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30 April 2020

Harmonic slumps, Akamai soars in contrasting Covid-quarter

With results season upon us, the true impact of first quarter quarantines on varying corners of the media and entertainment industry have come to light. Even non-public companies have been getting in on the act, with many reassuring Faultline in recent weeks that – aside from early supply chain slowdowns from South East Asia – everything is business as usual; in many cases even booming.

Akamai and Harmonic – two heavyweights of their respective fields – each published financial results this week for arguably the most tumultuous quarter on record. But that’s where the similarities end – as Harmonic reported a shock performance downturn compared to Akamai’s fully expected spike.

First quarter 2020 revenue for Akamai increased 8% year on year to $764 million, while Harmonic recorded a 2.1% decline to $78.4 million. Harmonic’s revenue drop comes despite reassurances from contacts within the video encoding industry in recent weeks that business would be unaffected by the pandemic, with demand for VoD content and live news enough to offset losses from live sports.

Harmonic suffered a net loss of $22 million during Q1, compared to net income of $12.1 million in Q4 2019 and a $4.8 million net loss in Q1 2019. So, what went wrong for the US video processing powerhouse?

Video revenues tanked 19% year on year, accounting for $54.4 million of total Q1 2020 revenue. Gains in the Cable Access division – with net revenue nearly doubling year on year to $24 million for the quarter – were ultimately not enough to offset a challenging quarter for Harmonic’s video division, particularly in the Asia Pacific region. Problems arose specifically in the Appliance and Integration segment, where revenues sank 8.8% to $47.7 million, while SaaS and Service revenues partly offset the damage, increasing 10.5% to $30.7 million for Q1 2020.

Evidently, Harmonic has been unable to fill a void left by major live events. We have been waxing lyrical about the absence of live sports – and how this lack of subscription and advertising revenue would trickle down the vendor supply chain with damaging consequences – for the past five weeks.

On the live sports conundrum, Harmonic CEO Patrick Harshman gave little away, saying only, “With the loss of sports, I think the data is clear that the advertising revenue is down,” while expressing confidence in a comeback.

So, how come Akamai thrived despite also being bereft of delivering lucrative live sporting content? Well, the way Akamai operates means that no individual live event has a significant impact on financial results. To-date, the stronger traffic from shelter-in-place orders has more than offset the impact of live sports cancellations and postponements for the CDN behemoth.

Despite major event cancellations, Akamai’s peak data traffic from March 2020 reached an exorbitant 167Tbps – double the peak traffic of 82Tbps seen in March 2019. Typical monthly traffic growth for Akamai is around 3%, while March saw a 30% surge in global traffic experienced.

These network-bending figures were reflected in revenue from Akamai’s Media and Carrier division, up 8% to $358 million. Akamai hailed the outperformance in media as primarily due to the surge in traffic from OTT video, gaming, social media and news and information sites. Akamai CFO Ed McGowan specifically picked out OTT video as the single biggest growth point during the quarter.

Back to Harmonic, there were certainly plenty of positive takeaways from the first quarter. While the pandemic emphasized certain cracks, the crisis also shone a light on Harmonic’s virtualized CableOS technology and cloud-based video streaming products, both of which held up under increased operational pressures.

With DOCSIS 4.0 specifications from CableLabs published only recently, we expect big things from Harmonic’s CableOS virtualized cable access platform this year. CableOS now comes fitted with a low-latency mode – enabling double throughput performance using 1-RU Intel servers with a 100 Gigabit Network Interface Card and virtual segmentation with network-wide QoS capabilities.

“Streaming content, including linear streaming content has been through the roof. All of the customers we’re talking to believe that they may have some bumps themselves in the near-term business, but we don’t see anyone talking about a fundamental change in the way the consumer-facing part of the business or the advertising model is,” said Harshman.

Harmonic’s financial slump came despite adding 9 new video SaaS customers during the quarter to reach 57.

Harshman accepted that results hindered business in Q1 while remaining skeptical about the prolonged effect. “While Harmonic’s financial results were impacted by Covid-19, we delivered on several key business initiatives. The future impacts of the pandemic are difficult to forecast but we are well positioned for the long term, as the broadband cable access and video streaming services we enable remain vital and our core technology position remains strong,” he said.

We chose to highlight Harmonic’s blip for good reason, to warn associated technology companies that turbulent times likely lie ahead, even if they haven’t been immediately felt. If the world’s second largest independent video encoding vendor was directly hurt by lockdowns during March, then ripple effects will reach smaller suppliers. But, by the same token, Akamai’s traffic and revenue growth speaks for itself.