5

Great. Thanks for the question. 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? Thanks.

Speaker 2

Yes. So first of all, no dependency on customers that are rolling out DOCSIS 3.1 or extended spectrum in DOCSIS four point zero. It primarily impacts those that want to take advantage of the full duplex or the flexible FDD, what's called FDD that you can dynamically change the split. In such case, you will need these type of amplifiers. As we said previously, these are not just smart amplifiers.

Speaker 2

These are in fact brilliant amplifiers and they require quite significant integration ecosystem integration into the network to fully operationalize them. And it takes time. The volume of these devices relative to our devices is a factor of one to 17. You have 17 times more of these devices. And these are outdoor.

Speaker 2

Once you put them, majority of the investment is to put them out there. So there is quite a lot of effort to fully operationalize that. And this is what we have been talking about that previously. At the same time, you may recall that we mentioned Circum getting into that space and later on we announced a partnership with them, a technological partnership with them and we're very encouraged with the progress made and we think that this is going to help the ecosystem move faster to fully operationalize these brilliant amplifiers.

Speaker 5

That's very helpful, Nimrod. Thank you. And maybe just in terms of your metrics, you quoted, I think, 1,300,000 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?

Speaker 5

Thanks.

Speaker 3

I'll address that, Ryan. Thanks, Ryan. Yes. So absolutely, the cable modems getting activated come after folks are picking up equipment and licenses. So you've kind of answered your own question there.

Speaker 5

Got it. All right. Thank you. And your earlier comment about inventory, was that similar to this too, but inventory stacking up at some customers ahead?

Speaker 3

No, our comments on inventory was with regards to taking an inventory provision related to the transition to DOCSIS Unified four point zero. We had certain 3.1 inventory, a specific type that we took a $5,000,000 provision on roughly $5,000,000 provision on in Q4. That was the comment earlier.

Speaker 5

Perfect. Thanks so much. Appreciate it both.

Speaker 3

Okay. Thanks, Ryan.

Operator

Thank you. One moment for next question. Next question comes from the line of Steven Frankel from Rosenblatt Securities. Your line is open.

Speaker 6

Talk about a question about Unified DOCSIS and when do you think there will be availability of chips to go into things like amplifiers?

Speaker 7

Let's see.

Speaker 2

The silicone is available. There is no dependency on availability of silicone. What I was talking about is how you put the product together and how you put all the firmware and software to operationalize that. How you get the deployment teams fully mastering the deployment and troubleshooting of that. So it's more of how you put that into the system together more so than the silicon.

Speaker 2

The silicon itself is fully available.

Speaker 6

Okay. And like a couple of other previous questions, I'm trying to square up what we're fairly bullish full year spending plans by your two biggest customers with your forecast, which is kind of the opposite of that. So what am I missing? Are they doing other things in their network build out that doesn't involve you? Or you're just not going to factor that build out in until you see the orders?

Speaker 2

So when you look at major MSOs CapEx in this network evolution category, It includes our piece of technology, but it also includes amplifiers. It includes a lot of labor to put it out there into the network. Depending on the type of upgrade that you do, if you do extended spectrum, you go and replace all the passive and taps in the network itself, which is a lot of labor effort. So holistically, when you look at that, we are a portion of that and in any given year, it's not necessarily that they spend equally on all parts.

Speaker 6

And 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?

Speaker 3

Yes. Steve, it's Walter. May I address that one? Our belief is those demand push outs are all related to the market dynamics we talked about in terms of the transition over to unified four point zero as well as the other ecosystem dependency. So I believe it's all related to that and we saw that as I mentioned in the prepared remarks, we saw that here in January.

Speaker 3

So we've now have all of our forecasts, we believe those forecasts are now settled out. And as we mentioned on the call today, we're prudently guiding based on the market dynamics and the transitions we spoke about for 2025.

Speaker 6

All right. Thank you.

Operator

Thank you. Our next question comes from the line of Tim Savageaux from Northland Capital Markets. Your line is open.

Speaker 7

Hey, good afternoon. Just a couple of questions here. Looking at the increase in gross margin forecast or guidance for calendar '20 '20 '5, I assume that's a result of well, maybe a higher mix

Speaker 2

of video overall, but within broadband,

Speaker 7

it would appear to be a higher mix of routing versus nodes. Is it would you confirm that and would it 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? Looks based

Speaker 2

on how much of my numbers

Speaker 3

Yes. Hey, Tim, it's Walter. But yes, you have noticed that if you look at the midpoint of our broadband guide on gross margins as compared to the full year '24 broadband gross margins, we're up about two ninety basis points. And that shift in mix is most significantly related to, you know, COS platform as compared to nodes. When we look at the mix with the revenue dropping, you are correct in assuming it's a lower mix of nodes and an increased mix with regards to licenses.

Speaker 7

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

Speaker 3

In terms of the revenue profile, I think 25%

Speaker 7

over 24%.

Speaker 3

I think it would be slightly up even at a nominal dollar basis.

Speaker 7

Yes. All right. That's interesting. And you managed 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?

Speaker 3

Yes, correct, Tim. As you know, on the video side of the business, we instituted our cost optimization through 2024. So now we're going to get the full year benefit of that in 2025. And you're correct in terms of the direction on the broadband OpEx is increasing. And the major reason for that is that as we mentioned earlier, rest of world customer growth in 2025 and supporting all of those customers basically building up the support structure on that OpEx.

Speaker 3

So we have broadband OpEx moving upward in 2025 over 2024.

Speaker 2

And maybe I can add on that. We mentioned on the last quarter that we expect Rogers to start deploying towards the second half of the year. That's an integration effort that we're investing. We have in the pipeline quite a few of sizable opportunities that we're expecting to secure this year. They all require some level of effort, both from an engineering point of view and integration and support.

Speaker 2

So put it all together that requires that incremental expense.

Speaker 7

Okay, got it. And last one from me, Walter, I think look, you're quite specific, but 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 20% before. I mean, is that a function of what you're seeing this year and factoring that in?

Speaker 7

Or is there something changed in the market to alter your overall sense of growth rate?

Speaker 3

Yes, certainly. And just to first of all make sure it was crystal clear, as we've shown on the chart today, the overall market for the Delauro report from 23% to 28% for the cable access part that's related to virtualized CMTS, DAA and remote OLTs is increasing at a 13% CAGR if you go over that period of time. And our comments, the comments that we made during prepared remarks are around us managing our business and looking at it over the same time period and a low double digit kind of growth rate from that '23 to 28 span using that type of CAGR. And the relevance of that is that from a cost structure standpoint, from the things we control, we're managing the business that way. As you can appreciate, very difficult to by going out two years, three years to know exactly what a year is going to look like.

Speaker 3

I think our focus right now is making sure that we continue to grow our market share, that we do the right thing from a cost standpoint and that we capitalize on the opportunities that are ahead of us when that revenue comes based on the timing of our customers and their deployment plans. So I wanted to address that first. Now your question as compared to prior CAGR rates that were out there, I think there have been some market revisions, the market analyst revisions from the prior views that were out there, and especially over the medium term. And what I mean by that is 2526, we're seeing a drop off. So I think we're managing our things that we control very cautiously and we'll be ready for whenever the customers deployment timings work out over the next few years.

Speaker 3

So that's what I meant by that. And I also just wanted to provide you a little color on what has changed.

Speaker 7

I appreciate it. Thanks very much.

Speaker 3

Okay. Thanks, Tim.

Operator

Thank you. I'm not showing any further questions at this time. I'd like to call back over to Nimrod for any closing remarks.

Speaker 2

We appreciate your continued interest in Harmonic and look forward to updating you on our progress in the future. Thank you all for joining the call. Have a good day.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.

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Earnings Conference Call
Harmonic Q4 2024
00:00 / 00:00
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