Conference Transcript - HLIT 2026-05-13

Ryan Kuntz, Analyst — Needham

Welcome to the afternoon. Thanks for sticking in at the 21st Annual Needham Technology Media and Consumer Conference. I'm Ryan Kuntz. I cover the broadband sector at Needham. Really thrilled today to have Harmonic here and CFO Walter Jankovic. Thanks, Walter. Thanks for having me, Ryan. Yeah, let's back clean up here. So you just had results Monday. Put up some pretty impressive numbers. Can you walk us through some of the puts and takes there for those that didn't get a full episode of the debrief fund? Yeah, certainly, Ryan. So we just reported our Q1 results,

Walter Jankovic, CFO

and we had a really strong start to the year. Our revenue growth in our continuing operations, which is our broadband business, revenue growth was 43% year over year. Sequential growth from Q4 to Q1 was 24%. And underneath the revenue, the rest of market, which is our non-top two customers, the growth there was 78% year over year, demonstrating the diversification that we're starting to get across our revenue base. When you look at our earnings for the quarter, they were significantly up in terms of our EPS year over year, about 140%. And that demonstrates the operating leverage that we have in our business as we scale up the revenue. Bookings were strong in the quarter. We posted a book to bill of one for rest of market customers. It was above one, and that comes on the heels of us doing a book-to-bill of 3.5 back in Q4. So we're sitting with record level of backlog and deferred revenue, and we highlighted during the call that we expect 60% of that to burn off over the next 12 months, which is out to the end of Q1. So we felt like we started the quarter quite strong. We had some wins in the fiber space, which is continued strategic focus for us. And we also highlighted that when you look back over the trailing four quarters in the fiber side of our business, that makes up over 14% of our revenue. So we're showing progress in one of the key areas that we're looking to grow and diversify in terms of the overall customer base. Free cash flow for the quarter, $30 million. We bought back about $43 million of shares, so it was a good start to the year.

Ryan Kuntz, Analyst — Needham

Certainly. The rest of market number just jumps off the page, really.

Walter Jankovic, CFO

Absolutely. And I think with the bookings and where we're sitting now with backlog, gave us the confidence to raise our full year guidance for the business by over 5% at the midpoint for the top line and about 13% for the EPS as we see strength for the year.

Ryan Kuntz, Analyst — Needham

And your 2Q guide was very impressive, too.

Walter Jankovic, CFO

Yeah, we continue to see the momentum as we're building up both across our top two customers but across the rest of the market. So we expect year-over-year strong growth in Q2. And so that's all adding to the story in terms of our confidence level in the business and the growth for 26.

Ryan Kuntz, Analyst — Needham

Yeah, fascinating. I mean, going a little bit off script here, But, you know, one of the questions I asked on the call was, you know, what is the trigger here that you're starting to see light up that rest of market for the business?

Walter Jankovic, CFO

Well, I think there was this, you know, a period where operators, especially the rest of the market, were deciding what technology to go with. and the decisions have been made in terms of the DOCSIS upgrades that are happening in the market and the competitive dynamics in terms of providing their subscribers, their customers, the quality of service, the reliability, and the speeds on the network. They have to compete. There's too many other competitors, both in the fiber space and fixed wireless access space. So you're starting to see that momentum building in terms of rest-of-market customers starting to deploy.

Ryan Kuntz, Analyst — Needham

That's great. I mean, because you've had Comcast there in the lead, kind of the lone wolf for a long time. And great to see everybody get behind the whole industry behind you. There in the quarter, your gross margins were also really strong on product mix. What can you tell us about what went well?

Walter Jankovic, CFO

Sure. It's the mix of the business. As we look at both Q1 as well as the guidance we provided for Q2, it's the COS licenses. That's our orchestration software. The mix of that business versus the total revenue is stronger. That drives up the margin profile of the company. And when you look at it from a first half year over year perspective, it's stronger because of the mix of that business as you're getting more operators rolling out the network, they're buying licenses for the COS orchestration software, and they're buying the nodes from us in terms of the hardware piece. And as we've talked about before, in the market share position, we continue high market share in the COS, in the license side of the platform, over 95%. And in the hardware side and nodes for DOCSIS, you know, it's around 70%. Our stated goal has always been greater than 60% in that space.

Ryan Kuntz, Analyst — Needham

Can you walk through some of the mechanics there of when customers come to you for licenses and what drives that? I mean, obviously, they're going to do an upgrade. They've got to roll out hardware, these nodes, these node upgrades. When do they come to you to buy the software typically?

Walter Jankovic, CFO

Different customers buy at different points in time, but generally they buy the licenses in advance of lighting up the network. So they've got to put out hardware out into the network in terms of the nodes and the rest of the ecosystem equipment that's required, but they're buying licenses as they go in terms of lighting up the equipment and putting it on the virtualized platform.

Ryan Kuntz, Analyst — Needham

And so you've got, must be great visibility looking at the 2Q now. Must have a lot of confidence in your 2Q numbers.

Walter Jankovic, CFO

Oh yeah, with the backlog that we have, it's set up with a high degree of backlog that supports the revenue in the near term. But that also goes for the year as we look at the backlog and where we sit today at the end of Q1 and look forward through the next several quarters.

Ryan Kuntz, Analyst — Needham

Yeah, that's fantastic. talk to us about supply chain i mean this has kind of been a little bit of a boogeyman in the hardware industry here with semis and memory and you know lots of companies out there raising price obviously you guys don't sell consumer gear or wi-fi gear so not tremendous pressure on your bill of materials as a percentage but you know how are you managing your supply chain fears these

Walter Jankovic, CFO

days? Yeah, certainly. I mean, it all started more so with the memory a few months ago. And as we highlighted during our recent call, we have secured most of what we need for this year. We have it in hand in terms of the memory requirements. So the team's done a great job in getting out ahead of this a few months ago in terms of making sure we're pipelining the memory. Obviously, we're paying at an elevated price on that memory, as many of you know, and that's going to impact us more in the second half of the year. As I highlighted during the earnings call, we expect to have about a $6 million net impact from the memory as we go into the second half as a result of the elevated pricing. On your hardware shipments. On the hardware shipments. As you look at 2027, we don't see the prices coming down. And so, you know, I think that's going to continue to be a headwind across the industry. But beyond the memory, there's, you know, concerns around supply chain with regards to PCBs, with regards to aluminum, CPUs, servers. Because sometimes we sell servers to our rest of market customers, but regardless, they need servers, either procure direct or from us. But at the end of the day, they need that in order to get their deployments moving at the pace they want to. So these are wide issues that are impacting in several different ways. And that's why we mentioned during the call on Monday that we're being prudent, cautious about our view because of the supply chain. We see the customers, we see the deployments happening, and we've got to be mindful with regards to the supply chain as well as the macroeconomic situation and all the other things that are going around out there. Yeah, it sounds pretty familiar. A lot of hardware

Ryan Kuntz, Analyst — Needham

companies are being conservative about that second half when supply looks like it's going to get tighter and hoping they can do better. That's right. Yeah, great. You just finished a pretty big transaction of divesting the video business process that started a few years back, but you're

Walter Jankovic, CFO

about to get it done i guess yes our expectation is we're going to close here in uh in q2 and then we'll move forward as a pure play broadband provider yeah phenomenal can you walk us through

Ryan Kuntz, Analyst — Needham

how that changes your profile on the income statement you're reporting i think separately

Walter Jankovic, CFO

now we already are since uh we filed our our q4 results it went into held for sale discontinued operation so that way investors can see the broadband business at its fullest as well as all the disclosures associated with it. So there's much more visibility into that business. And how it changes us is quite dramatic. First of all, broadband is a faster growing business. So now you see the full growth rate of the broadband business, as we've just talked about a few minutes ago. And as a pure play, it allows us to, A, focus on streamlining in terms of, you know, our operations to be all focused in on broadband. But the other thing that the transaction allows us to do is redeploy our capital. So by selling off that business, redeploy that capital into the faster growing broadband business into some key strategic areas that we're focused on. You've heard us talk about some of the organic investments we're making in regards to our fiber business and product launches there but also our intelligence platform and some of the recurring revenue opportunities that we see in the in the market so it's going to make us a lot sharper in terms of our focus and redeploying our capital in those areas where we see uh growth potential

Ryan Kuntz, Analyst — Needham

got it so cos is sold on a license basis but you'll have add-ons that can there could be

Walter Jankovic, CFO

that's right that's right when we sell our licenses today uh they're sold as a license and then you've got recurring revenue because you've got SLA support for that software but also we've got services that are recurring revenue services that we're adding on. If you think about it over the last like 12 months or so we've announced Beacon, we've announced Pathfinder, we just announced Amply which is amplifier orchestrate. We don't do amplifiers but the orchestration and software element of it. You could be the brain of the Amp Fires. Exactly. So you're looking at that intelligence platform that can drive you into a new area of TAM. Usually we look at TAM, it's the CapEx spend of the service providers. But when you're talking about this element, you're getting into the OpEx side of the business and driving value. And the kind of value to drive is from the data, from the insights, and to proactively deliver value to the customer by reducing truck rolls, reducing churn on the network. How much does a customer cost to acquire? How much does it cost you when you lose a customer? And by being able to pinpoint and improve customer reliability, improve, you know, reduce downtime on the network, micro outages and things of that nature. that creates a lot of value for our customer, creates value to the subscriber. And so we're focused around that part of our capability, building onto our COS orchestration, intelligent platform that goes on top of it to drive that kind of value and drive yet another growth vector outside of the capex tan. Yeah. Well, you're the natural aggregation point in the network to

Ryan Kuntz, Analyst — Needham

collect all that data that sits downstream from you. So it's a very strategic spot to hold. Absolutely. So let's shift up here, talk about the industry a little bit. DOCSIS 4 is this big catalyst for the industry, getting moving on, upgrades. Finally, we've had some kind of fits and starts. I think we're now marching, the whole industry's marching in the same direction now. How should investors think about your TAM per year? how are you sizing the TAM up right now relative to your core products that you sell and some of

Walter Jankovic, CFO

your newer products? Okay. Yeah. So let me zoom out and talk a little bit about, you know, phases of deployments and investment from the service provider angle. So right now, as you noted, Ryan, I mean, you know, we've got everybody starting and migrating. You've had some big customers who started before and continue to migrate and upgrade their network. You've got a lot of this rest of market now moving and upgrading, creating the network. And so when they're doing the upgrades, let it be to DOCSIS 4.0 or 3.1, but upgrading, virtualizing and all the rest of it. You've got a CapEx spend that these operators are spending on the software, the nodes, but also the amplifiers in the network. And many of these networks are being upgraded and all the installation costs that go with that. So you do this big upgrade, you're going to have elevated CAPEX during that phase. Obviously, we don't participate in that amplifier or installation part of it, but we do in the other elements of it. And so you go through this phase of migration. Then what's the next phase? The next phase is business as usual. They return to spending on the network now that they've completed the amps, the installation work, the passives. Now they're focused around densification, so splitting nodes, putting more nodes out there to improve speeds and feeds to the customer, but also fiber on demand. We've got many customers who are already starting that journey on fiber on demand where out of one of our enclosures, you can either do doxis or you can do fiber to the home. So you can be more precise about where you make your targeted investment, where you're going to get the fastest ROI, and it gives flexibility. And I think one of our customers was quoted in light reading a week or two ago, Optimum, talking about their network build and how Harmonic is playing into that network build in regards to areas like that. So that's the next phase in terms of densification, more fiber. Was that LTEs?

Ryan Kuntz, Analyst — Needham

Formerly LTEs, yeah.

Walter Jankovic, CFO

That's a big move. So you've got that phase that continues to spend, and our view is out of that spend of the operator, our participation rate is higher. Because, again, we don't do installation, a lot of installation. We don't do amplifiers. And eventually, you know, we're not going to stop at these speeds.

Ryan Kuntz, Analyst — Needham

We never have.

Walter Jankovic, CFO

We were talking about it today. 25 years ago was the one meg modem. We thought, hey, if you get a meg, you're golden. And the reality is it just continues to get uplifted from there. And what are today's macro trends? It's AI and upstream load that AI puts on the traffic. And if you think about more people doing more things with AI from home, we were talking to some folks in the room today that, you know, they'll run agents overnight so they get all their data and reports in the morning. That's going to require and strain the network. So you can see how the demand and the continued evolution of the network. The intelligent platform layer, you don't make a big investment in COS in the orchestration. without going after what I'll call lower hanging fruit of improving your OPEX, how you deliver your service to the customer. So that's another vector of growth and spend. And then we haven't talked much about the telco environment, but we've introduced a number of products specifically for that market as well in terms of fiber for the telco service provider and leveraging our COS platform, leveraging our remote OLT and some of our hardened remote OLT devices that we've recently announced.

Ryan Kuntz, Analyst — Needham

Yeah, for some of those really distant rural areas, they really need that.

Walter Jankovic, CFO

Suburbs and rural are key use cases for some of those products.

Ryan Kuntz, Analyst — Needham

So beyond DOCSIS 4, you're saying that that is the path forward then really to upsell fiber, sell them to the intelligence layer. How should investors think about kind of, question I get about you guys often is kind of terminal value. How do you think about, you know, when the DOCSIS 4 upgrades really begin to slow down, what is your monetization?

Walter Jankovic, CFO

The monetization is densification and it's fiber, fiber on demand. And eventually we see, you know, our view is we see the cable operators moving and migrating with leveraging the investment they've made. So it's kind of a seamless transition moving over to fiber. So there's no clear...

Ryan Kuntz, Analyst — Needham

Same OS from that perspective, too. Yeah, exactly.

Walter Jankovic, CFO

So it's not... You don't have to go and put a whole new platform in place. You leverage what you have, and you upgrade accordingly, and you upgrade on a targeted basis across the network, which we think is very compelling. So this is the way we look at the multi-phases of spend and how we will participate in that spend and continue to grow the company in terms of the key vectors that we're focused on today.

Ryan Kuntz, Analyst — Needham

That's great. You know, with some changes in the competitive landscape a little bit here with Vistance, the former Comscope, former Eris, now divesting the ruckus piece. You know, they're talking about M&A. You know, and you've got another third player in Vesema out of Canada that's kind of a tier two-ish type player. It's really a three-horse race. How are you thinking about that competitive landscape and how are you thinking about M&A with your enhanced balance sheet now post-video divestiture? Sure, sure. Let me just start with

Walter Jankovic, CFO

the competitive landscape first and we'll talk a little bit about the M&A priorities. But in terms of the competitive landscape out there, we don't see our position changing in terms of our market share position on COS. We continue to get new wins with customers. We'll talk about that in a second a little bit more. And so from our perspective, our focus is more on diversification. I think one of the things that's impacted us is our customer concentration. We continue to focus on rest of market, and fiber as ways to diversify the business. You know, specifically, I'll talk about the, you know, Vistan certainly with the ruckus. Now they're just a pure play Aurora networks, right, in terms of competitors. So definitely they're going to likely show up in more places in terms of competing. However, you know, we feel very confident with our position. I think there was some commentary a couple weeks ago with regards to one of our European customers and a win that Vistance had with that customer around the VCMTS platform. That's been a customer of ours for many, many years. We've had, you know, just this last quarter in Q1, multi-millions of orders coming in from that customer. We are continuing to strategically do things with the customer. I think at Enga, we'll have something to show over there.

Ryan Kuntz, Analyst — Needham

Which is a big European show.

Walter Jankovic, CFO

The European show next week. And the fact of the matter is that customers always kind of been focused on a dual vendor, even at the orchestration. Not many do, but that customer has, which is fine. And so I think the commentary was that we're being displaced. I think we're in a very strong position with that customer. of that. And we see that as continuing to have a good, strong relationship with them.

Ryan Kuntz, Analyst — Needham

I mean, being second source for one of those deals doesn't sound like that great of a business opportunity, to be honest, right? I mean, it's all the work and a little bit of the payoff.

Walter Jankovic, CFO

Well, you know, as you know, Ryan, I mean, once you put your orchestration in place, you've got all your back office connection. There's a lot of heavy lifting. You've been around the industry, so you understand that. But for just generally, for investors out there, it's like putting in an ERP. And it's not the ERP, it's everything that ties into the ERP that you're setting up there. So it's a big investment for a customer.

Ryan Kuntz, Analyst — Needham

There's a reason companies don't run two ERPs on purpose. Yeah. And I wanted to ask you too about M&A.

Walter Jankovic, CFO

Sure. Yeah. So on the M&A front, I think in our recent call, we've been very focused around two vectors in terms of what are our strategic priorities for the company. One is diversification across the piece and with an eye on fiber because we see the customer base and we're looking at how do we diversify so we have less customer concentration. So that is a area of focus. You're seeing it in our organic investments in terms of what we're doing in the fiber product space. And then the second vector is around the intelligent platform and how we can, and so the eye is always on, you know, here's the direction we're doing things organically. Is there something we can do inorganically that just speeds it up, right? And gets us, gets us in place. So we're really focused on those priorities in terms of what we would be interested in looking at.

Ryan Kuntz, Analyst — Needham

Sure. On the intelligence layer, do you see maybe more opportunity to take a bigger piece of that pie in rest of market than maybe you would see at a monster tier one that probably wants to do more in-house?

Walter Jankovic, CFO

Yeah, exactly. I think you hit the nail on the head. With larger customers who've got bigger organizations, they've got the capability. They may use us for certain things, but they've got the capability for rest of market. We would look there for higher wallet share in terms of those customers. So we see that as an exciting opportunity to really expand out our rest of market uh customers and diversify on that front as well yeah great and you started to tell us about

Ryan Kuntz, Analyst — Needham

some of the newer um customer activities um that may have been announced or you you've been talking

Walter Jankovic, CFO

about on your recent calls yeah we've had well a number of fiber wins and that's why you know there's one that we announced this morning in terms of venezuela and that's a specific use case for backhaul of mobile traffic, right? So here's, you know, service provider carriers that are using their wireless network and to offload traffic, leveraging a fiber type of solution. And so that's where we play in there specifically. So there's many different use cases. You know, we talked a little bit before about, you know, broadband in terms of fiber to the home. You've got the bead use cases, which are rural, which are nicely aligned with our remote hardened OLTs out in the field.

Ryan Kuntz, Analyst — Needham

Those are basically just switches out there, right, with your plug?

Walter Jankovic, CFO

Yeah, high density out there, and the benefit of those are instead of having to do a street cabinet and getting permitted in the way it's often done, you can send these out on poles. out. They're very small units, compact, and get a lot of capacity out to the end customer.

Ryan Kuntz, Analyst — Needham

And you can kind of pay as you grow, I think, too, with your model of pluggables.

Walter Jankovic, CFO

Absolutely. Absolutely. So those are key elements. Yeah.

Ryan Kuntz, Analyst — Needham

Yeah. Any other customer announcements that you guys have highlighted of late?

Walter Jankovic, CFO

No, I think we talked about Optimum because they were in the light reading recently. And so we see that as very exciting in terms of partnering with them in terms of their build out.

Ryan Kuntz, Analyst — Needham

That's a customer that's mainly focused on trying to convert from coax to fiber, and now they're going back going, well, there's still a lot of value in coax.

Walter Jankovic, CFO

Sure. It's not a one or the other. There are opportunities in terms of really leveraging and doing the migration, and it just demonstrates the seamlessness of the solution that we have.

Ryan Kuntz, Analyst — Needham

Great. Well, you know, really nice to have you for a far side. And anything you want to say and wrap it up in terms of the key investor message? I think the key investor message is,

Walter Jankovic, CFO

you know, we're off to a great start this year. You know, we're more confident in the year, hence the reason for raising our guidance. And we're very clear on where we're going as a pure broadband provider. So it's exciting times. The team's really excited about the opportunities ahead of us as well as the traction we're getting in in the market.

Ryan Kuntz, Analyst — Needham

Yeah, I am too. All right, appreciate it. Thanks, Ryan. Thanks, Walter.