Harmonic Inc. Q4 FY2023 Earnings Call

Welcome to the Fourth Quarter and Full Year 2023 Harmonic Earnings Conference Call. My name is Litzi and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Please note that this conference is being recorded. After the speaker presentation, there will be a question-and-answer session. I will now 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 Fourth Quarter and Full Year 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've also provided slides for the 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 could 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, and the remainder of this 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?

Thank you, David, and welcome everyone to our fourth quarter call. Today, we announced our fourth quarter and full year results, closing out 2023 with another strong performance that includes record total company revenue, fueled by continued demand for our leading broadband and video streaming solutions. Key highlights for the quarter feature record broadband revenue, confirming that our Broadband business is set for sustained multi-year growth, record Video SaaS revenue exceeding $50 million for the year, driven by our success in sports streaming, and the execution of a new $160 million credit facility that enhances our financial flexibility. We also saw strong new bookings during the quarter with a book-to-bill ratio of 1.2 and ended 2023 with over $653 million in backlog and deferred revenue, positioning us well for 2024 and beyond. In our Broadband segment, we reported revenue of $115.2 million, showing a 52% sequential increase and a 20% year-over-year increase. The number of global customers using our solution has grown to 108 million, a 19% year-over-year rise, with 26.3 million DOCSIS cable modems in service worldwide, representing about 15% of the total cable modems deployed globally, highlighting the significant growth potential of DOCSIS. We secured several new customers in the fourth quarter, including a major North American operator for whom we made initial shipments. Our pipeline of new customers remains robust, thanks to the expanding range of our competitive advantages. A notable area of competitive differentiation for us is DOCSIS 4.0. Our software core has effortlessly adapted to the new standard, as have our Remote PHY edge device designs. We are successfully supporting several early DOCSIS 4.0 deployments launched late in the year and are uniquely positioned as the preferred partner for any operator planning a launch or deployment of DOCSIS 4.0 in 2024 or 2025. Moreover, our DOCSIS 4 nodes are fully backward compatible with DOCSIS 3.1, meaning the availability of DOCSIS 4 RF amplifiers is not necessary for operators choosing to deploy our 4.0 capable nodes in 2024. We anticipate at least one key customer will significantly transition to DOCSIS 4.0 enabled edge devices in 2024, leading to a gradual pace of deployment early in the year, followed by a more rapid deployment in the second half. Furthermore, during the fourth quarter, we achieved greater revenue diversification with both Comcast and Charter accounting for over 10% of our revenue. While they are at different stages in their DAA architecture deployment journeys, we are grateful to collaborate with these industry leaders and focus intently on supporting their strategic initiatives. Alongside our growing multi-year pipeline of DOCSIS opportunities, we made solid progress in building a synergistic fiber-to-the-home business during the fourth quarter, securing several new fiber customer wins from both existing cable and non-cable fiber-first operators. We also announced new fiber products that significantly expand our market reach and enhance our competitive position against established fiber-to-the-home competitors. Early customer feedback on these products has been very positive. We are expanding our fiber specialist sales team and remain committed to making fiber a significant strategic and financial contributor to our business. In summary, our Broadband business is well-positioned, benefiting from unique and powerful technology advantages, strong customer relationships, a solid backlog, and a diverse range of new business opportunities that inspire confidence in our multi-year growth outlook. We concluded 2023 with robust execution, and given our customers' positive feedback, we are optimistic about maintaining this momentum into 2024 and beyond. Now, regarding our Video segment, the quarter's highlight was again SaaS revenue of $13.2 million, reflecting a 26% year-over-year increase. Total segment revenue was $51.9 million, down from $68.3 million last year, but gross margin reached a record 64.6%. These results underscore our ongoing strategic transformation toward SaaS, despite some macroeconomic challenges impacting our Appliance business internationally. As noted earlier, SaaS revenue for the year surpassed $50 million, up 47% year-over-year, primarily driven by streaming sports and live events. In the fourth quarter, we observed existing customers increase their usage and new clients beginning to adopt and launch our SaaS solution, maintaining a positive momentum into 2024. Earlier this month, our SaaS successfully powered the largest live streaming event ever in the US, reflecting our exceptional technology and service capabilities. This event’s visibility has already enhanced our SaaS sales pipeline. Our targeted ad monetization strategy plays a crucial role in transitioning live content, particularly live sports, to streaming, presenting an important growth opportunity for us. Earlier this year, we launched a new ad insertion SaaS, and it was gratifying to see several initial successes with this new service in the fourth quarter. In the Appliance segment, which is more capital intensive for our clients, we witnessed revenue stabilization, despite ongoing project delays related to financing and other macroeconomic challenges, particularly overseas. Our domestic Video Appliance business remains solid along with our overall pipeline and competitive position. Lastly, concerning Video, we are actively conducting a strategic review, which remains a priority for us. In conclusion, we wrapped up 2023 on a strong note with a robust backlog, highlighting the sustained demand from our customers and the solid foundation we have for future growth in 2024 and beyond. Now, I'll hand it over to you, Walter, for a more detailed discussion on our 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 Q4 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 fourth quarter results were consistent with our expectations and above the midpoint of our guidance range on the top as well as the bottom line. Additionally, we exceeded the midpoint of revenue guidance in both Broadband and Video. Before reviewing our Q4 2023 financials in detail, I'll call out the highlights here on slide seven. For the quarter, we reported revenue of $167.1 million, which was an all-time company record and included record broadband revenue of $115.2 million. We also reported EPS of $0.13, bookings of $196.5 million, a strong book-to-bill of 1.2, and near-record backlog and deferred revenue of $653.2 million. In a few moments, I will provide detailed Q1 and full year 2024 guidance, prior to that, I'd like to highlight a few key points regarding our guidance. For our Broadband business, we expect full year 2024 revenue to increase 24% year-over-year at the midpoint of our guidance. Based on the momentum we expect to see in the second half of 2024, we anticipate 2025 Broadband revenue growth to accelerate on a year-over-year basis. As Patrick mentioned earlier, we are well-positioned with our leading technologies, strong backlog, and our customer success to drive continued multi-year growth. With regards to Video, we are guiding conservatively for FY'24 due to the ongoing strategic review. Turning to slide eight. Total Q4 revenue was up nearly 2% year-over-year and 31.4% on a sequential basis. This quarter-over-quarter increase was due to growth in our Broadband segment. Looking more closely at Broadband, Q4 revenue was a record $115.2 million, an increase of 20% year-over-year. As anticipated, during the fourth quarter, we benefited from the initial shipments of another large Tier 1 customer. In Video, Q4 revenue was $51.9 million, while video appliance sales were lower due to the factors I noted on our last earnings call. Video revenue included SaaS revenue of $13.2 million or 25.4% of segment revenue for the quarter, up 26% from the prior year. Video SaaS revenue growth continues to be driven by live sports streaming expansions and new customer wins. We continue to focus on growing our SaaS business and Video while maximizing our profitability in appliances despite current macroeconomic headwinds. In our last earnings call, we announced the initiation of a formal strategic review process for our Video business, due in part to indications of interest we had received from a number of parties. We are continuing the strategic review process and it remains a top priority for us. Having said that, as previously noted, a node specific timetable has been established for the completion of the review. We are not providing any further details on this process unless and until a definitive agreement has been reached and our Board approves the transaction or decides to conclude the review. Turning back to our fourth quarter results, we had two customers representing greater than 10% of total revenue during the quarter with Comcast representing 41% of total revenue and Charter representing 15% of total revenue. The total company gross margin was 49.3% for Q4'23 reflecting decreased gross margin in the Broadband business segment sequentially. Broadband gross margin was 42.4% for Q4'23, down 520 basis points year-over-year due to product mix. To offer additional clarity, during Q4, we shipped out an extremely high mix of edge products that possess relatively lower margins compared to other products in our portfolio. Video gross margin was 64.6% in Q4'23, an all-time record for the business segment, even taking into consideration today's macroeconomic headwinds and project delays that we've discussed previously. This margin improvement occurred across both SaaS and Appliances. Moving down the income statement on slide nine, Q4'23 operating expenses were $63.4 million, up slightly both on a sequential and year-over-year basis. Adjusted EBITDA for Q4'23 was $21.7 million comprised of $21.9 million from Broadband and negative $0.2 million from Video. Adjusted EBITDA for Broadband was in line with our expectations, while Video beat our expectations due in part to the gross margin strength previously discussed. This all translated into Q4'23 EPS of $0.13 per share in line with our prior guidance and compared with $0.00 in Q3'23 and $0.17 per share for Q4'22. We ended the fourth quarter of 2023 with a calculated diluted weighted average share count of 115.7 million compared to 116.7 million in Q3'23 and 117.3 million in Q4'22. The sequential decrease is primarily due to the decreased convertible debt dilution of 1.1 million shares. Turning to the order book. Q4 bookings were $196.5 million. The book-to-bill ratio was strong at 1.2 for the quarter. For both Q3'23 and Q4'22, our book-to-bill ratios were 0.8. As we stated previously, over time we expect this ratio to normalize and approach the historical benchmark of greater than 1. For Q4, we were above 1 after being below 1 last quarter. Turning to the balance sheet on slide 10, we ended Q4'23 with cash of $84.3 million. The net $2.3 million sequential increase in cash and short-term investments was due to a few factors. Cash from operations provided $6.3 million due predominantly to a decrease in inventory and inventory-related deposits, offset by an increase in accounts receivable. We also used $2.7 million in the purchase of fixed assets. Turning to accounts receivables and days sales outstanding at the end of Q4'23, DSO was 76 compared to 78 in Q3'23 and 59 in the prior year period. The prior year period was lower due to a large customer taking an early payment discount. Days inventory on hand was 89 days at the end of Q4'23 compared to 145 at the end of Q3'23 and 140 at the end of Q4'22. The inventory decline in the quarter was a result of strong sales in Q4 and lower in-feed as we continue to tighten our supply chain. 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 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. This new credit facility allows us to repay our 2024 convertible notes outstanding while providing us with ample liquidity and flexibility to support our multi-year growth plans. As of today, we have not borrowed on this facility. Tomorrow, Tuesday, January 30th, we will issue a notice to holders to redeem the entire $115.5 million aggregate principal amount of our outstanding 2024 convertible notes. As a result, holders of the convertible notes will have the right to convert their notes to shares of Harmonic common stock under the terms of the indenture. We elected to settle any such conversions by paying cash equal to the principal amount and delivering common stock for any conversion value over par. We expect to use our credit facility and cash on hand to fund the cash portion of the redemption and complete the redemption in Q2 of this year. Additionally, with our enhanced liquidity position, we intend to step up our stock buybacks available under our current authorization of $100 million of which $5 million has been used to date. With that in mind, we plan to prudently manage our balance sheet by maintaining overall net leverage of around two times or less and available liquidity of no less than $100 million going forward. In summary, due to the actions we've taken to strengthen our balance sheet, we believe we have sufficient available liquidity to continue funding our growth plans while returning capital to our shareholders through increased stock repurchases. 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. At the end of Q4, total backlog and deferred revenue was $653.2 million. Our strong backlog reflects continued demand from our large broadband customers and growing Video SaaS commitments. Just over 50% of our backlog and deferred revenue have customer request dates for shipments of products and for providing services within the next 12 months. Lastly, we generated $3.5 million in free cash flow during the quarter. Before reviewing the guidance, I would like to mention that given the ongoing strategic review process, we have decided to hold off on setting a date for the next Analyst Day. We expect to revisit this in the future. Let's now review our non-GAAP guidance for the first quarter beginning on slide 11. We expect broadband to deliver revenue between $70 million to $80 million, reflecting a technology transition at one of our largest customers. Gross margins between 46% to 47% due to product mix. Gross profit between $32 million to $38 million and adjusted EBITDA between $4 million to $8 million. For the full year, we expect revenue between $460 million to $500 million. Gross margins between 46.5% to 48.5%, gross profit between $214 million to $243 million, and adjusted EBITDA between $95 million to $119 million. For Broadband, we 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 timeframe. Today's guidance and wider range also reflects anticipated shifts in the timing of certain project deployments related to customers that are transitioning to new technologies. In 2025, we expect our growth rate to accelerate from 2024 levels as our larger customers ramp up their spend levels in the second half of 2024, which should build greater momentum as we enter 2025. For our Video segment in Q1 on slide 12, we expect revenue in the range of $40 to $50 million, gross margin in the range of 60% to 61%, gross profit in the range of $24 million to $31 million, and adjusted EBITDA to range from negative $8 million to negative $2 million. For the full year, we expect revenue between $195 million to $210 million, gross margins between 60% to 62%, gross profit between $117 million to $130 million, and adjusted EBITDA to range from negative $7 million to positive $2 million. For Video, we continue to be conservative, reflecting the ongoing strategic review and other macroeconomic factors I mentioned earlier. Turning to slide 13, for the first quarter of 2024, we expect total company revenue in the range of $110 million to $130 million, gross margin in the range of 51.1% to 52.4%, gross profit to range from $56 million to $69 million, adjusted EBITDA to range from negative $4 million to positive $6 million. A weighted average diluted share count of 111.7 million to 115.2 million and EPS to range from a loss of $0.06 to a profit of $0.02. And for the full year, we expect revenue between $655 million to $710 million, gross margins between 50.5% to 52%, gross profit between $331 million to $373 million, adjusted EBITDA between $88 million to $121 million. In summary, we reported solid fourth quarter results including record total company and Broadband segment revenue. We believe our Broadband segment continues to be well-positioned for future growth. In addition, our Video segment continued its strategic transformation and shift to SaaS during the fourth quarter. Thank you everyone for your attention today, and now I will turn it back to Patrick for final remarks before we open up the call for questions.

Thanks, Walter. In summary, as Walter just said, Harmonic delivered another strong quarter, capping a year of solid financial and operational execution despite industry-wide challenges. The company continues to be exceptionally well-positioned for sustained growth and create greater value for our shareholders. We remain focused and confident in our ability to execute, and we appreciate your confidence in us. With that let's now open up the call for some questions.

Thank you. Our first question comes from the line of Simon Leopold of Raymond James. Please go ahead, Simon.

Great. Thank you very much for taking the question. I'm just sort of trying to figure out a little bit more of what's going on within this Broadband segment in that when I couple your first quarter revenue guidance with the full year, it would appear that the second quarter or back half of the year really expands dramatically from this first quarter, and I'm trying to get an understanding of what you're assuming for that to happen. And I'll be explicit you may not be in your answer but we recall last earnings period Charter talked about delaying some of its upgrades by perhaps six months and we know Comcast has started deploying DOCSIS 4.0, but some of your language in the prepared remarks sounded like you were making references to some slower aspects of the 4.0. So I'm just trying to discern what the real driver is and what the pattern might be through the year. Thank you.

Hi, Simon. I’ll begin by explaining how our guidance is structured and addressing the points you raised. From a Q1 perspective, our guidance indicates that we anticipate a return to year-on-year growth in the second half, specifically in Q3 and Q4. Our confidence in providing that full-year guidance is based on two main factors: our existing backlog and contracts with customers, and importantly, insights gained from recent discussions with key customers regarding their deployment plans for 2024. The guidance reflects the latest information we’ve gathered while collaborating with our customers to understand the timing of their technology transitions. Regarding the two specific technologies, we have customers ramping up to 4.0, which will require some deployment time, as Patrick mentioned earlier. Additionally, I noted the alignment in plans and deployment strategies from another customer who is also ramping up. Patrick, would you like to add?

No, I think you've covered it, but I'll ask you Simon if that's clear. If you have any more specific follow-up.

Actually, I've got a different follow-up and this is just much more of the sort of broader topic in that, you highlighted sort of the 15% coverage to date, we know Comcast has been working at its own initiative for about four years, that's backwards looking. If you were to sort of take a look at what's in front of you and your pipeline, can you give us sort of your thinking of how many years this cycle should last for you?

I think it's a challenging question, Simon. A high-level response would be that we can expect another four to five years. There are some conflicting dynamics at play. On one side, the market has learned a lot and the pace of deployment today should be much quicker than it was four years ago when this initiative began. However, some customers still prefer to move slowly for various reasons, especially when it comes to launching the programs. These factors are somewhat balancing each other out. In conclusion, I anticipate that the pace moving forward will be moderately faster than what we've experienced so far, but not significantly so, which positions us for four to six or more strong years of investment and opportunity in this area.

Great. Thank you for taking the questions.

Thanks, Simon.

Thank you. Our next question comes from the line of Ryan Koontz of Needham and Company. Please go ahead, Ryan.

Thanks for the question. I wonder if we could just step back also and talk about your North America Tier 1s? Obviously, we're familiar with Comcast and your win at Charter, but without naming names, can you refresh us on where we are with the other North America Tier 1s that you have wins with maybe without naming names, but talking about them in generality?

Sure, Ryan. We have previously mentioned that among the top five, we have received orders or business from the top three. As I noted in the prepared remarks, we secured another Top 10 client just this past quarter. Our coverage is over 50%, though not at 100%, and each of these customers is progressing with different priorities and at varying speeds. So far, the pace with the two largest clients has been slower than we anticipated compared to a year or two ago, but we are seeing signs of improvement. One factor that's kept some potential clients hesitant has been questions about DOCSIS 4 and its various technologies. However, the success we are having with the rollout is being positively received in the market by both existing clients, who are determining their next steps, and prospective clients, who are waiting for the right time to engage. The momentum is strong, our position is solid, there are additional accounts to win, and we have a lot of productive work ahead of us, with plans being developed with customers that have yet to ramp up significantly.

Okay, that's super helpful, Patrick, thank you. And maybe double-clicking on your comment there around DOCSIS 4, and I know in your prepared remarks you mentioned the amplifier supply and these sort of things, can you unpack that a little bit for us there in terms of your assumptions that go into your DOCSIS 4 migration in terms of dependence on other things that you can't control, be they Broadcom ships whatever programs?

I appreciate the question and we were trying to clarify a few things. For a customer to activate an end-to-end DOCSIS 4 system, certain components need to be ready, including a DOCSIS 4 modem and typically some form of DOCSIS 4 amplifier. However, it's important to note that our new DOCSIS 4.0 technology can operate in a DOCSIS 3.1 mode. So if a customer, for example in Akron, Ohio, is not yet equipped with the modem and RF amplifiers, they might still choose to purchase DOCSIS 4 capable nodes now rather than regret buying DOCSIS 3.1 limited nodes. We are seeing some changes in customer strategy, and we are definitely not observing any limitations in the purchasing or planning of our DOCSIS 4.0 technology due to the broader ecosystem. This leads us to the fact that one major customer has decided to significantly transition to deploying the DOCSIS 4.0 version with us, which is excellent. It leverages our new technology and further solidifies our market position. In the short term, as indicated in our guidance, we expect a slower first half followed by what we anticipate will be a very strong second half. Nonetheless, this does not reduce the overall opportunity, nor does it put us in a position of waiting for any third-party products or components. Is that clear or helpful?

That's great. One quick follow-up there. Yes, that's perfect, Patrick, thank you. Regarding your DOCSIS 4, is the load in the second half more influenced by your customer's demand or is your own supply chain causing delays in terms of the second half pressure on broadband?

Specifically regarding DOCSIS 4, it's more about our customers. I mean, that being said, it's a good question. I mean, the fact is, we could not ship DOCSIS 4.0 in infinite quantities today even if we wanted to. So frankly, we're all in a kind of a ramp-up of the supply chain, of the deployment experience, and maturation, et cetera. So everything is converging, but I think if you have to point to something that could be a limiting factor, it's more on the demand side. We feel quite good about where we are with the technology and that we're going to be in good shape to supply quite heavy demand in the second half. In fact, as you've heard from Walter, that is our plan.

Great. Thank you so much.

Thanks.

Thank you. Our next question comes from the line of Steven Frankel of Rosenblatt. Please go ahead, Steven.

Good afternoon. Patrick, let's talk about the other set of customers. There were a large number of customers entering SCTE that hadn't really figured out their deployment plans kind of where are we with those, and how big a percentage of that group is likely in the 4.0 camp, and so they're going to be back half weighted as well?

Yes, that's correct, Steve. It's a great question and a valid point. There isn't a major cable operator domestically that isn't considering DOCSIS 4.0 as part of their strategy. It's a key topic in discussions and influences the current landscape. We believe that DOCSIS 4.0 actually broadens the opportunity, but it does come with timing considerations. Most mid-sized operators are still focused on 3.1 for their short-term plans, but developing a strategy for 4.0, especially in competitive markets, is crucial for them. This is central to their discussions with us and to their growth plans. As you mentioned, this will likely push some timelines to the latter half of this year.

Okay. And then, on the Fiber business, maybe a little more color on the progress you're making with new opportunities in the pure fiber area.

Well, I mean, for us it's all new opportunity, Steve. I mean, as I mentioned, we've won quite a bit of business with some significant existing cable accounts, but actually very often within those accounts, it's a different team. This could be a team dealing with business services, services to MDUs, as well as the groups who are expanding the footprint, the so-called edge-out activity acquiring new homes passed. So we're making good progress there. We've had a couple of very significant design wins. Last year was actually quite a good year from a particularly new order input point of view. One of the things we discovered, particularly internationally though is that there were a couple of holes in the product line. For instance, we focused on 10G initially and there's a number of accounts that are really also looking for complementary one-gig solution still, legacy solution. So we've added some capabilities around that, really I think bullet-proofing our offering and giving us a more complete end-to-end solution for domestic and international operators, and this is looking at both cable as well as new, let's say, traditional telecom or fiber-first operators. And we're also excited about the progress we're making there with those new non-cable accounts against several good wins late last year and a pretty strong pipeline, and actually it's going after those accounts, that's one of the key areas of focus for us in terms of scaling up our go-to-market capability.

And would you remind us how many fiber-first customers you have today?

I don't think we've quoted that and I think that's not a metric we want to get into, but it's more than just several. How about that, Steve?

Okay, great. Thank you.

Okay, thanks.

Thank you. Our next question comes from the line of George Notter of Jefferies. Your question, please, George.

Hi, guys, thanks very much. Hey, if I go back to last quarter, I think there was a conversation about customers carrying excess inventory, I guess I was thinking about it more in the context of Comcast, but could you give us a sense for what that looks like? Did that inventory get burned off here in Q4 or is that still something that's kind of lingering going forward?

No, in terms of what we talked about last year, George, in terms of orders that got pushed out, those orders were fulfilled in Q4 that was part of the impact you would see there on inventory, for example, the reduction in inventory. So we were holding inventory that was ready to go a couple of quarters ago and we've now flushed that out in Q4.

Got it. Okay. And then also what about inventory that is in the possession of your customers. Is there a comment on that as well?

No specific comment, George, in terms of having direct access to see exactly what's in their pipeline in terms of let it be 3.1 nodes or 4.0 is just getting started. So there's very little inventory in the pipeline because that's just getting started now.

Got it. Okay. So, is that part of the narrative here that as you see customers transition from 3.1 to 4.0, your business trends are softer now because they're adjusting inventories or is it in fact that it's a different skew then that they're buying as they deploy 4.0 or how do I think about kind of how the customers approaching their own inventories of your products as they go through this transition? Thanks.

Yes, certainly, George. Well, as Patrick mentioned earlier, with regards to deployment around 4.0 nodes and their backward compatibility in terms of ability to put those notes in place in the network and not regret putting a 3.1 and having to go back in short order and upgrade to a 4.0 node. So I think we're seeing a level of planning around that as customers look at how they're going to leverage our 4.0 nodes that have that backward compatibility. So I think that's a big driver in terms of the technology transition, specifically to 4.0.

Got it. For you, is that a different SKU that you're selling into a customer like Comcast?

Certainly, 4.0 is a different SKU than 3.1.

It's a different hardware design with a different core chip and an updated RF design to support the DOCSIS 4 capabilities, so the edge devices feature a new hardware design along with additional capabilities and functionality on the core software.

Got it. Right. And, I guess, so the question I'm asking is, is that a source of the softness that you see here in the first part of the year? Customers depleting any remaining inventory of 3.1 nodes in advance of cutting over to 4.0?

So, it's part of the story. I don't think it's the whole story, but for one customer in particular, George, it's a big part of the story. Yeah, if you're gearing up for 4.0, you're not only just right sizing your inventory, you're actually bleeding your legacy inventory down hard, right? We have another significant customer that for their own reasons is just the natural curve of their ramp-up is still, I'd say, ramping up moderately through the first half and kind of hitting the knee of the curve sometime in Q2 and really getting to a much heavier pace of deployment in Q3 and Q4. That's a customer who is relatively newer to deployment and that's consistent with what we've seen in the past with other customers who are in their, let's say, first year of major rollout. So we've got two separate things working at the same time and coincidentally both following the same kind of lighter first half, stronger second half curve kind of multiplying the effect. Did that makes sense?

That helps. Thank you, guys, very much.

Thank you.

Thanks, George.

Thank you. Our next question comes from the line of Tim Savageaux of Northland. Please go ahead, Tim.

Thank you, and good afternoon. I'd like to discuss the nature of your initial ramp with Charter and what you might anticipate moving forward. To start, you experienced weaker gross margins in Q4. Can we assume this is due to a hardware-heavy initial mix or some form of stocking that relates to the significant upfront software license with Comcast during the initial deployment? Additionally, considering that a large portion of the Charter revenue is from Broadband and was minimal last quarter, how does this ramp compare to what you historically experienced with Comcast? I recall times when you operated at similar levels and reached $50 million to $60 million a quarter, particularly on the Broadband side. When you mention the ramp in the second half, should we use those types of metrics to define what you mean regarding Charter specifically?

Hey Tim, it's Walter. We're not going to discuss any specific customer's ramp, but there are a few points to address. First, regarding the margins for Q4 in Broadband specifically, we had a significantly higher mix of nodes go out in the fourth quarter than we had expected. Part of this was due to other customers who placed orders that we prioritized for fulfillment in that quarter. This heavy mix of nodes in Q4 contributed to a decrease in the Broadband margin compared to our historical data. The second point to highlight is how to consider the margin profile as we move forward with our customer base. As customers acquire nodes, they also obtain software licenses to enable those nodes once they are integrated into the network. As we've mentioned before, margins will fluctuate quarter-to-quarter based on this mix. However, when viewed over a longer period, such as a year, these fluctuations tend to average out, leading to a more normalized mix of costs associated with the nodes being deployed in Broadband. I answered some of your questions, Tim. Did I cover everything you listed?

Yeah, I think so. As a follow-up question, you mentioned the prospects for an accelerating growth rate in '25 as new customers kind of get ramped up, can you offer any kind of commentary because you mentioned over a year gross margins are normalized you're guiding into the high 40s, let's say, 47 something like that. As the business scales, if we're looking at '25 is 50% on the table from a gross margin perspective or do you expect to hardware mix to be heavy enough that this range is a reasonable range to expect where we are currently? Thanks.

That's a good question. Tim, the way I would look at FY'24, it's a transitional year with regards to a lot of nodes that are going out into the networks as we look forward beyond 2024, I would say, that the mix will likely be slightly improved in terms of the mix of our COS as compared to our hardware. But as you can imagine, there are many factors and some of the ones that Patrick highlighted earlier with regards to our focus around fiber as well that has an impact in terms of the overall margins for the business.

Okay. Thanks very much.

Okay. Thanks, Tim.

I would now like to turn the conference back over to Patrick Harshman for closing remarks. Sir?

Okay. Well, thank you again for joining us today. We're pleased with our strong quarter and we're excited about the opportunities ahead of us and we're determined to execute in 2024, 2025, and beyond. We appreciate your support. We're confident in our ability to execute and we look forward to continuing to be in close dialog with you as we go forward. Thanks again, everyone. Have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.