Harmonic Inc at JPMorgan Global Technology, Media and Communications Conference (Virtual) Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Sanjay, thanks for that. So let me get started with a question, and this is a question that I received quite recently, given some of the interest that came into from investors in trying to understand the company after some of the recent kind of different investor moves that we saw. And investors were really trying to understand how the 2 segments fit together, either -- is there a technology overlap that makes it fit together? Are there customer synergies? So when we talk to a new investor, it's not very obvious to them how our cable equipment business fits in with a video streaming business, particularly given kind of the -- that's where you focus more of your narrative on the video segment. So just help investors piece that together, what is the overlap? What is the synergy getting these 2 segments together? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. MAY 25, 2021 / 7:40PM, HLIT.OQ - Harmonic Inc at JPMorgan Global Technology, Media and Communications Conference (Virtual)

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : And Jeremy, just to clarify, is there any major technology overlap between these 2 segments? Is there something in terms of R&D synergies that you appear to get or largely, these are 2 independent, indeed?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Fair. So let me start with the video segment. And before I do, I do want to remind the audience, if you do want to send in questions, you have the option of doing that. Just hit the ask a question button on the website and you can send in questions, and I can ask it on your behalf. Now let me start with the video segment here. And I know typically, I do start with the cable side of the business. But let's switch it around this time. Video segment, you raised the full year guidance on expectations of momentum in the video streaming business and new SaaS wins. We have a near-term gauge of the opportunities. How do we expect opportunities will shape up in the longer run? I think you've been a bit more clear about the near-term opportunities here. How should we think about the longer-term opportunities? What can be the upside drivers for the video segment in the long run?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. So let me then dial back a bit and just to then understand the drivers here a bit better. You did see a slowdown during the COVID-impacted period. What -- in the video business in terms of revenue, what led to that slowdown? And now you're starting to see again momentum pick up. So when you start -- when you think about the slowdown and the kind of subsequent acceleration, what have been the drivers towards those 2 individual kind of overall drivers? How do you lay out what drove those 2 different dynamics here?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Got it. So essentially, customers just being more mindful of how much they spend at that point is what you're attributing that?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : So you -- and maybe this is more for Sanjay. Let me see if you can give us any ballpark numbers here. You talked about the video business, and there's 2 different parts of it, the traditional video equipment that you help your customers with and the other one is more of the SaaS opportunity that you are seeing on the streaming side. Can you ballpark that mix for us? How does it look today in terms of how much of the revenue in the video segment is supporting streaming channels versus some of the more traditional video use cases?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. I think one of the concerns that have been raised is, clearly, the streaming side is benefiting from strong growth in streaming channels overall. But does that, at some point, reach maturity? Like at the end of the day, there's only that many kind of -- that much consumption that a consumer can have in terms of streaming channels. So do you get to a point where you start to see maturity in the number of streaming channels on their growth overall? And does that -- how correlated to that would Harmonic's growth be in that segment of the business?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Yes. No, that's fair. Sorry, I was on mute here. That's great. So let me move and change gears here a bit and move to the cable segment. You had strong growth in the first quarter. I think what you've highlighted there, though, is margins were a bit weaker or on heavier mix of DAA hardware. Firstly, how are you -- what are you seeing in terms of your customers and their willingness to continue to spend towards cable equipment? Obviously, we saw that momentum in 2020 as well from most cable customers spending to add capacity. How long does this cycle continue? And just then on -- and the second part to that, help us understand the cycle in terms of what they're procuring, how much of the -- how do we shift between hardware and software purchases and what do they prioritize at what points of their investment cycle?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Got it. So definitely, sounds like a lot to -- there'll be a lot of new information at the Investor Day. So look forward to that. Let's talk about CableOS. You have mentioned adding new customers. I think you recently spoke about a multimillion-dollar purchase order from a Tier 1 operator. So how should we think about the time line in terms of that opportunity fully materializing? Also on a separate basis, how should we think about some of these government infrastructure plans, but maybe that's the more second part of the question. Maybe you address the first one, and then we can dive a bit more into the infrastructure plans.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : No, that's good. And let me just follow-up on that before we move to some of the infrastructure-related questions. I believe what I've heard you previously quantify on earnings calls is that you support about 3 million modems today with your customers, where the total opportunity is, what, $50 million. And correct me if my numbers are wrong there. But can you talk about these new customer -- this new customer or Tier 1 operator? How -- what does that do to the addressable market of 50 million modems that you've talked about?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : I don't know the industry that well, so you can give me that number.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. No worries. I'll move on to kind of the infrastructure question here. I think largely, a lot of focus on RDOF, on the Biden Infrastructure Plan amongst investors. Now help me on 2 fronts. One, generally, the perception is that the Tier 2, Tier 3 operators in the rural kind of suburban areas are going to see more of the spending support from the government plans. How is Harmonic's exposure to that segment of customers? Secondly, how should we think about the timing of the benefit? Phase 1, obviously, auctions have already happened. Some of the funds probably will be released later this year, early next year. When does that spend really start coming through to the equipment purchases that Harmonic kind of supports customers with? So a 2-part question there, but hopefully, kind of you can go through them one by one.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Got it. And as a reminder, again, if anyone in the audience has any questions, please feel free to send them over, and I'll ask it on your behalf. So moving on to more of the competitive landscape. I think, Jeremy, like how should I compare Harmonic's capabilities in the cable segment to companies like Cisco and CommScope that you're competing against? What's the differentiation that Harmonic is bringing, which is allowing Harmonic to gain share? What really should convince investors that Harmonic can gain share from these larger companies?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : And I mean, maybe just to follow-up on that, just to make sure we understand the differentiation here. In terms of the transition, I'm guessing you're mentioning the transition to more of a virtualized or DAA architecture. Can you just elaborate on that? And where your product portfolio is related to -- like have you seen, particularly, I think, related to CableOS? Have you seen Cisco or CommScope kind of catch-up to -- with any solutions related to where you are?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. Helpful. I think one of the longer-term concerns that we have surfaced from time to time, and might not be as relevant to Harmonic, but I still wanted to get your thoughts around it, is that as the industry or the customers move increasingly towards virtualized solutions, the overall revenue opportunity for cable equipment companies comes down just because of the lower cost of implementing a solution related to the traditional appliances. Wanted to get your thoughts around that. How much of a -- do you, first of all, agree with that view? And how much of a shrinkage in the overall revenue opportunity would you think that would drive? What's the -- how much of a lower cost is it to implement apples-to-apples network using virtualized solutions, related to the proprietary appliances of the past?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : No. Got it. That's a good explanation, Jeremy. Let's move over to the C-band repurposing kind of opportunity that you've talked about. I think you have guided more recently to that opportunity accelerating in the second half. Can you just walk us through what's happening there, what's driving the acceleration? And I think as a second part to that, I think we keep getting questions on whether this is more of a onetime opportunity or something that could kind of be more sustained through the year? So if you can clarify that as well.

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Yes. It makes sense, Jeremy. So a follow-up to that, I know you haven't really quantified how much of revenues you are getting on an annual basis from that, but who are the primary competitors in this area when you start winning business in this? Who are you seeing kind of -- who are you running up against in these opportunities? Are these the traditional Ciscos, CommScopes of the world? And in terms of market share, is this now becoming an opportunity where you're seeing a higher market share than, again, what your traditional kind of cable business is just purely because the technology you are ahead in terms of the offering the technology to -- for your customers to leverage at this point?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : A quick couple of questions for Sanjay before I wrap it up here. Sanjay, one, any thoughts on how the next year looks related to the C-band opportunity related to 2021? Secondly, one of the -- I think one of the limiting drivers to the flow-through on earnings related to the top line growth that you're seeing this year has been the higher pace of investments that you talked about? What is that directed to? Which areas are those higher investments directed towards?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Sanjay, if I can -- just sorry, quickly clarify. I was more mentioning the OpEx increase of 15% year-on-year that we have in our model. I think you've guided to something very similar, mid-teens OpEx increase on a year-over-year basis. Does that -- pace of investment that we're seeing this year, does that start to moderate in terms of growth rates next year?

Question: Samik Chatterjee - JPMorgan Chase & Co, Research Division - Analyst : Okay. That's all we have time for Jeremy, Sanjay. Thanks for taking the time to do this session. Thanks for the time today, and also thank you for participating at the conference.