Harmonic Q2 a Mixed Bag

Video Business Expands as Cable Edge Sales Soften (Updated)
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Harmonic president and CEO Patrick Harshman called the second quarter a “tale of two businesses,” as its video business segment grew 13% thanks to rising adoption of its VOS software-based media processing platform, paired with a sharp 28% decline at its Cable Edge business, which includes edge QAMs and its budding converged cable access platform (CCAP) product line. 

Overall Q2 revenues (Comcast represented 11% of  revenues in the period) were down 1%, to $103 million. Harmonic posted a GAAP net loss of $1 million (1 cent per share), narrowed from a year-ago net loss of $2.7 million (3 cents per share). Wall Street analysts were expecting $103 in revenues and a loss of 4 cents. 

On the positive end, VOS bookings were three times those in the first quarter, which saw nearly two dozen new customers buy into the platform.  Harmonic “is still in the early innings of demonstrating the true power of our next generation video architecture…it's increasingly clear that Harmonic's VOS platform is a real winner,” Harshman said on Monday's earnings call, noting Harmonic saw Ultra HD and HEVC compression activity “breaking loose” in the  period though overall demand is “still modest.” 

The drop in Cable Edge sales followed a record first quarter of revenue and bookings, but softness in Q2 came amid ongoing industry consolidation, including Charter Communications’ pending deals for Time Warner Cable and Bright House Networks, but sales sluggishness spanned all geographic regions. Its near-term outlook for the Cable Edge business makes it unlikely that Harmonic will grow revenue this year. 

“While we expect these consolidation dynamics to weight on Cable Edge revenue in the near term,” recent customer feedback on Harmonic’s development DOCSIS 3.1 solution leaves the company “incrementally more bullish on our mid- to long-term opportunity and competitive position here,” Harshman said. 

He said Harmonic made advancements with its two-way CCAP and DOCSIS 3.1 program, which features the NSG Pro, by passing “several key internal and customer lab milestones” ahead of anticipated mid-2016 deployments of D3.1, a platform that will bring multi-gigabit speeds to HFC networks. 

He said Harmonic is on schedule to deliver two-way DOCSIS 3.1 hardware based on the NSG Pro to customer labs later this year. DOCSIS 3.1, Harshman explained, represents a “real entry point” for Harmonic as most of its large customers have not intention to introduce new tech suppliers for DOCSIS 3.0 products. 

Harshman said Harmonic also saw interest from customers in new distributed forms of CCAP architectures, which were recently specified by CableLabs. Harmonic is targeting that emerging market with the NSG Exo

“There is a growing branch of the CCAP market that will play out as part of the new distributed architecture,” Harshman said. “Though the market remains relatively uncontested…this is particularly evident in regions where operators are extending their fiber networks” to reach MDUs and small businesses and in support of denser WiFi networks. 

Update: Raymond James analyst Simon Leopold maintained his “underperform” rating on  Harmonic.

“Although we are encouraged by signs of traction for the software-based products, gross margin trajectory, and eventual CCAP sales, we see pressure from operator consolidation, forex, and legacy product declines as heavy burdens.”

D3.1 CCAP products, he added, won’t ramp until the second half of 2016, “later than we think some had expected.”  But eventual adoption of UHD should aid growth for Harmonic’s VOS solution, he said in a research note issued Tuesday.