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1 August 2019

Harmonic dented despite Comcast mega-deal, blaming SaaS transition

Harmonic closed out its 8th consecutive profitable quarter in style on the back of a huge new software license agreement with Comcast, yet even a lucrative deal with the cable TV giant couldn’t prevent revenues tumbling. Where will the US compression specialist look to salvage diminishing cable revenues, or will it focus efforts on the larger video slice of the business as IBC fast approaches?

It was a tough second quarter in the cable field for Harmonic as revenue in the segment slipped 34.5% to $13.3 million, while the video division also experienced a blip with revenue dropping 9.6% to $71.6 million. All in all, total net revenue declined 14.6% to $84.9 million as Harmonic goes about executing its OTT SaaS transformation.

Unfortunately for Harmonic, initial revenue delays are an inherent short-term side effect of managing a SaaS transition journey. There is little doubt though that Harmonic will be back to revenue growth pretty soon.

Without Comcast’s 10% revenue contribution in Q2, Harmonic’s cable business would have looked in real trouble but, as we know, the deal signed recently is for a four-year software license agreement, priced at $175 million, covering CableOS head end software. Harmonic highlights that the amount does not cover hardware appliances like DAA nodes and centralized architecture CMTS shelves, noting that any additional use of its complementary technology is upside.

Harmonic describes the deal as a win-win arrangement through which future additional purchases above the Harmonic products, such as DAA hardware and CMTS shelves earn credits, which can be deducted from a software license fee. “The remaining bill highlights that we can’t disclose are that Comcast will pay us the first $50 million of cash in 2019, and the rest of the remaining 5.8 million in change warrant shares granted when the original partnership agreement was signed,” it states.

Looking at the video division now, revenue may have slipped but the company’s earnings call discussed what’s to come in the transformation process – which is ultimately about shifting from its legacy broadcast-centric appliance business to a more efficient and profitable OTT video beast. But to do that, Harmonic needs to provide its technology either as software running on COTS hardware or as a SaaS model running on private, public or hybrid cloud infrastructure.

Progress directly relating to this transformation in the second quarter saw a 10% increase in the number of cloud-based live OTT channel deployments and a 65% year on year growth of number of SaaS customers – reaching 28 in total. It says the SaaS platform and dev ops team ensured 24/7 delivery of premium live video services to over 6.5 million consumers the world over.

Another caveat to embracing SaaS along with initial revenue delays, and another excuse for the company’s second quarter revenue decline, is that SaaS sales cycles apparently take roughly twice as long as traditional appliance sales, in their current form anyway. Harmonic is confident, however, that SaaS sales cycle times will return to normal and strengthen transition headwinds.

To that end, it expects revenue recognition milestones to be planned and executed later in the second half of this year.

“We’re certain that not only is the video streaming market positive for our business, but it’s the right direction for the market to be headed in general. The dialogues we’re having with customers gives us continued confidence that it is not a question of if – but when,” commented Harmonic CEO Patrick Harshman.

There are also intriguing movements happening in the cable segment despite its poor performance. Harshman described seeing more groundbreaking work associated with DAA architectures at big tier 1 accounts than anyone anticipated within the past year. Some of Harmonic’s DAA projects are behind schedule, Harshman admitted, but pointed to the company’s major new international deal with an unnamed entity, for which he expects the ball to start rolling later this year and into early next year. This DAA deployment is valued at around $55 million over five years.

We should therefore expect a similar story from Harmonic’s Q3 results but with revenue then potentially picking back up towards the $100 million mark where it should be (it was $99.4 million in Q2 2018) with both the vendor’s cable and video segments reaping the rewards of transformative deals relating to those two magic acronyms – DAA and SaaS.