Harmonic Inc. Q2 FY2023 Earnings Call

Thank you for standing by. Welcome to the Second Quarter 2023 Harmonic Earnings Conference Call. My name is Jonathan, 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. Please note that this conference is being recorded. And now I would like to turn the call over to David Hanover, Investor Relations. David, you may begin.

Thank you, Operator. Hello everyone, and thank you for joining us today for Harmonic's second quarter 2023 financial results conference call. With me today are Patrick Harshman, President and Chief Executive Officer; 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 have 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. And 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 to 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?

Thanks, David, and welcome everyone to our second quarter call. In the second quarter, Harmonic delivered solid Broadband and Video SaaS growth, while also encountering short-term headwinds. Revenue was $156 million, EPS was $0.12, and adjusted EBITDA margin was 13.5%. Our Broadband segment revenue grew 20% year-over-year, our Video SaaS revenue was up 58%, and book-to-bill was over $1.2 million, leading to record backlog and deferred revenue of over $663 million. Hardware deliveries on both the Broadband and Video sides of the business were softer than anticipated. And we expect this softness to persist through the third quarter before rebounding in Q4. Our competitive position continues to be strong, evidenced by several important new customer wins during the quarter. The combination of record backlog and deferred revenue, active and healthy existing customers, and new customer relationships that have yet to scale continues to position us well for sustained long-term growth. Taking a closer look, first, at our Broadband segment, we delivered another quarter of solid growth, with segment revenue of $97.1 million, up 20% year-over-year. Customers deploying our solution reached 98, up 24% year-over-year, with corresponding 21 million cable modems now served worldwide, still only approximately 12% of the addressable global market, highlighting our significant expansion opportunity expanding existing and new accounts. We did expect Q2 growth to be higher, and during the quarter we ran into unexpected reductions in hardware deliveries, reductions we now expect to persist through the third quarter. I want to emphasize we see no loss of business, nor do we see any change in our mid-to-long-term growth opportunity. Indeed, our customers remain proactive with regard to new gigabit services. Our new broadband bookings were strong, enabling record backlog and deferred revenue, and our competitive position has never been stronger. Contributing to these bookings were initial multi-million-dollar orders from two new Tier 1 accounts; one in North America, and one international. Neither of these accounts have yet begun deployment or contributing revenue. Further highlighting our still-strengthening market position, market intelligence firm, Dell'Oro Group, recently recognized Harmonic as the cable broadband equipment market share leader for the first time. Another highlight of the quarter was the extension of our software license relationship with a key customer. Our cloud-native core software continues to be unrivaled in the market, valued by our customers, and key to our unique and powerful market proposition. Illustrating the flexibility and competitive advantage of our software core, we're leading in enabling the new DOCSIS 4.0 standard, which unlocks compelling new multi-gigabit services for our customers and new growth opportunities for our business. Complementing our extended software core is a new family of backward-compatible DOCSIS 4.0 RPDs and optical networks. The technology development and trial progress in this area has been truly remarkable, and we're now gearing up to support initial deployments in the coming months. While technology transitions such as this can result in short-term headwinds, as some customers begin to look ahead to the coming standard, the new growth opportunities being created by the associated new wave of symmetrical multi-gigabit services that DOCSIS 4.0 unlocks are good news for our business. Also good news for our business is the progress we continue to make in the fiber-to-the-home area. We recently announced Claro Perú has selected our 10G PON solution for their new fiber service. And we also announced the availability of a powerful new hardened switch for XGS and 10G-EPON. Worldwide, cable customers are looking to fiber as they expand their footprints and compete head-to-head with telecom providers. Our growing fiber sales pipeline reflects this expanding opportunity. In summary for our Broadband business, we continue to be confident in our technology position, our market position, and our opportunities. With record backlog and deferred revenue, we're continuing to execute on high-impact cable and fiber initiatives that are being embraced by a growing number of customers worldwide, positioning us for sustainable, long-term growth. And turning now to our Video segment, the highlight of the quarter was SaaS revenue of $13.6 million, up 58% year-over-year. Total revenue was $58.9 million, down from $76.2 million a year ago, reflecting our intentional SaaS transformation, some project delays, and a continuing transition of historical appliance revenue to software, evident in the second quarter from the 61.7% segment gross margin. The business delivered a positive EBITDA, demonstrating our commitment to profitability while investing in the transition to SaaS, with its inherent revenue timing challenges. While streaming sales growth was again driven primarily by live sports, both existing and newer customers contributed. As a reminder, we're benefiting from several newer SaaS customers signed in prior periods that are now coming online and ramping usage. The exceptional video quality and low-latency characteristics of our video SaaS continue to shine in the market. For example, we're currently supporting the Women's World Cup, and consumer feedback on the relative quality of the streaming services we're powering has been excellent. Based on this progress and the growing impact of several new capabilities we announced last quarter, we continue to forecast SaaS growth greater than 50% for the full year. On the appliance side of the business, North America was quite solid, while we experienced some project delay headwinds internationally. We've undertaken a thorough review of our sales pipeline and are working closely with key customers worldwide. The net result is a reconfirmed solid sales pipeline for the second half of the year, with a seasonally strong fourth quarter, which is typical for our video business. Recapping our Video segment strategy, we remain focused on taking a leading position in the growing streaming SaaS market, particularly for live sports, while also maximizing profit from the traditional video appliance market. Our results through the first half of the year demonstrate continuing excellent progress on SaaS and continued overall profitability despite some macro international headwinds. We're confident in our second-half outlook and in our ability to continue to create value through sustained streaming SaaS growth. With that, let me turn it over to you, Walter, for a deeper discussion of our financial results and outlook.

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 Q2 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. During the second quarter, we delivered double-digit year-over-year broadband and SaaS revenue growth and generated strong gross margins in total and across our business segments. Having said that, we also experienced hardware sales delays that resulted in total revenue below our expectations. Despite this, our SaaS continues to grow to record levels, and our overall mix of software revenue was up significantly as reflected in our gross margins. Our operating model demonstrated its inherent strength as we continue to deliver solid profitability, resulting in EPS of $0.12, which was within our guidance range. We ended the second quarter with a solid balance sheet as well as record backlog and deferred revenue of $663.8 million, positioning us well for continued long-term growth. Before reviewing our Q2 2023 financials in more detail, I'll briefly review the key highlights here on slide seven. For the quarter, we reported revenue of $156 million, with EPS of $0.12, bookings of $194.7 million, and record backlog and deferred revenue of $663.8 million. In a few minutes, we will discuss our Q3 2023 and full-year '23 guidance, which now takes into consideration the impact of recent customer demand push-outs that have occurred following our last earnings call. These demand changes reflect inventory adjustments by our broadband customers and macroeconomic challenges affecting our video customers. To offer some additional color, they do not reflect any loss of market share or any changes in the competitive landscape. Now, let's review our second quarter financials in detail. Turning to slide eight, again, total Q2 revenue was $156 million, down less than 1% on a year-over-year basis. Looking first at our Broadband segment, Q2 revenue was $97.1 million, down slightly sequentially and up 20% year-over-year. We continue to see current ramp-up and newer customer launches during the quarter including modest contribution from fiber revenue. As mentioned, hardware revenue was lower than expected, reflecting sales delays across several customers. In our Video segment, we reported Q2 revenue of $58.9 million, up 3% sequentially, and down 23% year-over-year. While hardware sales were lower, our Video revenue included SaaS revenue of $13.6 million or 23% of segment revenue in the quarter, up 58% from the prior year. We continue to execute the strategic transformation of our video business and the continued growth of SaaS, while also focusing on maximizing profitability in the appliance business. We had one customer representing greater than 10% of total revenue during the quarter, with Comcast representing 47% of total revenue which was similar to last quarter. Total company gross margin was 54.7% for Q2 '23, up 80 basis points sequentially and 190 basis points year-over-year reflecting increased gross margins in both of our business segments sequentially. Broadband gross margin was 50.5% for Q2 '23, up 40 basis points sequentially and 750 basis points year-over-year. The sequential increase predominantly reflects favorable software mix as a result of lower hardware sales in Q2. Video segment gross margin was 61.7% in Q2 '23, up 130 basis points sequentially and down 150 basis points year-over-year. The sequential increase was primarily due to SaaS continuing to scale. Moving down the income statement on slide nine, Q2 '23 operating expenses were $67.2 million, up 1.5% sequentially and 9% year-over-year. The sequential increase reflects higher sales commissions due to recent contract wins. Adjusted EBITDA for Q2 '23 was $21.1 million, or 13.5% of revenue, down 13.4% versus Q2 '22, comprised of $19.7 million from broadband representing 20.2% of segment revenue and $1.4 million from video. This all translated into Q2 '23 EPS of $0.12 per share consistent with Q1 '23 and compared to $0.16 per share for Q2 '22. We ended the second quarter of 2023 with a calculated diluted weighted average share count of 119.3 million compared to 117.8 million in Q1 '23 and 109 million in Q2 '22. The sequential increase is primarily due to the increased convertible debt dilution of 1.2 million shares. Turning now to the order book, we reported bookings of $194.7 million. The book-to-bill ratio was 1.2 for the second quarter. For Q1 '23 and Q3 '22, our book-to-bill ratios were 2.1 and 0.9 respectively. This follows what we've stated previously that over time, as supply chain conditions improve, we expect this ratio to normalize and approach the historical benchmark of greater than one as it did in Q2. There is one item that I would like to draw your attention to from our GAAP to non-GAAP reconciliations for Q2. In Q2, we recorded a nonrecurring expense of $2.1 million that is excluded from our non-GAAP results relating to professional accounting, tax, and legal fees associated with strategic corporate initiatives. Given their nonrecurring nature, we have excluded these costs from our non-GAAP results to provide investors greater transparency regarding the performance of our core businesses. Turning to the balance sheet on slide 10, we ended Q2 '23 with cash of $71 million compared to $90.9 million at the end of Q1 '23. The net $19.9 million sequential decrease was due to a few factors. We used $16.5 million of cash in operations. This was primarily due to an increase in accounts receivable, offset partially by a decrease in inventory in the quarter. I will address these two items in a moment. We also used $1.5 million of cash in the purchase of fixed assets. Turning to accounts receivables and days sales outstanding, at the end of Q2 '23, DSO was 69 compared to 50 in Q1 '23 and 61 in the prior year period. Our second quarter DSO reflected a significantly larger portion of shipments in the final two weeks of the quarter that have since been collected. Going forward, one of our larger customers has informed us that they will no longer take an early pay discount, so that will now be reflected in our go-forward DSOs and cash forecasts. Days inventory on hand was 145 days at the end of Q2 '23 compared to 163 at the end of Q1 '23 and 100 at the end of Q2 '22. It's important to note that the inventory decline in the quarter was a result of lower than expected material infeed as we tighten our supply chain. Regarding capital allocation, our top priority remains driving our future growth. As such, when appropriate, we will strategically invest in building inventory as we've done in the past to meet strong demand. Having said that, as we've stated previously we have the flexibility to maintain somewhat lower inventory levels that is reflected in our ending inventory balances for the second quarter. At the same time, our capital allocation strategy takes into account our ability to return capital to our shareholders through stock repurchases. Again, as stated previously, the timing and amount of any repurchases will depend on a variety of factors, including the price of Harmonic's common stock, market condition, corporate needs, and regulatory requirements. We also consider our 2024 convertible notes in our forward cash planning activities. At the end of Q2, total backlog and deferred revenue was $663.8 million compared to $623.5 million at the end of Q1. This record backlog in deferred revenue reflects continued demand from our large broadband customers and growing video SaaS commitments. The majority of our backlog and deferred revenue has customer request dates for shipments of products and providing services within the next 12 months. In summary, while our Q2 revenue was below expectations, our SaaS business continued to grow to record levels. In addition, our overall mix of software revenue was up significantly, as reflected in the strength of our gross margins. While we do expect to see continued short-term headwinds in our revenue as customers deal with inventory levels and macroeconomic conditions, we do not see these factors impacting our market share or our long-term expectations for continued growth. Before reviewing the guidance, I'd like to take a moment to comment on my first two months here at Harmonic and my priorities going forward. First of all, as I've met with all the organizations and conducted a deeper review into our technology capabilities and market opportunity, I'm extremely excited about the opportunities ahead of us and our ability to grow over the long-term. To facilitate our long-term growth plans, I've laid out the following key priorities for my team in collaboration with the broader organization: first, to conduct a thorough review of our long-term market opportunities to drive an updated strategic plan which we will share with you at our next Analyst Day late this year; second, to develop a roadmap on how we scale up the organization cost-effectively and with the appropriate tools and processes to facilitate our expected growth; and third, revise our capital allocation plan based on our updated strategic plan. I look forward to updating you as we progress on these key priorities. Let's now review our revised non-GAAP guidance for 2023, beginning on slide 11. Based on the current macroeconomic conditions and the continued demand we're seeing for our products, for the full-year 2023, on a total company basis, we expect revenue in the range of $620 million to $660 million, gross margin in the range of 51.9% to 52.9%, operating expenses to range from $262 million to $268 million, adjusted EBITDA to range from $71 million to $93 million, and an effective tax rate of 20%, up from 13% from last year as we exhausted our NOLs in the past year. Our weighted average diluted share count was approximately 119.2 million. Please note that the convertible debt related dilution included in our share count uses the Q2 average stock price, which was approximately $16.05. As a reminder, the share count figure utilized in our dilution calculations will change depending on stock price movements. EPS is expected to range from $0.38 to $0.52 per share, subject to the just mentioned dilution calculation, down 24% at the midpoint from previous guidance and cash at the end of 2023 is expected to come in between $80 million to $95 million. Our cash guidance reflects one of our larger customers no longer taking an early paid discount option, as I mentioned earlier this will result in higher DSO than what we have seen over the past few quarters. We still see cash accretion over the second half of 2023 and into 2024 to give us full optionality on how we handle the repayment of the principal of our 2024 convertible notes. For the total company for the third quarter of 2023 on slide 12, we expect revenue in the range of $125 million to $140 million, gross margin in the range of 50.0% to 50.8%. Operating expenses to range from $65 million to $67 million, adjusted EBITDA to range from $0 million to $8 million, an effective tax rate of 20%, a weighted average diluted share count of approximately 112 million to 119.8 million and EPS to range from a loss of $0.02 to a profit of $0.02 and then cash to range from $80 million to $90 million. Turning to slide 13 for the full-year 2023 based on the progress to date, we expect broadband to achieve revenue between $385 million to $410 million below our prior guidance at the midpoint. Gross margin is between 47.0% to 48.0%, reflecting a much greater mix of hardware in the second half of 2023 versus the first half. Operating expense is between $122 million to $125 million, and adjusted EBITDA between $65 million to $78 million. For our Broadband segment in Q3, we expect revenue in the range of $70 million to $80 million, gross margin in the range of 42.5% to 43.5%, operating expenses in the range of $30 million to $31 million and adjusted EBITDA to range from $1 million to $6 million. Now, on slide 14, I will review full-year '23 Video segment guidance. We expect revenue in the range of $235 million to $250 million, gross margins in the range of 60% to 61%, operating expenses in the range of $140 million to $143 million, and adjusted EBITDA in the range of $6 million to $15 million. For our Video segment in Q3, we expect revenue in the range of $55 million to $60 million, gross margin in the range of 59.5% to 60.5%, operating expenses in the range of $35 million to $36 million, and adjusted EBITDA to range from a loss of $1 million to a profit of $2 million. This guidance reflects a wider range on revenue and earnings related to short-term headwinds we are seeing with customers. We believe it's somewhat conservative, which we think is appropriate given the current environment. In summary, during the second quarter we continued to execute on our long-term strategic plans with continued growth in our Broadband segment and further progress with the planned transformation of our Video segment and shift to SaaS. We ended the second quarter with record backlog and deferred revenue which we believe positions us well for future growth. 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.

Thanks very much, Walter. I think you got the summary right. Our products and services, our customer relationships, and our team all continue to lead the markets we serve. We remain determined and confident in leveraging this leadership to take full advantage of the expanding market opportunities in front of us. And we appreciate all of you listening on the call today. Our shareholders, we appreciate your continued support. With that, let's now open up the call for questions.

Certainly. One moment for our first question. And our first question comes from the line of Simon Leopold from Raymond James. Your question, please?

Great. Thanks for taking the question. So, a couple of things I'm trying to digest here, but it really comes down to trying to make sure we understand what's changed in terms of the commentary you offered last quarter to this quarter, because it seems to me that this is a combination of factors and not just one. So, I think we had been expecting, during the second half of the calendar year, you would be seeing more growth from your other customers besides your largest. And we also felt like your largest customer was sort of running at a pretty steady pace. And given this outlook for the third quarter, it seems as if, perhaps, your largest customer is sitting on too much inventory, and the other customers are maybe not showing up with the strength you thought. And just one clarification to tie this together, is it does seem as if the fourth quarter, you're anticipating very, very strong sequential growth, and I want to make sure I'm plugging that in correctly, and what gets us there? Thank you.

Okay, well, thank you, Simon. There's a lot there in the question. As you know, we cannot separate what's happening with different customers. Maybe going back to the headline, indeed what transpired during the past quarter in terms of expected demand, we saw a significant change in terms of what was communicated to us. And that change was not exclusively from one customer. We don't think in any way reflects changes in long-term or even mid-range plans. It does reflect though some absorption of inventory, some contraction. And secondarily, I think some other market factors; transition to FDX being one of them. I think the outlook for the business, while it's premature to give 2024 guidance, the outlook for the business is really unchanged. And I think recent statements by several of our customers, as they've issued their earnings releases, speaks to their continuing aggressiveness in advancing their deployment plans. We're certainly encouraged by that, and yes, we're confident in the guide that we've given here for the fourth quarter and confident in our positioning with these customers as they continue to drive their businesses.

Thank you for the clarification. I would like to ask a quick follow-up regarding how you structure your agreements in the CableOS. Specifically, I would like to know if your customers receive perpetual licenses, if they pay by the seat, and whether there are renewal streams. Could you explain the business arrangement concerning the software on the cable side? Thank you.

Okay, I'll take it. And, Walter, you can chime in. Simon, the most common model, and the truth is there are a couple of different we've used. But by far and away, the most common model is a perpetual license associated with a fixed amount of provisions of bandwidth around a specific standard. So, let's just say 100 megabits, 5-gigabits, 10-gigabits of DOCSIS 3.1 traffic; a perpetual license for that, that is associated with the underlying compute.

So, when a customer migrates to 4.0, you'd essentially have a new software agreement?

That is the most common model. That is correct.

Yes, I was just going to add, as Patrick highlighted, just to emphasize the point, there are different models in terms of the CableOS and how we're selling that through to customers, and how that will transact going forward. So, as we see customers, there are many customers who will be buying on a subscriber basis. So, as they increase their network in terms of adding subscribers, that will have an impact in terms of our software revenues.

Thank you for taking the questions.

Okay, thank you.

Thank you. One moment for our next question. And our next question comes from the line of Ryan Koontz from Needham & Company. Your question, please?

And thanks for the question. Given your software license model there around bandwidth consumption, I've been hearing there was some recent history reports about declines in broadband traffic demands. And I wonder if you're seeing that have any impact relative to the pace of customer projects and maybe over-purchase of inventory. So, as you look at these near-term headwinds and it sounds like you mentioned it was mostly international. Can you parse out any of those thoughts for me in terms of how you think it might be affecting your near-term demand?

Hi, Ryan, it's Walter. Thanks for the question. So, first of all, with regards to international demand and comments, I think those comments reflect across both broadband and video. We're seeing certain regions that are being more impacted in terms of delaying their decisions to move forward with certain projects. So, I first wanted to clarify that point specifically. And then secondly, as we had emphasized in our opening remarks, customers are adjusting inventory levels. I think that's something that's happening across the board with many customers out there, and as it necessarily reflect their plans in terms of deployments moving forward. And I think that's a really important point to take away from the comments here. We expect, as Patrick highlighted earlier, that the fundamentals, the expectation of continued growth and roll-outs from our customers is happening, and will continue to happen. And from the position of where we stand and the wins that we have in the market share, we've never been stronger. So, I just wanted to clarify with those comments.

That's great. And want to continue that thought forward with a comment around FDX and DOCSIS 4. It sounds like you feel well-prepared to participate in some of these early trials. When do you think you'll see the customers, in total, really begin to move over to DOCSIS 4? We still talking '25, do you think?

It's a fluid picture, Ryan. Actually, the progress, the technology progress and the early trial progress that we've been involved with has actually moved more quickly than I think many anticipated. We expect not just trials, but we now expect initial true revenue deployments to be happening beginning in 2024. Now, some customers are further along and more aggressive than others. So, 2024, I think, will still be more of a DOCSIS 3.1 story, but there's no doubt that, because of the pace of progress that we in particular have made, and I believe that we've very much leading here, the door is now open to some customers to start to pivot to that, even in 2024. And I think it's exciting. It's going to enable, I think, a very interesting additional competitive platform for cable versus telco and pure fiber competitors. And I think it also speaks, maybe back to the earlier part of your question, to the continuing aggressiveness that many of our customers still have motivating them as they're looking at competing in this space.

Helpful, Patrick. Thank you both.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Steven Frankel from Rosenblatt Securities. Your question, please?

Thank you, Patrick. Let me just circle back to the second part of Simon's question, which was, I think, all of us had this assumption that one of your largest customers may be going through something, there was a set of other customers, including some Tier 1s that hadn't really gotten started yet, they were still in the early deployment phases. And the assumption was they would be ramping up in the back-half of this year. Are you telling us that some of those customers are also putting the breaks on at this point; they're not ready to ramp up?

Hey, Steve, it's Walter. I'll first respond, and then Patrick can provide additional insights. As mentioned earlier during the Q&A, our guidance indicates that we anticipate several customers will begin ramping up in Q4. This expectation is reflected in our full-year guidance numbers. So, to put it succinctly, yes, we are observing customers starting to ramp up, and this is factored into our Q4 guidance. Patrick, if you want to add on.

No, I think that captures it all.

Okay. But no one is stepping up in Q3 to fill the gap, clearly, from the guidance. Patrick, maybe some color on the two new Tier 1 wins?

We're excited about them. They're definitely players, or let's say, if I can use quotes, "household names in the community." So, they're premier accounts, and we're excited to have them onboard. I think that, as I mentioned in the prepared remarks, initial multi-million dollar orders, so we have a ways to go. But to your question, neither is contributing revenue yet, and likely, only modest revenue before year-end, but it's really part of the layering that's going on with our business. And speaking to what we think will be greater diversity of customers, a breadth of customers larger as well, that's building over time here. Yes, Steve, it's not always easy to prognosticate what the pace of the ramp will be; every customer has got their own thing going on. But having more in the funnel, it's only good news for our business. And so, we're thrilled to see continuing progress in North America, as well as continuing progress overseas.

Okay. And just a clarification on the backlog, I think you said, a couple of times, you didn't feel like you were losing market share or any shifts there. But from a technical point of view, if I was a customer, do I have the ability to cancel that backlog or am I locked in to some extent?

Generally, customers are locked in with their purchase commitment. What we sometimes see, and is obviously experience, is customers will push out the order dates. And so, we have to work with our customers with regards to their plans and requirement, and so is something that does impact us from the perspective of timing, as compared to an order being cancelable.

All right, thank you. I'll jump back in the queue.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of George Notter from Jefferies. Your question, please?

Hi, everyone. This is Blake on for George. Thanks for taking our question. I'm curious if you can provide any additional detail on the follow-on software contract with the existing, large Tier 1, maybe how that deal is structured, if it's any different, and if the economics have improved at all for you?

I appreciate the question, and I understand where it's coming from. But I ask you to appreciate it's not something that we can really unpack for you. I think that the headline message is that the differentiation, the power of the software is enduring. I think we've faced the question of, "Will some customers stay with you?" And I think we're offering it as an example of the durability of our leadership, and the relationships that are built around or built around the software have the software as a major building block. What we can't talk about really is the duration or the scope or other aspects of that, and, other than to say that, it in no way is a one-for-one with what has been done previously with the customer. But it's an important reflection of our continuing relationship and the continuing leadership that we have in the industry with our software capability.

Understood. And then curious where lead time stands for cable access equipment, I believe they're about 12 months, recently, for larger quantity node orders. Is that still the case, and maybe how did they change at all during the quarter, if so? Thanks.

Blake, it's Walter here. From our viewpoint, we have been actively collaborating with our customers regarding lead time requirements. As mentioned in my opening remarks, we are still encountering some long lead-time parts that require a 52-week lead time. However, many components within the supply chain have improved, allowing us greater flexibility in managing orders and inventory levels. Customers are assessing their inventory buffers and deciding on the levels they wish to maintain. This corresponds to our earlier comments about customers making inventory adjustments, which we observe across many of our current clients.

Great, thank you.

Thank you, Blake.

Thank you. One moment for our next question. And our next question comes from the line of Tim Savageaux from Northland Capital. Your question, please?

Good afternoon. I have a couple of questions. First, regarding the earlier discussion about the new Tier 1 wins, including Charter. Patrick, you mentioned that your growth outlook for 2024 remains unchanged. Does this mean we shouldn't expect significant revenue contributions from those three wins this year, despite having booked some orders, with a more substantial ramp expected next year? Collectively, will they help you get closer to achieving your growth plan?

I appreciate the question, Tim. I think it's premature for us to be talking in any quantitative way about 2024. And as you also I think will appreciate, I can't comment specifically about Charter. But, look, what we've seen with other Tier 1s, and going back to the Comcast relationship, it takes a while to get going. It's a powerful but new operational paradigm, in addition to technology, et cetera. And so there is a non-ramp, for lack of a better term, that needs to be worked through. And in each of these accounts, we're working through that. I cannot say that there is no contribution in 2023; in fact, there is modest contribution from some of the newer Tier 1s in 2023. But indeed, the lion's share of the opportunity lies ahead in 2024 and 2025, and that's for sure. And as we look out to 2024 and 2025, that's one of the reasons why we can say with more certainty or more confidence, that as we look at customer concentration in our business, et cetera, we think we will be in a different place as more of these Tier 1s have come online. Exact timing and exact size, I think we're going to have to hold back being quantitative until we're a little closer to 2024, and we've reviewed with our customers in more detail 2024 plans.

Got it. Moving on to a different topic, which might be a bit complex, so please bear with me. Earlier in the call, you mentioned that most of your comments about weaknesses seemed to focus on the external plan. To me, that implies a focus on hardware. Your order book reflects that it's robust despite a weakening demand environment, and you noted some new Tier 1 clients. Are we noticing any differences in how the business is performing between the virtualized CCAP and router segments compared to the node segment? You stated that you didn't believe you were losing market share, but with FDX ramping up quickly and one of your major competitors being well-positioned, doesn't that suggest some market share loss on the hardware side? Wouldn't that potentially be beneficial for your business model in the long run, even if it means lower revenue but higher margins? Is that perhaps why you are reassessing the targets set for the 2025 Analyst Day? On one hand, Patrick, you mentioned supporting long-term growth targets, but I thought Walter just indicated that new numbers are forthcoming. Could you provide some clarification on that? I apologize for the lengthy question.

Let me handle that one first, Tim. So, in my remarks, in terms of our focus, every year we go through a strategy planning process, and now I'm coming in new into the organization and working with the team to thoroughly go through that process and build up our long-term strategic plan. And so, we will be revising that plan. We'll be working together as a team internally and then presenting that at our Analyst Day later this year. So, I just wanted to clarify, this is something that will happen each and every year. And as you would expect in terms of us recasting our long-term plan, and with regards to the target models that have been provided previously, those were put together a year ago and presented at Analyst Day. And as Patrick pointed out earlier and in some of our remarks, if you look at the long-term opportunity for us in terms of the market itself and our position in the market, we're still very strong in terms of our overall position. So, I'll let Patrick handle the next couple of questions here.

Thank you, Walter. Tim, I want to touch on a few related topics briefly, and you can follow up later. First, regarding DOCSIS 4.0, we believe we’re very well positioned and the work we’ve done is outstanding. The feedback we receive from our customers on our products has been exceptional. We see DOCSIS 4.0 as a chance to increase our hardware market share. Our ability to adapt quickly, thanks to a software foundation, contributes to our speed and agility. Therefore, we consider 4.0 to be beneficial for strengthening our competitive stance, and from a hardware standpoint, it also comes at a higher price point. This is advantageous from several perspectives, even though there might be some market delays as companies begin to prepare for DOCSIS 4.0 products. You mentioned market share, and we don’t believe we are losing any. In fact, we maintain a significant lead in software core solutions, as we provide the only real virtualized option available. On the hardware side, we actually continue to exceed our expectations for market share. The recent Dell’Oro Report highlights Harmonic as the clear leader in DAA and vCMTS for the first time. Regarding the software and hardware balance, the second quarter showed lighter hardware sales, as discussed, but we experienced strong software performance, which led to a tilt in mix and strong margins. Our software strength is significant. On hardware, I want to remind you that we have multiple models. While some customers purchase our Node and RPD, others, especially overseas, buy just the RPD within third-party node platforms. Additionally, some North American customers are exploring that model as well, which we support. The RPD is the most valuable and high-margin part of our offering. Partnering with third-party enclosures is beneficial, even if it reflects lower headline revenue. Nevertheless, the business remains strong, which was evident in the second quarter. To sum up, we believe we are not losing any market share. We are exploring different business models that may lean toward a higher software mix, and we think DOCSIS 4.0 will only reinforce our market position.

Great. Thank you very much.

Forgive me, but did that cover what you were after?

It absolutely did. I really appreciate it. Thanks.

All right, thank you.

Thank you. One moment for our next question. And our next question comes from the line of Alyssa Shreves from Barclays. Your question, please?

Hi, this is Alyssa Shreves from Barclays. Just could you talk a little bit about the broadband slowdown? Specifically, when did you kind of see in the quarter customers kind of changing their plans and delaying? And was it all at the same time or did you start to see it accelerate? And then, also, can you talk a little bit about in which GEOs you're seeing the weakness in video? Thanks.

Okay, thanks for the question, Alyssa. The changing requests or direction we started receiving for customers on broadband were really back-half of the quarter, mid-quarter, and onward. And yes, I don't think there's much information to be further parsed by exact timing, but more on the back end, and as you can see, modest impact on the second quarter really, and this is more of a third quarter impact and somewhat movement to fourth quarter, as evidenced in our guidance. On the video side of the business, the weakness is definitely overseas and we think it's really macro related. Our SaaS business is strong worldwide. Our video appliance business was quite robust in North America. The real weakness that we saw really manifest as delays, not lost projects, but customers kind of saying, well, you know what? We're not ready to pull the trigger this quarter as planned. We'd like to do it a little later in the year. That kind of dialogue we saw in several instances internationally.

Thanks.

All right. Thank you.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

All right, well, thank you all for joining us again today. Through our prepared remarks, and I think this is a very good Q&A session. I hope it's evident that the fundamental market drivers on which we're focused remain in full force and we believe will for the mid to long term. There's no doubt about it. We've laid out our best understanding and as Walter said, we believe a conservative understanding of what the remainder of this year looks like. But make no mistake, we're playing long ball here, and we're extremely excited about the future of this business. We're 100% focused on execution, and we look forward to keeping you apprised of our progress. Thank you all, again. Good day.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.