Harmonic - Q1 2024

Transcript

Operator (participant)

Hello, and thank you for standing by. Welcome to the First Quarter 2024 Harmonic Earnings Conference Call. My name is Tawanda, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please note that this conference is being recorded. I would now like to turn the call over to David Hanover, Investor Relations. David, you may begin.

David Hanover (Head of Investor Relations)

Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's first quarter 2024 financial results conference call. With me today are Patrick Harshman, President and Chief Executive Officer, Nimrod Ben-Natan, Senior Vice President and General Manager of Harmonic's broadband business, 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. 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 Harmonic 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. Please note that unless otherwise indicated, the financial metrics we provide you on this call are determined on a non-GAAP basis. 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 8-K. We will also discuss historical, financial, and other statistical 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, Patrick Harshman. Patrick?

Patrick Harshman (CEO)

Thanks, David, and welcome, everyone, to our first quarter call. Today, we reported our Q1 results and updated full-year outlook, both of which are in line with our prior guidance and demonstrate solid execution and continuing confidence in our growth opportunities. Key business highlights include strong broadband orders and new customer wins supporting this business's sustained multi-year growth trajectory, continued video SaaS revenue growth driven by new sports opportunities and ad delivery technology, and the retirement of our outstanding convertible debt this month, capping share dilution associated with convertible notes. We also announced on April 8th my planned retirement on June 11th, the date of our annual shareholder meeting, and our board selection of Nimrod Ben-Natan as the next CEO of Harmonic.

Nimrod, Walter, and the senior Harmonic team have my full confidence in driving the next phase of growth for our company, and I look forward to having a continuing supporting relationship with Nimrod on the board for at least another year. With that, I'll now turn the call over to you, Nimrod, to provide a more detailed update on our broadband business.

Nimrod Ben-Natan (SVP and General Manager, Broadband)

Thank you, Patrick. Moving now to our broadband business on slide number four, we reported segment revenue of $78.9 million, a decrease of 31% sequentially and 21% year-over-year, which was in line with our expectations. We had another strong quarter of new bookings, driving record new backlog. The number of global customers deploying our solution reached 113, up 20% year-over-year, corresponding with 28.6 million DOCSIS cable modems now served worldwide. This represents approximately 16% of cable modems deployed globally, again highlighting the substantial DOCSIS growth opportunity still in front of us, in addition to further upgrades to DOCSIS 4.0 and fiber to the home.

As a result of this growth, Dell'Oro Group has recognized Harmonic with a fourth consecutive year of market share leadership in the DAA category, which is virtual CMTS and remote PHY devices, as well as becoming global market share leader in total cable broadband equipment. As we communicated last quarter, the pace of DOCSIS 4.0 shipments is accelerating in accordance with our plan, and we expect this to expand further in the second half of the year. Additionally, we recently participated in the CableLabs DOCSIS 4.0 and DAA technology interop event, where we showcased our end-to-end DOCSIS 4.0 solution, highlighting record speeds of 9.4 gigabits per second for DOCSIS and interoperability with multiple DOCSIS 4.0 cable modems.

We are also getting increased customer interest in our boosted DOCSIS 3.1 capability, which is unlocking the full potential of the existing DOCSIS networks in combination with a new generation of DOCSIS 4.0 modems. This upgrade option is creating a unique opportunity for cable operators to achieve fiber speeds at a lower capital intensity and faster time to market. Driven by the migration to higher-speed networks, we announced earlier today a new and unique product capability, the Beacon, which is a new application running on our cOS edge compute platform alongside the virtual CMTS, and it helps maximize the broadband speed while lowering the operating cost of maintaining the network and dynamically addressing noise interference using our edge compute platform and AI implementation. In the first quarter, we built on the momentum of our fiber to the home initiatives.

Most notably, we have secured a seven-digit purchase order for our recently launched new fiber products from an international tier-one customer. This important milestone further validates our innovative approach with our fiber solutions. We also see continued traction with our fiber island strategy. We are enabling operators who use our DOCSIS technology to fiber-connect high-value customers and MDUs within their existing HFC footprint, affiliates, and self-overbuilds to enhance services in a way that reduces churn within existing service areas and enabling dramatically cost-effective edge-outs with fiber. During the first quarter, we also announced that Millicom Tigo is accelerating deployments with our node-based solution to offer fiber-to-the-home service. These advancements are critical as we continue to scale our operations and add fiber as a key driver of our financial success.

Both Comcast and Charter contributed greater than 10% of our first quarter revenue, and we are grateful to be working with both of them to scale and expand their respective deployment milestones. We continue to focus on further diversifying our business. This is showing positive results with a larger portion of our business coming from others in the marketplace. We are seeing an expanding pipeline of opportunities from these other operators, driven by urgency to modernize their architecture to enable greater reliability and higher upstream and downstream speeds. As part of this effort, we recently hired Jeffrey Glahn as our new global SVP of sales to exclusively lead our broadband go-to-market strategy and have also expanded the team with dedicated fiber sales and specialists.

In summary, our broadband business continues to be uniquely positioned with differentiated technology advantages, great customer relationships, expanding backlog, and a rich array of new products and business opportunities that give us confidence in our multi-year growth outlook. We executed the first quarter according to our 2024 plan and are confident in our ability to carry this execution forward through 2024 and beyond. I'm excited to be here today and honored to have been chosen by our board to serve as the next CEO of Harmonic. I look forward to connecting with many of you in the coming weeks. Now let me turn it back to Patrick.

Patrick Harshman (CEO)

Okay, thanks, Nimrod. Turning now to our video segment, the big picture is that we continue to see streaming SaaS become a larger portion of the business. In addition, we've closed our strategic review and are now actively rebuilding business momentum with a focus on further SaaS growth and driving improved profitability. SaaS revenue in the quarter was $12.9 million, up 11% year-over-year, but down modestly sequentially. Total segment revenue was $43.2 million, down from $57.3 million a year ago. We've continued to see macroeconomic and sector headwinds impacting our traditional pay-TV customer spending on appliances, and our strategic review process was also causing a growing number of appliance and SaaS customers to hold back on new commitments pending the outcome.

Looking more closely at our SaaS results, we're seeing growing usage by our largest and most successful customers, especially for live sports, partially offset by the loss of a couple of mid-tier streaming customers who lost content rights and/or ran into financial problems. Driven by the success we continue to have with our tier-one SaaS customers, we've continued to invest and innovate in new streaming-related technology. Our new in-stream personalized ad technology was a huge hit at the recent NAB show. For those of you unfamiliar with in-stream advertising, it's the creative insertion of personalized ads while viewers are still watching live-action programs versus the traditional ads that are simply inserted into programming breaks. Based on this and other unique technical capabilities, our pipeline of opportunities with new and existing sports-focused streaming customers is stronger than it has been since we launched our SaaS activity.

The marriage of high-quality stream live sports with personalized ads and experiences continues to look to us and our media customers like a real winner. That said, we also recognize marketplace headwinds affecting appliance sales remain persistent industry-wide, and so we're taking action to restructure and streamline. As a result of these actions and our continuing confidence in our streaming SaaS growth plan, we're increasing our full-year segment EBITDA outlook. With that, now over to you, Walter, for a deeper discussion of our results, actions, and outlook.

Walter Jankovic (CFO)

Thanks, Patrick, and thank you all for joining us today. Before I discuss our quarterly results as well as our outlook, I'd like to remind everyone that the financial results I'll be referring to are provided on a non-GAAP basis. As David mentioned earlier, our Q1 press release and earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP that are discussed on this call. Both of these are available on our website. Our first quarter results were consistent with our expectations. Additionally, we exceeded the midpoint of revenue guidance in broadband. I'll call out some of our first quarter highlights here on slide seven. For the quarter, we reported total revenue of $122.1 million. We also reported EPS of $0.00, bookings of $146.1 million, a strong book-to-bill of 1.2, and a record backlog in deferred revenue of $677.8 million.

Before reviewing our first quarter financials in more detail and providing detailed Q2 and full-year 2024 guidance, I'd like to highlight a few key points regarding our guidance. Regarding broadband, we're reaffirming our FY24 revenue guidance range of $460 million-$500 million. As we do each quarter, we closely evaluate the latest customer information, forecasts, and commitments just prior to our earnings call. Although the mix of customer business has changed from our prior guidance, in total, we expect to meet our FY24 revenue guidance range. At the midpoint of our reaffirmed FY24 broadband guidance, we expect revenue to increase 24% year-over-year. Based on expected momentum in the second half of 2024, we continue to anticipate 2025 broadband revenue growth will accelerate on a year-over-year basis. As Nimrod mentioned earlier, we are well-positioned with our leading technology, strong backlog, and our customer success to drive continued multi-year growth.

With regards to video, we are increasing our FY2024 EBITDA guidance due to actions we are taking to improve profitability, which I will discuss in more detail in a few minutes. Turning to slide eight, total Q1 revenue was $122.1 million, down nearly 23% year-over-year and 27% on a sequential basis. This was in line with the updated guidance we provided in early April and above the midpoint of the original guidance we gave on our last earnings call. Looking more closely at broadband, Q1 revenue was $78.9 million, a decrease of 21% year-over-year and consistent with our guidance. As anticipated, during the first quarter, we saw reduced shipments from a large tier-one customer. In video, Q1 revenue was $43.2 million, with lower appliance sales compared to last year due to the factors Patrick mentioned earlier.

At the same time, video revenue included SaaS revenue of $12.9 million, an 11% year-over-year increase and representing 29.9% of segment revenue for the quarter. Video SaaS revenue growth continues to be driven by live sports streaming expansions and new customer wins. In the first quarter, we had two customers representing greater than 10% of total revenue, with Comcast representing 29% of total revenue and Charter representing 17% of total revenue. Total company gross margin was 52.5% for Q1 2024, above the high end of our original guidance range and reflecting sequential gross margin improvement in the broadband business segment. Broadband gross margin was 47.5% for Q1 2024, up 510 basis points sequentially and down 260 basis points year-over-year due to product mix.

Video gross margin was 61.6% in Q1 2024, up 120 basis points year-over-year and down 300 basis points from an all-time segment record in Q4 2023, mainly due to macroeconomic headwinds. Moving down the income statement on slide 9, Q1 2024 operating expenses were $62.8 million, down 5% year-over-year. Adjusted EBITDA for Q1 2024 was $4.1 million, comprised of $10.4 million from broadband and -$6.4 million from video. Adjusted EBITDA for broadband exceeded our expectations, while video came in at the low end of our expectations due to the lower revenue. This all translated into Q1 2024 EPS of $0.00 per share, in line with our previous guidance and compared with $0.13 in Q4 2023 and $0.12 per share for Q1 2023.

We ended the first quarter of 2024 with a calculated diluted weighted average share count of 118.1 million compared to 115.7 million in Q423 and 117.8 million in Q123. The sequential increase is primarily due to the increased convertible debt dilution, partially offset by share buybacks. Turning to the order book, Q1 bookings were $146.1 million. The book-to-bill ratio was strong at 1.2 for the quarter. For Q423 and Q123, our book-to-bill ratios were 1.2 and 2.1 respectively. As we stated previously, over time, we expect the ratio to normalize and approach the historical benchmark of greater than one. Turning to the balance sheet on slide 10, we ended Q124 with cash of $84.3 million, which was flat compared to Q423. Cash from operations provided $26.8 million due predominantly to a decrease in accounts receivable from collections, partially offset by the net loss in the quarter.

We also used $21.7 million during the first quarter for share repurchases, which I'll discuss in more detail shortly. Turning to accounts receivable and days sales outstanding, at the end of Q1 2024, DSO was 78 compared to 76 in Q4 2023 and 50 in the prior year period. The prior year period was lower due to a large customer taking an early pay discount. Days inventory on hand was 134 days at the end of Q1 2024 compared to 89 at the end of Q4 2023 and 163 at the end of Q1 2023. The inventory increased $2.6 million in the quarter sequentially as a result of higher infeed following strong sales in Q4. Turning to capital allocation, our top priority remains driving our future growth. When appropriate, we will strategically invest in building inventory as we've done in the past to meet strong demand.

In line with this strategy, in December 2023, we closed a five-year $160 million credit facility that included a $120 million revolving credit line and a $40 million delayed draw term loan. Subsequent to the end of the first quarter, on April 18th, we redeemed entirely the $115.5 million in convertible notes outstanding, repaying the principal in cash by using our credit facility, and the value over par was distributed with approximately $4.6 million in shares. As of today, we have drawn down $115 million on this credit facility. Additionally, with our enhanced liquidity position during Q1 2024, we bought back $21.7 million or approximately 1.7 million shares at an average price of $13.07. To date, we have repurchased $26.8 million of the $100 million approved under our repurchase program.

As we said previously, the timing and amount of any stock repurchases will depend on a variety of factors, including the price of Harmonic's common stock, market conditions, corporate needs, and regulatory requirements. Also, as mentioned during our last earnings call, we plan to prudently manage our balance sheet by maintaining overall net leverage of around 2x or less and available liquidity of no less than $100 million going forward. We believe we have sufficient available liquidity to continue funding our growth plans while returning capital to our shareholders through increased stock repurchases. At the end of Q1, total backlog and deferred revenue was a record $677.8 million. Our strong backlog reflects continued demand from our large broadband customers and growing video SaaS commitments. Around 54% of our backlog and deferred revenue has customer request dates for shipments of products and for providing services within the next 12 months.

Lastly, we generated $24.9 million in free cash flow during the quarter. Before reviewing our guidance, just a few comments regarding our video business. As previously announced on April 8th, 2024, following a formal strategic review of our video business, our board of directors concluded its review and determined that Harmonic would retain the business. As part of our go-forward strategy, Harmonic's video business will be centered on driving profitable growth by focusing on scalable market opportunities, streamlining its operations, and optimizing its cost structure. To align to this go-forward strategy, we are implementing a restructuring program to achieve cost savings in this business. Many of these initiatives are already underway, and we expect the vast majority of them to be completed no later than Q3 of this year. We currently expect to incur approximately $17 million of restructuring costs related to these actions in 2024.

We expect to achieve approximately $18 million in savings in FY24 as a result of these actions and approximately $28 million in savings on an annualized basis in FY25. We believe these actions are necessary to better align the video business with our go-forward strategy. Due to these actions, we are increasing our FY24 video EBITDA guidance. At the same time, we are being conservative and reducing our FY24 video revenue guidance to reflect ongoing video market weakness, which we expect to persist throughout FY24. Once this restructuring is completed, we believe the video business will be able to achieve break-even EBITDA at below $180 million of revenue per year. With that, let's now review our non-GAAP guidance for the second quarter, beginning on slide 11.

We expect broadband to deliver revenue between $85 million-$95 million, gross margins between 47%-48% due to product mix, gross profit between $40 million-$46 million, and Adjusted EBITDA between $11 million-$15 million. For the full year, we expect revenue between $460 million-$500 million, gross margins between 46.5%-48.5%, gross profit between $214 million-$243 million, and Adjusted EBITDA between $95 million-$119 million. For broadband, we continue to expect to see a return to top-line growth in the second half of the year and the potential to hit record quarterly revenue during that time frame. For our video segment in Q2, we expect revenue in the range of $40 million-$45 million, gross margin in the range of 62%-63%, gross profit in the range of $25-$28 million, and Adjusted EBITDA to range from -$5 million to -$2 million.

For the full year, we expect revenue between $185 million-$195 million, gross margins between 62%-64%, gross profit between $115 million-$125 million, and Adjusted EBITDA to range from $0 million-$5 million. For video, we continue to be conservative, reflecting the factors I mentioned earlier. Turning to Slide 12. For the second quarter of 2024, we expect total company revenue in the range of $125 million-$140 million, gross margin in the range of 51.8%-52.9%, gross profit to range from $65 million-$74 million, Adjusted EBITDA to range from $6 million-$13 million, a weighted average diluted share count of $116.8 million, and EPS to range from $0-$0.05.

For the full year, we expect revenue between $645 million-$695 million, gross margins between 51.0%-52.9%, gross profit between $329 million-$368 million, adjusted EBITDA between $95 million-$124 million, a weighted average diluted share count of $118.5 million, and EPS to range from $0.51-$0.71 per share. In summary, we reported first quarter results in line with guidance. We believe our broadband segment continues to be well-positioned for future growth. In addition, with our restructuring actions, we believe our video segment will be better positioned for long-term growth and profitability. And lastly, before turning it over to Patrick, I'll ask everyone to mark your calendars. On June 13th, we will be hosting a virtual analyst day event similar to the ones we have held in the past. During this event, we will provide multi-year updates for both our broadband and video business segments.

Please stay tuned for additional details as we get closer to the date. Thank you, everyone, for your attention today, and now I'll turn it back to Patrick for final remarks before we open up the call for questions. Okay, thanks, Walter. In summary, Harmonic delivered another solid quarter. Our order book, competitive position, and customer relationships are stronger than ever, and we continue to be uniquely positioned for sustained growth. Finally, on a personal note, I've been privileged to work alongside my talented and committed Harmonic colleagues, some great customers, and shareholders who have both challenged and supported me. To all of you, I want to again say thank you and to convey my view that the best is still to come for Harmonic. With that, let's, as Walter said, open up the call now for your questions.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Simon Leopold with Raymond James. Your line is open.

Simon Leopold (Managing Director and Senior Equity Analyst)

Thanks for taking the question. Patrick, if this is the last call you'll be doing, just wanted to thank you for the time you've worked with us. You've been a great help. And Nimrod, we're looking forward to resuming and expanding the relationship with you. But getting into the question, one of the things I wanted to see if we could explore was Harmonic's dependence on the evolution of amplifiers, particularly for the rollout of DOCSIS 4.0.

I understand you're not a manufacturer of the amplifiers, but want to understand how that affects your trajectory and what you're assuming for the availability of both extended spectrum and full duplex amplifiers. Thank you.

Nimrod Ben-Natan (SVP and General Manager, Broadband)

So a couple of things, Simon. First of all, any remote kind of PHY device and network expansion that operators that are going 4.0 are doing are always forward-looking. And even if they put it in an area which is not 4.0, they would love to put something which is 4.0 upgradable for whenever the rest of the network will become ready to 4.0. Same thing as others are putting 4.0 amplifiers or passives and so forth. So that's number one.

Number two, and I think you should go back to what was kind of reported by the industry in terms of progress on the full duplex amplifiers, and I would go from the silicon to a vendor and the operator. All of them have reported progress and a plan to go into field trials this year with the plan to have that in deployment going into 2025. So that's our assumption based on everything that we've seen. And I guess many of you have visited the SCTE show in October. This is progressing really well.

Simon Leopold (Managing Director and Senior Equity Analyst)

Thanks. And just maybe a quick follow-up. On the video segment, I think Walter made a reference to Patrick's comments as to some of the incremental weakness. And I understand some of the explanation is related to customers maybe pausing as the strategic review was underway.

What I'm looking for is maybe a little bit of help bridging how much of the shortfall might be attributed to a pause and then what the other aspects might be leading to the lower full-year outlook for video. Thank you.

Walter Jankovic (CFO)

Yeah, Simon, I'll kick it off here just in regards to the expectations on the full year. As Patrick highlighted in the opening remarks, I mean, this was creating a pause with certain customers in terms of making decisions. Obviously, with the announcement that we made recently, that's opened up the conversations, and there is an expectation that those conversations will move forward in terms of some of the business that was on hold. So I'd say from a full-year guide perspective, that the impact is marginal from that event and is more related to the headwinds that we're continuing to see with regards, especially to the appliance business.

Simon Leopold (Managing Director and Senior Equity Analyst)

Thank you very much.

Walter Jankovic (CFO)

Okay, thanks, Simon.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of George Notter with Jefferies. Your line is open.

George Notter (Managing Director in Equity Research)

Hi, guys. Thanks very much. I guess I just wanted to ask about there is a pretty significant ramp you guys have now for the balance of the year. I think on the broadband side, I was looking at or calculating about $310 million in sales in the second half versus about $169 million in the first half. And I'm certain that your two largest customers are probably big components of that. But could you give us any more sense for what you're seeing in terms of pipeline activity, traction towards that second-half ramp? Anything that could give us a bit more confidence in it would be helpful. Thanks a lot.

Walter Jankovic (CFO)

Okay, certainly. Maybe I'll start, and then I'll ask Nimrod to provide some more color on that, George. First of all, from a customer standpoint, as I mentioned in the opening remarks, we're obviously tracking very closely with our largest customers in terms of the expectations for the full year and especially the back half of the year from a demand perspective, from a supply chain, ensuring that we're ready for the higher expected revenue in broadband. In addition to those larger customers, we do have an expectation of growing the rest of the customer base beyond the two largest customers. So we made some great traction in Q1 in terms of our revenue level from those other customers. The team is highly focused in terms of continuing that momentum and building up the rest of the market opportunities and revenue in the back half.

And I'd like to turn it over to Nimrod to provide some color around what we're seeing in the market and some of the very encouraging conversations we're having with those other customers.

Nimrod Ben-Natan (SVP and General Manager, Broadband)

Yeah, and I think we talk a lot about DOCSIS 4.0 and some of the major customers that are driving that. But what we see through the rest of the market is an increased urgency to look into what we call modernizing the network. And whether you look at it competitively or just to keep up with bandwidth demand, operators have to increase whether it's the upstream or the downstream of the network. And I did touch on this, what we call boosted DOCSIS 3.1, which really gives you fiber speeds. And we see more and more customers looking into that. This is now becoming available with availability of DOCSIS 4.0 modem.

Has nothing to do with amplifiers or nodes or anything like that, just a combination of a 4.0 modem with boosted capabilities of 3.1 network. Also interesting, and you may have heard other customers announcing retirement of legacy QAM video and moving to all IP. This is freeing up a lot of bandwidth in the network, which they can now put into this boosted architecture. So we have a lot of a lot of these discussions and, in fact, advanced stages in lab and field trials. And this is giving us the confidence for the rest of the market to follow.

George Notter (Managing Director in Equity Research)

Got it. Great. Thank you. I assume that Charter is a big piece of the second-half ramp. I know those guys have talked about, for example, the NextGen Cable Strategies Conference. They were talking about kind of reaccelerating their or accelerating their remote DAA build in July. Is that still something that seems doable from your perspective?

Nimrod Ben-Natan (SVP and General Manager, Broadband)

We cannot comment on any specific customer activity. I think specifically, if you look at the two major customers, both of them have announced their earnings last week, and they did provide an update. So you can follow up on that. I believe Charter talked about completing their upgrade by 2026. I cannot comment specifically on July or any specific date.

George Notter (Managing Director in Equity Research)

Got it. Okay. Thank you very much. I appreciate it.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Steven Frankel with Rosenblatt Securities. Your line is open.

Steven Frankel (Director of Research and Senior Research Analyst)

Good afternoon. I wonder if you might give us a little more color on the seven-figure fiber-to-the-home deal that you talked about there in your commentary. Was this a new customer, or is this within one of your existing CableOS customers today?

So it's an existing Tier 1 international customer. And what's exciting for us about this is that this is adoption of new fiber product generation that we announced during FSCTE last year, which is kind of the second phase of our fiber product introduction. And we're excited because this is being adopted by a major Tier 1 customer for this new architecture. And how quickly does this get deployed? Is this something that will be deployed in the back half of this year, or do we have the kind of prolonged ramp like we've seen with some of the DOCSIS customers?

Nimrod Ben-Natan (SVP and General Manager, Broadband)

No, this is second half of the year. Shipments are starting early second half, and this is definitely second half. Okay. And then maybe just an update on the color of customer conversations at NAB around streaming in the video business.

Walter Jankovic (CFO)

Well, Steve, I'll take this one, and I'll answer it in two ways. First, it felt to us to some extent that the market was back. I mean, candidly speaking, there's just been a little bit of a slowness to the overall space. And as both Walter and I explained, we still see some of that drag on the traditional appliance space. The streaming guys and the large media companies were out in force at NAB talking about looking about new content, new ways of packaging that content. And our booth was jam-packed. As I mentioned, our pipeline leading up to and particularly after NAB around significant new SaaS streaming opportunities is substantially larger than it's been in the last four quarters and stronger than it's been really since we launched the SaaS offering. So while not exclusively, sports is the bigger piece of that.

And part of it is supporting new programming, new rights. But another part of it is better monetizing the existing rights. And more than ever before, discussions around new and innovative advertising models, particularly personalized advertising models, and as I mentioned, this in-stream advertising, which you may have seen in a broadcast scenario at home where there's a squeeze back, etc. But that's all broadcasting. Everybody is seeing the same Ford truck advertisement there. Imagine if the squeeze back happens and now something is being served up specifically for you or your neighborhood. That becomes really powerful. And it's something that's generating a lot of excitement and incremental opportunity that we're seeing, Steve.

Steven Frankel (Director of Research and Senior Research Analyst)

Great. And then lastly, just maybe a few more nuggets on Beacon and how material could that be as a revenue contributor to the broadband business?

Walter Jankovic (CFO)

First of all, it is a service. So it's a recurring service. We are not disclosing pricing or anything like that, but this is something that you can think of that scales with the number of nodes or subscribers in the network. We are in the customer field trial, and we expect this to start generating small revenue but late this year. And over time, we see that kind of the footprint of our cOS, this is an add-on on top of that. And just lastly, is that targeted at tier two specifically because tier ones can figure out how to do this themselves, or do you think even a tier one customer could potentially get benefits from this product? I guess your question is on the targeted ads or Beacon. I was not sure.

Steven Frankel (Director of Research and Senior Research Analyst)

Yeah, on Beacon, please.

Walter Jankovic (CFO)

Oh, okay. Beacon can be relevant to any of our customers. It's not exclusive to only small ones.

Steven Frankel (Director of Research and Senior Research Analyst)

Great. Thank you so much.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Ryan Koontz with Needham & Company. Your line is open.

Ryan Koontz (Managing Director and Senior Equity Research Analyst)

Hi. Most of my questions have been answered, but maybe you can expand a little more on this in-stream advertising opportunity you were talking about in terms of the revenue and the deployment model. Where is the whole market in terms of maturity, in terms of being ready for this in-stream dynamic ad model? I'd kind of thought that it was already there, but maybe I was misunderstood. Thanks.

Patrick Harshman (CEO)

It's not already there for this particular kind of advertising avail or availability. Certainly, personalized advertisement exists, but matching up personalized advertising with not a program break, but ongoing live programming is new, Ryan. So in fact, I mean, I spoke earlier about in-customer meetings.

An almost next volume, I would say, in terms of meetings was with a broader ecosystem. Now, we're, of course, not an ad matching company, etc. But we had a number of those folks also through the booth. So it felt very much that at NAB that not that we're miles or years away, but that things were just now coalescing, combination of the technology we're enabling on the pipeline together with those who do the ad inventory and matching and together with the people who will meld it all together into services. So yeah, it's pretty exciting. And I think we think we're going to see a lot of progress in the coming couple of quarters and certainly the next year.

Ryan Koontz (Managing Director and Senior Equity Research Analyst)

Great. Great, Patrick. Thanks. And just a quick follow-up on the DOCSIS 4.0 supply chain. You feel ready to meet your customer need at this point in terms of the ramp. Is it more supply chain-limited, or customers are kind of phasing in the DOCSIS 4.0 hardware?

Nimrod Ben-Natan (SVP and General Manager, Broadband)

I think the supply chain is not an issue, and it's ramping according to the phasing that we've been working with our customer. So it's on track based on what we predicted previously.

Ryan Koontz (Managing Director and Senior Equity Research Analyst)

Got it. Thanks, Nimrod. That's all I've got.

Operator (participant)

Thank you. Thanks, Charles. Please stand by for our next question. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Your line is open.

Tim Savageaux (Managing Director and Senior Research Analyst)

Hey, good afternoon. I'll offer my congratulations as well to both of you guys, actually. I think when you got started with this thing, we're doing about $40 million in legacy revenue and now talking about $480. So that's a pretty amazing accomplishment over that period of time in terms of building the broadband business for both of you guys. And look forward to working with Nimrod. And it's really the diversification of that business that I think is critical now that you've put away both Comcast and Charter, which, again, is an amazing achievement.

But moving forward, I mean, I think Walter made a comment about being pleased with the kind of non-top two performance of the business, although and I'm doing this real-time and making a lot of assumptions, but it seems like that part of your business has been about 35%-40% of broadband revenue. And that percentage, I think, was probably up in Q1, but I'm not sure the absolute number was. But I'd be interested in that.

If that range is about right, and how do you grow that business, whether it's fiber to the home with other tier ones? Are there other major global MSOs that could meaningfully shift that balance? And to the extent I'm kind of right there, where would you like to have that number in a year? Well, it might be tough given Charter full ramp, but you know what I'm saying. Where do you want to take it over time? Thanks.

Walter Jankovic (CFO)

Hey, Tim. It's Walter. I'll kick it off, and then Nimrod can add some more color to it. But just in terms of your observations, when I made the comment that we were pleased with the first quarter results, we did see some strong numbers for folks outside of the big two customers.

And then also from a forecast perspective in terms of the reviews that we've had with Nimrod and the team around the full year and the expectation and I think you hit the high points, expectation around additional customers that are ramping on from a DOCSIS standpoint, but also getting more traction on the fiber-to-the-home type of opportunities, both at the telco level, but more so in the strategy that Nimrod mentioned earlier around our cable customers and their strategies on focusing in on fiber islands, etc. So I think there's momentum there. We were pleased with the mix of business we saw in Q1. But your observations that as we ramp up the second half, we obviously have the big customers that impact the overall number, but we're also seeing good traction and have good expectation around the rest of the customers growing from an absolute dollar perspective.

So I'll turn it over to Nimrod to provide a little more color on that.

Nimrod Ben-Natan (SVP and General Manager, Broadband)

So I would say a couple of things. First of all, there is a known list of operators that have yet to make a migration to a next-generation architecture, and we target them as key opportunities. We also have customers that are not 100% our solution. They still have a legacy. So we're certainly looking to expand with them. And I would say above and beyond kind of the core architecture, we look at fiber as another dimension of growth with existing cable customers. And also outside, we see a lot of value that we bring into fiber-first customers. And this is an area where we have expanded our go-to-market.

We now brought kind of a fully dedicated sales leader on the broadband side, which is what I've seen over the last couple of weeks, is kind of boosting everything we're doing. So I would say the combination of all of that, along with the fact that we made it a priority, we're continuing to focus on our major customers, kind of taking them through the transition that they make. But we feel that this is a good timing for us to focus on the rest of the market and make the right investment.

As well as, as I said, we feel the urgency, whether it's fiber competition, whether it's the fixed wireless, or the urgency to kind of extend the life of their DOCSIS broadband network. The combination of all of that brings many of them into kind of a more urgent discussion about upgrading their network. So obviously, we're going to keep kind of focusing on the execution and growing that piece as Walter described.

Tim Savageaux (Managing Director and Senior Research Analyst)

Great. And thanks for all that color. And Walter, just to follow up, I think on another comment, which was, I guess, in maintaining the broadband revenue target for the year, I think you made a comment about kind of getting to the same place with a different mix. Is that sort of what we're talking about here, which is more new customer revenue, more fiber, or did you mean and maybe less of big customer? I'd like you to kind of amplify on that comment.

Walter Jankovic (CFO)

Sure, Tim. Just from an overall perspective, we have a lot of customer shift as you would expect as things move on through the year. I would characterize it as we had some shifts in big customers that had an impact as well. We've had some shifts in some of the smaller customers as well. And when I mean shift, it could be positive in terms of more, or it could be less. And so I think one of the key things - and you hit it on your first question - it's all around diversification.

And I think this is one of those situations as I looked at the number with the team for the full year, we're getting some benefits from diversification in terms of when there's some changes going one way, there's some potential offsets another way. And so that's the way I would characterize the workup of the full-year number. It's different than it was 90 days ago, but it's still holding in at the number we have overall that we guided 90 days ago.

Tim Savageaux (Managing Director and Senior Research Analyst)

Great. Thanks very much.

Walter Jankovic (CFO)

Okay. Thank you, Tim.

Operator (participant)

Thank you. Ladies and gentlemen, I'm sure no further questions in the queue. I will now like to turn the call back over to Patrick for closing remarks.

Patrick Harshman (CEO)

Okay. Well, thank you again, everybody, for joining us this afternoon. We're excited about the quarter. We're excited about the momentum. And we're looking forward to our next opportunity to meet with you all. Until then, have a good day. Bye-bye.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.