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, 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.

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

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.

And your 2Q guide was very impressive, too.

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.

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

Well, I think there was this 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 sure the quality of service the reliability uh and the speeds on the network they gotta compete 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.

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? 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. So 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 percent in that space yeah 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 uh these nodes these note upgrades uh when do they come to you to buy the software typically 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.

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

Oh yeah, with the backlog that we have, it's set up with a high degree of backlog that It 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.

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 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 days yeah certainly i mean it all started more so with the memory a few months ago and as we highlighted during our our recent call um 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, you know, 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, people are getting, 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 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. It started a few years back, but you're about to get it done, I guess.

Yes, our expectation is we're going to close here in Q2, and then we'll move forward as a pure play broadband provider.

Yeah, phenomenal. Can you walk us through how that changes your profile on the income statement? You're reporting, I think, separately now.

We already are since we filed our Q4 results. It went into health for sale, discontinued operations, 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 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 growth potential.

Got it. So COS is sold on a license basis, but you'll have add-ons that can be subscriptions. That's right.

When we sell our licenses today, 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 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. And this is all part of the amplifiers. Exactly. So, so you're, 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 their 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 our capability building on to 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 to collect all that data that sits downstream from you.

So it's a very strategic spot to hold. 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 your newer products?

Okay yeah so let me zoom out and talk a little bit about you know phases of deployments and investment from 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 continued to migrate and upgrade their network. You've got a lot of this rest of market now moving and upgrading and creating the network and so when they're doing the upgrades led to 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 DOCSIS 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?

Formerly LTEs, yeah, that's a big move.

Optimum. 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 we never have 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 yeah and and the reality is it just continues to get uplifted uplifted from there and what are today's macro trends it's ai and upstream load that ai puts on 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 optics, how you deliver your service to the customer. So that's another vector of growth and spend. And then, you know, 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.

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

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

So beyond DOCSIS 4, you're saying that that is the path forward then really to upsell fiber, sell them to the intelligence layer. That's right. 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?

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

Same OS from that perspective too. Exactly.

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, you know, 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.

That's great. You know, with some changes in the competitive landscape a little bit here with Vistance, the former Comscope, former heiress, 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, you know M&A with your enhanced balance sheet now post a post video divestiture sure sure let me just start with 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 you know we 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. You know, 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 with our position i think there was some commentary a couple weeks ago with regards to one of our european customers yeah and and a win that um distance had uh 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.

Which is a big European show.

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.

And we see that as continuing to have a good, strong relationship 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.

Well, you know, as you know, Ryan, I mean, once you put your orchestration in place, you've got all your back office connection.

A lot of work.

There's a lot of heavy lifting. You've been around the industry, so you understand that. But 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.

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

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 sure 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 yeah right and gets us gets us to play so we're really focused on those priorities in terms of uh what we would be interested in in looking at sure on the intelligence layer do you see uh maybe more opportunity to make a take a bigger piece of that pie in rest of market well maybe you would see at a monster tier one that probably wants to do well yeah exactly I think you hit the nail on the head um 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 a exciting opportunity to really expand out our rest of market customers and diversify on that front as well yeah great and you started to tell us about some of the newer customer activities that may have been announced or you you've been talking about in 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. Those are basically just switches out there right with it with your yeah high density out there and 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 and you can kind of pay as you grow I think too with your model of pluggables absolutely absolutely so those are those are key elements yeah yeah any other customer announcements that you guys highlighted of late? 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.

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.

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. 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, you know, we're off to a great start this year. Sure. You know, we're more confident in the year, hence the reason for raising raising our guidance and we're very clear on what where we're going as a pure play broadband provider so it's exciting times a team's really excited about the opportunities ahead of us as well as the traction we're getting in in the market so time to all right appreciate it thanks Ryan