Q3 2022 Harmonic Inc Earnings Call
Welcome to the Q3 2022 harmonic earnings Conference call. My name is Jonathan and I will be your operator for today's call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question.
During that time, Please press star one one on your telephone. Please note that this conference is being recorded.
And now I'd like to turn the call over to David Hangover Investor Relations, David You may begin.
Okay.
Thank you operator, Hello, everyone and thank you for joining us today for harmonics third quarter of 2022 financial results Conference call.
With me today are Patrick Harshman, President and Chief Executive Officer, and Sanjay Kalra Chief Financial Officer.
Before we begin I would.
I'd like to point out that in addition to the audio portion of the webcast. We've also provided slides for this webcast, which you may view by going to our webcast on our Investor Relations website.
Now turning to slide two during this call we will provide projections and other forward looking statements regarding future events or future financial performance of the company.
Such statements are only current expectations and actual events or results may differ materially.
Refer you to documents, Vermont harmonics filed with the SEC, including our most recent 10-Q and thank your reports and our forward looking statements section of today's preliminary results press release.
These documents identify important risk factors, which could cause actual results to differ materially from those contained in our projections or forward looking statements.
And please note that unless otherwise indicated the financial metrics. We provide you on this call are determined on a non-GAAP basis. These metrics together with corresponding GAAP numbers and a reconciliation to GAAP are contained in today's press release, which we've posted on our website and filed with the SEC on form 8-K.
We will also discuss historical financial and other statistical information regarding our business and operations and some of this information is included in the press release.
The remainder of the information will be available on a recorded version of this call or on our website.
And now I'll turn the call over to our CEO Patrick Harshman Patrick.
Well, thanks, David and welcome everyone to our third quarter call.
In the third quarter of 2022 harmonics again delivered excellent business results revenue was up 23% year over year bookings were up 50%.
<unk> was 13.
And adjusted EBITDA margin was 13, 5%.
Both business segments were again solidly profitable and had book to bill greater than one.
Access segment, which we have recently renamed broadband.
<unk> to deliver strong topline growth with revenue up 60% year over year.
Video segment revenue transformation continues.
SaaS revenue up 64% year over year.
In mid September we updated you on key market trends, our strategy and our enhanced three year financial model.
Our third quarter results released today further highlight the key points from that presentation and support our confidence in our growth plan.
We see robust demand for multiple gigabit broadband and live streaming video for associated products and services are winning in the marketplace and our focused business execution remains resilient despite economic headwinds.
Yeah.
Taking a closer look now at our broadband segment, we delivered strong financial results and further solidified our technology leadership and growth opportunity outlook.
Segment revenue was $91 $9 million up 13% sequentially and 60% year over year segment gross margin rebounded to 45% and adjusted segment EBITDA margin was 18, 4% demonstrating consistently improving leverage as the business scales.
New orders were also strong contributing to near record backlog and deferred revenue.
This sustained growth reflects both a robust broadband market and our strong execution.
The quarter end consumer modem served grew to $10 9 million up 179% year over year still less than 20% of our existing customers DOCSIS footprint.
We added several new customers during the quarter, bringing the number of customers actively deploying our solution to <unk> 85 up 25% year over year.
And we secured an important DOCSIS DAA win with an international tier one.
We're also making excellent progress with several tier ones, who have not yet selected us.
As a winning over these new accounts are to increasingly compelling technology advantages.
There is growing industry consensus with the particular variant of DAA, we pioneered with Comcast and other really customers that is virtualized <unk> paired with remote phy nodes is the most architecturally advantageous and market proven solution and consequently, the best way to go.
Obviously, there is growing consensus is good news for us considering the huge technology and deployment expertise lead we have in Virtualized <unk>, Sir remote phy.
Our second unique advantage, which is increasingly resonating with prospective customers.
The way our fiber to the home PON solution that seamlessly converged and integrated in both software and hardware with our DAA DOCSIS solution.
This competition from fiber based service providers continues to intensify our multi pronged solution that incorporates fiber on demand capability is becoming a must have for our customers.
Emphasizing this point another highlight of the quarter. This is a significant new fiber win with an existing tier one international cable customer.
Weighted by an initial multimillion dollar purchase order.
Complementing our fiber solution. We've also been investing heavily in new DOCSIS four <unk> capability I believe that here again, we are the industry technology leader, which puts us in excellent position to benefit as demand for DOCSIS four <unk> commences in late 2023 and 2024.
Putting it all together our unique combination of DOCSIS three one DAA DOCSIS for Dino DAA contingent fibre all managed through common cloud native core software and analytics is simply the right solution at the right time.
It only by our company.
Those of you who had the opportunity to visit the cable industry's Premier Technology Conference in September in Philadelphia. So all of this on display and the tremendous feedback we received from both existing and prospective customers.
We left the event feeling even more upbeat about the outlook for our business over the next several years.
Referring back towards mid September analyst day, we laid out an aggressive three year growth plan that calls for over $800 million of revenue and 28% EBITDA margin in 2025.
As we head into the final quarter of 2022 and began looking ahead to 2023, we remain confident in our ability to deliver on this target.
I'm excited about the impact we're having on the global broadband market.
Turning now to our video segment.
Here also we delivered another quarter of solid financial and strategic execution.
Third quarter segment revenue was $63 8 million down seven 1% year over year as expected due to the previously discussed movement of a few large appliance orders into the first half of the year and the corresponding Q2 upside.
SaaS revenue growth continues to be outstanding up 64% year over year.
Sanjay will discuss momentarily segment gross margins were again strong segment EBITDA was six 8%.
Raising our full year segment EBITDA guidance.
Highlighting our continued focus on profitability as we scale our SaaS business.
As you will recall from our September analyst day, our video business strategy has two key elements, taking a leading position in the growing streaming SaaS market, particularly for live sports and maximizing profit from a slowly declining traditional video appliance market.
Year to date results demonstrate our continued execution of this plan.
Specifically the highlight of the quarter was again streaming SaaS growth driven principally by larger media accounts spending excuse me expanding the consumer footprints.
Live sports content rights and usage of our service.
We secured several important new SaaS customer wins during the quarter spanning North America, Latin America, and EMEA, expanding our foundation for sustained SaaS growth.
As evidenced by recent demand associated with the upcoming soccer World Cup, we continue to see live sports streaming and the movement of legacy broadcast workflows to the cloud as attractive and growing opportunities.
And our associated brand and technology leadership strengthened.
While SaaS was the highlight overall demand including for video appliances.
During the quarter with book to Bill greater than one and a solid sales pipeline extending into 2023.
The market seems particularly robust in north and South America offsetting what we currently see is some possibility of macroeconomic headwind for video in Europe in the coming months and of course, the loss of our business in Russia.
Looking further ahead, we remain confident that our transformation and video to consumption driven streaming SaaS is working.
And we're on track to achieve the targets we laid out for you in our mid September analyst day.
As a reminder, this plan calls for greater than 45% compounded annual SaaS growth through 2025.
Consistent profitability.
And a return to mid teens EBITDA segment margin.
The new wins, we've recently secured a high profile streaming services. We're now powering our expanding segment gross margins in steady segment profitability demonstrates that we remain on track to achieve these objectives.
And with that let me now turn it over to you Sanjay for further discussion of our financial results and our outlook.
Thanks, Patrick.
And thank you all for joining us today.
Before I discuss our quarterly results and outlook I'd like to remind everyone that the financial results I'll be referring to.
Provided on a non-GAAP basis.
As David mentioned earlier, our Q3 press release and earnings presentation includes reconciliations of the non-GAAP financial measures to GAAP.
That are discussed on this call. Both of these are available on our website.
While the third quarter of 2022, we delivered another period of strong financial results.
Okay.
Before reviewing our quarterly financials in detail.
I'll briefly review the key highlights here on slide seven.
We reported September quarter record revenue of $155 7 million up 23, 3% year over year, along with strong gross margins of 59%.
We also generated adjusted EBITDA of 13, 6% up 187 basis points from the prior year and EPS of <unk> 13 cents.
Our balance sheet remains steady with a cash balance of $105 3 million at September 30th.
We also reported September quarter record bookings of $171 1 million and continue to maintain near record backlog and deferred revenue of $490 1 million at quarter end.
Positioning us well for the remainder of <unk> and into 'twenty two 'twenty three.
Now, let's review, our third quarter financials in more detail.
Turning to slide eight.
As I just mentioned total company Q3 revenue was $155 7 million slightly down on a sequential basis and up 23, 3% year over year.
Okay.
Looking first at our broadband business segment revenue.
Revenue for the quarter was $91 9 million up 13, 2% on a sequential basis from Q2 and up 59, 6% year over year.
Selecting both the continued ramp up of existing customers and newer customer launches, including modest fiber revenue.
In our video segment, we reported Q3 revenue of $63 8 million.
That was 16, 3% sequentially.
Okay.
This decline was attributable to a reduction in our appliance business <unk>.
Including a modest impact from unfavorable foreign exchange rates.
A $3 million of shipments that were moved up earlier into Q2 as we discussed on our last earnings call.
Offset partially by strong SaaS consumption.
Our video revenue included SaaS revenue of $8 9 million up 63, 9% from the prior year.
Ahead of our expectations.
Okay.
We had two customers representing greater than 10% of total revenue during the quarter.
Comcast contributed 38% and Vodafone contributed 11% of total revenue.
Okay.
Total company gross margin for Q3, 'twenty to decline 190 basis points to 59% compared to 32, 8% in both Q2 2002 <unk> hundred 91.
The year over year decline was due to increased mix of broadband segment revenue as a portion of total company revenue.
We achieved broadband gross margin of 45% for Q3 22 compared to 43% in Q2, 'twenty, two and 42% in Q3 21.
Broadband gross margin improved both sequentially and year over year near to several factors.
Our strategic decision to invest in increasing our inventories.
Enabling us to use more ocean freight rather than air freight.
He is most cost effective.
We also saw modest sales and margins from improvements in freight rates improved customer pricing and favorable product and services mix.
Okay.
Video segment gross margin was 59, 3% in Q3, 22 down 390 basis points sequentially, and 260 basis points year over year.
Q3, 22 was modestly impacted by unfavorable foreign exchange rates.
Please note that the periods I'm, referring to record video gross margin quarters.
We continue to see a strong overall gross margin improvement trend over the past two years as our video gross margins have risen from 54, 5% and 58, 7% in 2020, and Tony 91, respectively.
Moving down the income statement on slide nine.
Q2, operating expenses were $61 million net of modest foreign exchange benefit.
As a result of strong U S dollar during the third quarter compared to $61 7 million in Q2, 'twenty, two and $54 9 million in Q3 21.
The year over year increase was primarily due to increased research and development to support the growth of our broadband business.
And the ongoing strategic transition of the video segment SaaS.
Adjusted EBITDA for Q2 was 13, 6% of revenue at $21.2 million.
Comprised of $16 9 million from broadband and $4 3 million from video.
This compares to an adjusted EBITDA of $24 3 million or 15, 4% of revenue in Q2, 'twenty, two and demonstrated year over year improvement compared to $14 8 million or 11, 7% of revenue in Q3 21.
This all translated into Q3 EPS of <unk> 13 per share compared to 16, especially out in Q2, two <unk> per share for Q2 'twenty one.
Okay.
We ended the quarter with diluted weighted average share count of $113 2 million compared to $109 million in Q2, 'twenty two $806 4 million in Q2 'twenty one.
The sequential increase is primarily due to the increase in convertible debt dilution of $2 9 million shares.
And the dilutive effect of outstanding artist using options, but <unk> 7 million shares.
Both resulting from an increase in our average stock price during the quarter.
Increased by the issuance of <unk> 6 million shares to employees for invested oddest use.
The year over year increase reflect the dilution of our convertible debt by $2 9 million shares and dilutive effect of outstanding artists using options with 017 million shares both resulting from an increase in our average stock price during the year.
And three 7 million shares due to the weighted effect of stock issued to employees and ESD B shares.
Offset by the impact of repurchases of approximately 0.6 million shares.
Yeah.
Turning now to the order book, we reported new September quarter record bookings of $171 1 million compared to $140 9 million in Q2 'twenty two.
$714 3 million for Q3 'twenty one.
The book to Bill ratio was one one in the quarter compared to <unk> nine in both Q2, 'twenty, two and Q3 'twenty one.
Book to Bill was more than one for both segments.
Turning to slide 10 will now discuss our liquidity position and balance sheet.
We ended Q3 with cash of $105 3 million compared to $121 8 million at the end of Q2, 'twenty, two and $128 4 million in Q3 last year.
The $16 5 million sequential cash decrease is primarily comprised of $8 2 million cash used in operations.
Primarily in inventories of $16 4 million and prepaid deposits for suppliers of inventories of $7 4 million.
These working capital investments of our inventories and related deposits are part of our larger strategy to proactively manage the supply chain landscape enhancing product availability.
Providing us flexibility to use a higher mix of ocean freight rather than air freight.
Resulting in increased gross margin.
We also used $1 $9 million of cash and part sales of fixed assets.
$1 $9 million of cash towards taxes, our employees' withholding on Rs used vesting and an unfavorable foreign exchange rate impact of $4 3 million.
Okay.
Turning to days sales outstanding at the end of Q3 DSO was 61 days same as of Q2 'twenty two.
And comparable at 54 days in Q3 21.
Our days inventory on hand were 116 days at the end of Q3 compared to 100 days at the end of Q2, 'twenty two and 78 days at the end of Q3 'twenty one.
The increase reflects continued investment in inventory as you prepare for heavy shipments during the remainder of this year and into next year.
Regarding capital allocation.
Our priorities remain unchanged.
<unk> is committed to strategically deploying capital, where we believe it can generate value for our shareholders.
Our top priority is to drive future growth.
As such we continue to invest in building inventory, which enables us to better manage the supply chain.
Enabling us to fulfill incoming orders on a timely basis and control inventory transportation costs.
At the same time, our capital allocation side that you're also considering returning capital to shareholders through share repurchases the timing and amount of any of you. Appreciate this will depend on the idea of factors, including the price of harmonics common stock market conditions cooperate needs and regulatory requirements.
Yeah.
This balanced capital allocation strategy also takes into consideration anticipated future debt obligations, including our upcoming debt repayment.
For $37 7 million in December 2022.
At the end of Q3 total backlog and deferred revenue was $491 million up approximately 3% sequentially from $477 8 million in Q2.
And up 47% year over year from $333 3 million in Q2 'twenty one.
This large backlog and deferred revenue reflects strong demand from our large broadband customers and drawing video SaaS commitments.
Note that approximately 80% of our backlog and deferred revenue has customer request dates for shipments of products and providing services.
Within the next 12 months.
Okay.
As mentioned on previous calls not included in our backlog and additional call.
Additional contractually agreed cable less business with.
Do have all of our initiatives do you have on broadband customers.
At the end of Q3.
Rental amount was approximately 60 million.
Down from 96 million last quarter, and approximately 36 million went to the purchase of our office.
And therefore moved into bookings.
Free cash flow was negative in Q3, 'twenty due primarily due to the investments in working capital for inventory and related deposits.
As I mentioned earlier.
Okay.
Now I'll turn to our revised non-GAAP guidance for 2022, beginning on slide 11.
I would also give brief commentary on key changes from our prior annual guidance we gave in August .
For the total company for full year 2022.
We now expect.
Revenue in the range of $612 million to $626 million.
The midpoint is a slight increase of our prior guidance.
Gross margin in the range of 56% to 51% up.
Up 75 basis points at the midpoint versus prior guidance due to improved gross margins in both segments.
Gross profit to range from $310 million to $319 million up 2% at the midpoint versus product items.
Operating expenses to range from $242 million to $244 million down slightly versus our prior guidance at the midpoint, primarily due to favorable foreign exchange rates.
Adjusted EBITDA to range from 79% to $87 million. This represents an 8% increase at the midpoint versus prior guidance.
And effective tax rate of 13% a weighted average diluted share count of approximately $111 2 million an increase of one 6 million shares from prior guidance.
This is primarily due to increased debt related dilution given the higher average stock trading price.
UBS to range from 49 to <unk> 55 per share.
At the midpoint. This is an 8% increase versus prior guidance.
Finally cash at the end of <unk>, you do is expected to come in between $80 million to $90 million.
The lower cash balance is primarily reflective of $37 7 million debt repayment maturing in December and additional strategic working capital investments, mainly inventory to support our 2023 revenue growth.
Turning to slide 12, I will review, our total company outlook for the fourth quarter of <unk>.
We expect revenue in the range of $1 $51 million to $165 million down 1% from the midpoint of previous guidance.
This guidance reflects a stronger Q3 result.
Gross margin in the range of 51, 3% to 52, 6%.
At the midpoint, an increase of 180 basis points versus prior guidance.
It reflects higher expected broadband and video gross margins.
Gross profit in the range of $78 million to $87 million, reflecting an increase of 3% from prior guidance at the midpoint.
Operating expenses to range from 61 to 66 million nearly flat at the midpoint of prior guidance.
Adjusted EBITDA to range from $19 million to $27 million up 7% at the midpoint.
Our weighted average diluted share count of approximately $113 5 million.
EPS to range from 12 to 18.
Up 7% at the midpoint of prior guidance.
On Slide 13, I will first review guidance for both the full year and fourth quarter of 2022 for our broadband segment.
For the full year 2022 based on our progress to date, we expect broadband to achieve revenue between $345 million to $350 million.
A 2% increase from the midpoint of prior guidance, implying a full year revenue growth of 59% at the midpoint.
Given our success navigating capacity constraints through the first 10 months of the year, we are modestly expanding the high end of our outlook.
Gross margins between 43, 2% to 43, 6% the 60 basis point improvement from prior guidance is due to the reasons mentioned previously.
Specifically, our strategic investments in inventory to reduce freight costs, even as component costs remain high.
Yeah.
Gross profit between $149 million to $152 million up 3% from prior guidance at the midpoint, reflecting both higher expected revenues and margins.
Operating expenses of between $100 million to $101 million.
Up 4% versus prior guidance at the midpoint adjusted EBITDA between 55 million to $58 million up 4% from the prior guidance at midpoint.
Also reflecting higher than expected revenue and margins.
Okay.
Part of our broadband segment in Q4, we expect revenue in the range of $90 million to $95 million.
Gross margin in the range of 46, 4% to 47, 4%.
Gross profit in the range of $42 million to $45 million operating expenses in the range of <unk> $26 million to $27 million and adjusted EBITDA to range from $17 million to $20 million.
Moving to slide 14, we will review, our full year and fourth quarter 2022 video segment guidance.
Okay.
Currently we expect revenue in the range of $267 million to $276 million.
2% decrease from the midpoint of prior guidance.
Full year 2022, SaaS growth is now expected to exceed our annual SaaS growth expectations of 50%.
Gross margins in the range of 61% to 63%.
130 basis point improvement versus prior guidance at the midpoint.
Due to improved product mix, partially offset by a continued modest foreign exchange headwind.
Gross profit in the range of 161 million to $167 million.
Slight improvement from prior guidance at the midpoint, primarily due to stronger than expected Q3 margins.
Operating expenses in the range of 142 to 143 million $2 seven when better than prior guidance at the midpoint.
Primarily due to reduced hiring and improved foreign exchange benefit.
Adjusted EBITDA in the range of $24 million to $29 million.
An 18% improvement from prior guidance at the midpoint.
Part of our video segment in Q4.
We expect revenue in the range of 61% to $70 million.
The broader range for Q4 reflects increased uncertainty entity in Europe appliance demand and timing of bulk deals.
Gross margin in the range of 58, 6% to 59, 6%.
Reflecting a 330 basis point improvement from prior guidance due to improved product mix.
Gross profit in the range of $36 million to $42 million.
Slight decrease from prior guidance at midpoint.
Operating expenses in the range of 35% to $36 million better than prior guidance at midpoint due to the factors mentioned previously.
And adjusted EBITDA to range from $2 million to $7 million an improvement from prior guidance.
In summary, during the third quarter, we continued to execute and drive strong momentum in our broadband segment.
Advancing our strategic transformation in our video segment.
Which led us to raise our full year adjusted EBITDA guidance for both segments.
As a result, we ended the third quarter with near record balances for backlog in deferred revenue. We believe this momentum positions us well for the balance of 'twenty, two and into 'twenty three as we continue to execute on our long term business plan.
Okay.
Thank you everyone for your attention today and now I'll turn it back to Patrick for final remarks, before we open up the call for questions.
Alright, Thanks Sanjay.
Look just before concluding the call, let's let's review the strategic and execution priorities that have been guiding us this year.
For our broadband business, we remain focused on enabling our existing customers to successfully ramp accelerate deployment and compete.
We're also focused on breaking into the tier one operators that we have not yet secured.
Vitally important leveraging our fiber solution to expand our addressed market and create additive to revenue growth and value.
For video segments, we are driving rapid expansion of our <unk> brand and customer base for further extending our streaming SaaS technology and service differentiation.
Particularly for live sports.
We're leveraging the traditional broadcast appliance business to profitably enable these transformations.
And each of these areas are year to date results have been excellent.
And we are well positioned to finish 2022 strong and enter 2023 with great market momentum.
We're truly excited about the future of our business and we greatly appreciate your continued support.
With that we'd like to now open up the call for few questions.
Certainly ladies and gentlemen, once again, if you have a question at this time. Please press star one one on your telephone one moment for our first question.
And our first question comes from the line of Ryan <unk> from Needham Your question. Please.
Okay, Great just quick.
Clarification. Please thanks, thanks for the opportunity to ask you about your tier one fiber trials I know you announced two last quarter and as I said.
Third one this quarter end.
How are these kind of scheduled out to ship over the coming quarters.
Well I'll take that Brian .
First.
What we have announced here or not trials, but they are.
At the backend of trials, there actually purchase order commitments, representing planned deployments of a couple of different scales I would say and yes. What we're announcing today is a third significant win last quarter, we talked about.
Actually a couple of different customers, who have selected us and.
With more of a focus on the domestic market and we're excited that during the third quarter, we secured our first significant commitment from a tier one international customer.
That's fantastic.
Just maybe stepping back in the Big picture here as we think about cable operator spending moving away from monolithic legacy systems to Nextgen distributed Virtualized like where do you feel like we are in that transition or where we maybe 25% of the way shift to nextgen and at what point do you anticipate you might get to see the market surpassed.
Thank you.
Well I think it's an excellent question Theres two ways to answer it I mean, one way is what percentage of the operators have kind of embraced and have begun deploying nextgen.
For that.
Roughly round numbers, we think something close to maybe a third.
The operators not in terms of aggregate number, but if we look at terms of subscriber base.
And there's a nice chart about this back in our.
The analyst day deck that we did in September .
In September and it's kind of a.
It really captures our view of what's happening in the market, we're kind of at the crossing the chasm point so.
Operators controlling about one third of the global cable operators today, we think have begun to deploy next gen architecture and as I mentioned in my prepared remarks, we think that there kind of something on the order of little less than 20% into it.
Then there's the other two thirds of this cable subscribers in the market those operators have yet to really commence nextgen work.
And that being said our pipeline tells a story.
As well as the feedback at the recent industry events tells the story of <unk>.
Or.
Yes really of the chasm beginning to be crossed now and so we see.
A lot of activity around that.
The main market, if you will getting ready, we think getting much closer to making decisions and moving forward sure that thats Super helpful. But let me park does that answer the question.
Yes, you did I just one more quick clarification throughout the third of operators that have shifted are they still spending much on legacy or are they.
We have largely wound that down and are kind of in a pause in ramp mode.
Yes, it's hard to generalize that there is still there is definitely still spending on legacy.
Yeah.
What's the best way to think about it.
Yes think about an operator that is may be operating in two or three cities.
Even if they're going as fast as they can on next Gen. Then you still have an immediate kind of hole to plug.
And the part of the network being served by legacy equipment I'm sure you can imagine that so we think that for sure there is some.
Spending on legacy going on even under the umbrella of those who have embraced the next generation stuff, but when we think that that spend is in general kind of being minimized in Arizona.
As needed as absolutely needed basis.
Great that's super I'll get back in the queue. Thanks Patrick.
Alright, thank you.
Thank you one moment for our next question.
And our next question comes from the line of Simon Leopold from Raymond James Your question. Please.
Great. Thanks for taking the question.
Couple if I might the first one is you did host the analyst meeting back in September and provided us with some <unk>.
Targets for 2025, and I guess I'm, just sort of wondering in 2021, you had given us.
Target of $830 million for 2024.
I guess I just want to put that in perspective should we still be thinking about 830, <unk> survey a milestone mid point to the 2025 targets.
Or should we sort of think about how to extrapolate between 23 and 25, just a little bit of advice on how to consider that.
Uh huh.
We don't want this what I'm about to say to be construed as strict guidance, but we see it Laura less is kind of a linear growth out to 2025.
That is we don't expect any significant knee in the curve.
Don't know a year and a half out we've.
We've been we've been growing strongly.
If you look past back over the past two years, and we expect that that growth rate as we get.
A little bit larger to maybe be tempered a little bit hence the aggregate growth rate that we quoted.
But we expect.
The growth to be more or less linear between now and 2025.
That's very helpful and then not to get too deep into the technology we.
We can avoid it but I've been hearing some suggestions that the industry is harmonizing around a remote phy architecture and not the backed by choice and I guess two parts. One is that true and two what are the implications if any for harmonic.
I would say, yes to the first part.
There is a growing consensus which is not complete.
There is still an active dialogue in the industry, but I would say there is growing consensus.
That.
In terms of overall efficacy.
Technical as well as just scale.
Our proven and volume advantages there is a.
Kind of a convergence of opinion around.
The benefits of Virtualized, <unk> and remote phy.
And to the extent that that happens.
It's very good news for harmonics now I want to pause and say we.
We have had an active remote Mac phy so we.
The risk of sounding like I'm talking on both sides of my mouth.
We are we are prepared and capable of supporting that five that being said when you think about just the five variant of the of the architecture.
We are miles ahead of the rest of the interest rate in both terms of technology understanding knowhow deployment experience.
Et cetera. So.
So to the extent that the industry really.
Converges on remote phy as the as the architecture of choice.
<unk>.
That strengthens our.
Our leadership position in the market even further.
That's very helpful in that.
End of answer I was trying to get a good understanding of it and then just one last one you gave a couple of updates I believe on the call about some wins in the fiber to the Prem architecture is this something where when it get is there sort of a threshold where you are you would break it out in terms of dollar contributions or how should we be.
Thinking about the implications in modeling for the FTP traction. Thanks.
Yes, well going back to the analyst day, we did give you a.
We did give a 2025 targets and we're starting from a small base. So.
From a multiyear perspective, I think that that gives you a picture of where we think we're going over the next three years.
And data is relatively small numbers.
I think in that chart if memory serves correct Sanjay we estimated maybe $10 million of revenue.
Certainly expect order input well above that this year.
And so it's.
I mean, it remains to be seen.
Well not if but when we begin to break that out as it becomes.
Short term a bigger part of the business but.
But to be clear.
We do anticipate at some point breaking it out as it gets too.
The right scale in 2025 target that we've given I think gives you an idea of.
Where we think were added.
Great I appreciate it thanks for taking the questions.
Thank you.
One moment for our next question.
And our next question comes from the line of Steven Frankel from Rosenblatt Securities. Your question. Please.
Good afternoon, Patrick So just to follow up on this theme of the industry coalescing behind remote phy.
To what extent have you seen that either accelerate orders from existing customers or maybe up the urgency among people that were in the pipeline.
Okay.
No change, Steve with existing customers I mean, frankly existing customers. We're already there in there they are doing their thing.
So this is.
For those who maybe on our call is warranted.
First of all of this.
A couple of permutations on DAA to be clear I think everybody in the industry with focus MBA Theres a couple of permutations.
That.
And then there were some customers out there I would say on the fence between the different permutations.
I don't want to suggest as we discussed a moment ago that that debate or discussion is currently is over but indeed more of those who are on the fence I think are leaning towards.
Remote phy and Steve I don't think that I think part of the conversions as is the urgency.
We're seeing our competition not only in the U S, but really around the world from particularly from fiber, but also from fixed wireless broadband competitors. It's just it's becoming a much more competitive market for traditional cable operators and so I think some of them are deciding the time to kind of evaluate different technology alternatives.
<unk> and the time to.
Begin planning to get on with it is at hand.
And if you're an operator, feeling some amount of urgency I think that.
I think looking to the variant of DAA that has been most widely deployed most mature has.
Got the kind of the most miles.
<unk>.
Underneath that is that's certainly advantageous and that speaks to some of the advantage that I think we are bringing to the market as well, we think that we're in a better position frankly above and beyond the technology itself is a partner that can help a operator move quickly.
We think we are the <unk>.
The premier partner in the industry right now.
So so it's all still kind of a real time.
But yes.
We're we're excited about the opportunity to help both existing and new customers really meet the challenge of their fiber and wireless based competition and we will.
We've got the tool set to do it.
Okay.
The last few quarters, you've kind of characterized your installed base and broadband is kind of going through a shake down crews for a bit and figuring out DAA and then accelerating deployment could.
Could you give us some color on kind of how you think those tier ones are today, if we had a material movement to more of those customers.
Getting through the shakedown cruise and kind of putting their foot on the accelerator in terms of deploying right now.
Well I think its the other side of the coin of what we just discussed.
We closed as you saw a significant new tier one international during the quarter were excited about that and the progress with other tier ones that haven't yet made decisions on next generation architecture.
I would characterize it as very good.
So.
<unk>.
I think the urgency is that.
I feel that.
Yes, they have fantastic broadband businesses, and I think that understandably they want to work to secure them I think that theres been a real push to understand the architectural variance and to make decisions and begin to get on with it. So.
I earlier referenced the crossing the chasm kind of idea I think we're not quite to the other side of it but I think where we're substantially closer than we were when we spoke to three months ago.
We expect as we did in our analyst day in September we expect 2023 to be an important year of a number of significant decisions being made and and we hope.
Several new scale Rollouts are commencing.
Great. Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Tim <unk> from Northland Capital markets. Your question. Please.
Good afternoon, and congrats on the results, especially on the gross margin side, which is kind of where I wanted to start.
Focusing in broadband in particular and sorry, Joe you gave US a couple of drivers for the strength.
And in Q3, but you're guiding to a further uptick in Q4 into the high forties I Wonder if you could talk about what's driving that I mean as I look at your results. It seems like you've had an uptick in <unk>.
Kind of router or software revenue within cable access maybe getting a few of.
Of your new tier ones off the ground here I mean, obviously you were strong in Europe . This quarter. So wondering if you can characterize that growth for the quarter and the outlook.
But especially the outlook in terms of broadband gross margin.
Sure Tim so.
<unk> said in the prepared remarks, the most important.
Aspect of our gross margin improvement in Q3, and which also is a reason why Q4 guidance is up is that we are deploying our capital mostly in investing in inventories and related deposits that I mentioned and that's basically driving a lot of gross margin improvement we are able to.
Use more of an auction for Ed given the flexibility we have versus the air freight Ocean video freight costs are hugely different they are like 188 times of the other approximately.
That said.
We have also seen modest improvements in the freight rates coming down there are some marginal price increases as well. So overall if you look at the entire mix of all these factors we saw that in Q3 and substantially in Q4 as the next steps further down.
As we invest more in inventories and to your point.
More tier ones are they increasing the ramp yes, and Thats also contributing and the mix is working in our favor as well and this is exactly what we guided right at the beginning of the beginning of the year. Tim over Q1 was supposed to be weakest anvil are expected to March to the highest gross margin quarter by Q4, and it played out exactly as of yet.
And exactly for the same reasons and we are glad our capital deployment is working effectively to give us those benefits.
Great. Thanks, very much and without addressing the elephant in the room here over the last couple of questions I will ask about your.
Your new tier one win that you mentioned at the analyst day and I just wanted to make sure I have this right I was looking for a footprint update.
In terms of your total subscriber footprint.
That you deferred to this call.
From the $60 million. So hopefully you can provide that.
Or is that tier one.
Yes.
Is that relevant as it is it a virtualized C cap DOCSIS deal or is it a fiber deal or is it both I've kind of heard both here.
During the call are fiber win with an existing tier one customer internationally.
Is that separate and distinct from what you talked about at the analyst day and can I get that updated footprint member.
Yes.
We don't have a I don't have an exact updated footprint number for you. So.
Let me come back and take it in turn so.
We announced in the analyst day, and we repeated here that early that earlier in Q.
Three we secured a new DOCSIS win.
With a new international tier one cable operator.
And indeed that.
I would say.
Yes, I don't know exactly off the top of my head.
Let's say.
A couple of several million dollars.
Homes past Tim so.
It's.
Adding on to I don't think were split we said around 60. So that's.
Let's call it a 5% or so increase to the address to footprint and Thats just in cable.
Full stop.
Second and distinct from that.
New news on this call today.
Is that.
With a.
Previously kind of announced if you will.
At least from a numbers point of view international.
Cable operator, not the one I've just mentioned, but one that we secured business with.
Prior to 2022 that customer has now in addition to rolling out DOCSIS with us.
It has embraced our.
Fiber to the home PON solution.
<unk>.
They're going to begin rolling that out as well in a converged kind of way and they've given us for our first <unk>.
Substantially multimillion dollar order for that fiber business.
Got it thanks, very much and does that does that makes sense does that clarify it makes perfect sense and you kind of hit.
And it added a couple of times, but.
In the past you've talked about kind of assessing where your group of tier ones are.
With regard to moving to a meaningful or full deployment I think now you have 10, maybe it's about half as does that remain the case or have you seen some progress there and that'll that'll be it for me.
Yes.
We've seen that demand.
The path, we are marching on in terms of the gorilla.
This year, we had approximately 60% up year over year, I think all of that and the ramp of <unk> existing tier ones.
And that's playing out as we planned and anticipated.
Okay. Thanks.
Thank you Andrew.
Specific question, Tim had yes, I think that in terms of announced.
It's 10 tier ones globally.
We have one that is right now.
A couple of them.
Also given us a scale of fiber to the home as we penetrated a couple of them not only with the DOCSIS solution, both the fiber solution and to be clear. Our objective over time is to penetrate all of them. Our belief is that over time fiber will become a.
Our weapon or a tool if you will and the portfolio of every cable operator.
They compete and while our ambitions and fiber are not limited to cable operators certainly.
Within the within cable and in particular with the tier ones that have already deploying our <unk> solution. Our objective is to have them.
Embraced our fiber solution as well so we will.
<unk>.
We'll talk about our progress in that dimension as well as winning new accounts outright.
Okay.
And as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone.
One moment for our next question.
Okay.
Our next question comes from the line of George Notter from Jefferies. Your question. Please.
Hey, this is Kyle on for George Thanks, very much for the question.
I was interested that you mentioned investing in inventory.
It makes sense given the revenue growth, but we've also heard that some areas of supply chain are getting modestly better can you tell us how much of this inventory investment is directly related to revenue growth and how much might be still related to protecting yourselves for the supply chain or or could it be the case.
Sure.
Reacting to a better supply chain and that might be an offsetting factor.
Just a little bit more about the moving pieces of inventory. Thanks.
Sure.
The thing I will say that the investment we are making in inventories is purely how we is helping our gross margins purely in sense of how the transport the inventory to US let me be very clear the cost of inventory still remain high.
Costs go up far far away from our suppliers is very hard to see them going down so they do get big into standard costs and costs get elevated and the remainder there what else can be doing to bring it down and that is exactly in our control. That's what we are deploying our capital.
It's primarily the freight benefit which I mentioned.
And other than that yes, we are seeing modest improvements.
In the confluence of things.
Price increases we are also seeing a software and services mix improvement all of these are contributing to it that said going back to the.
Increase in revenue question, Yes, definitely this investment in inventories is giving us an opportunity to address the strong demand. We have the strong backlog, we have and to ship the products on time to the customers.
Okay, great. Thanks, Mike Thanks, very much.
Thank you one moment for our next question.
And our next question is a follow up question.
From Ray <unk> from Needham and company your question. Please.
Alright, thanks for the quick follow up.
You mentioned.
European macro risks, there and obviously had a really great quarter in Q3 here.
How should investors think about the risk in Europe borrowing.
Borrowing at.
All out spreading of the war, but just given the energy crisis, what kind of insights can you share with us about the demand picture in Europe next year. Thanks.
Sure.
Hey, Brian .
We're not economists, let me say that first and foremost.
To date.
Date.
We haven't seen any major deterioration and particularly on the broadband side.
The competition is as intense as it is anywhere else in the world. So we are.
Our current perception is that certainly the broadband part of what we do what we think is going to be relatively.
Immune or.
Our macro headwind resistant.
We think we may be slightly more susceptible on the video side of our business slightly higher percentage of our video business is happens in Europe about 30%.
Europe Middle East and Africa.
Is one consideration in another.
Perhaps slightly more are subject to economic macroeconomic headwinds, although historically, our video business as well has been somewhat resistant to <unk>.
<unk>.
Yeah.
More challenged consumer spending.
So where we are is we have some uncertainty <unk> seen that we've given a wider range on the video business for the fourth quarter, that's really simply a reflection of the uncertainty that we have.
Our current sales pipeline. The recent orders that we saw in Q3, none of that points to any significant challenge.
But we do want to highlight that we see some.
Some potential risk and.
There is something for us to do except for to continue to watch that and.
And.
And execute as aggressively as we can on the opportunities that we do have in France.
Sure that makes great sense. Thanks, Patrick.
Alright, Thank you Ryan.
Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to management for any further remarks.
Okay, well, thank you very much all for joining us today.
We're pleased to report a solid quarter, we're excited about our momentum we appreciate your interest and support.
And we look forward to driving another strong quarter and talking with you. All again soon thanks very much have a good evening.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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