Seeking to play a big role in the emerging market for converged cable access platform (CCAP) gear, Harmonic has snagged its first big MSO equipment order, and it expects to land many more in the next couple of years.
Despite its relatively late start in the market, Patrick Harshman, president and CEO of Harmonic Inc. (Nasdaq: HLIT), laid out this optimistic view of his company's CCAP prospects in its third-quarter earnings call late Monday. He said Harmonic is gearing up to capture significant share of what could be a $2 billion annual market before the end of the decade.
"We're making good progress," Harshman said. "We don't underestimate the challenges" in the CCAP market, but "we're increasingly confident of our ability to be a player and ultimately a category leader."
During the earnings call, Harmonic reported that it had landed its "first multimillion-dollar order" for NSG Pro, a dense, supercharged edge QAM modulator designed to become a full-fledged CCAP device with full cable modem termination system functionality over the next 12-18 months. Harshman said the vendor is conducting "integrated testing with a large North American customer," which he would not name, for commercial deployment of NSG Pro.
One good guess would be that the mystery MSO is Comcast Corp. (Nasdaq: CMCSA, CMCSK), which has been the first one out of the gate with CCAP trials and deployments. Comcast also happens to be Harmonic's biggest customer, accounting for 15 percent of its revenue in the third quarter, versus 11 percent in the second quarter. No other customer produces as much as 10 percent of Harmonic's revenue.
Though vendors such as Arris Group Inc. (Nasdaq: ARRS) and Casa Systems Inc. have already announced CCAP chassis orders from MSOs such as Comcast and Time Warner Cable Inc. (NYSE: TWC), and Cisco Systems Inc. (Nasdaq: CSCO) has already conducted trials with Cox Communications Inc. , Harshman said he's not concerned about entering the market later. He argued that the CCAP market is in the early throes and is still evolving quickly, and that the five major vendors do not have a full-fledged solution available yet.
"There isn't a 100 percent CCAP-compatible product out there," he said in response to analysts' questions. "With real CCAP yet to come, we think we're as well positioned as anyone for the medium to long term."
However, Harmonic officials conceded that its gross profit margins will take a hit on the first CCAP orders shipped to cable customers. CFO Carolyn Aver said the "first batch of units" will generate "much lower margins" as the company gears up production of the devices.
That admission caused Raymond James analyst Simon Leopold to express concern about Harmonic's earnings potential. In a note issued to clients Tuesday, he argued that the gross margin hit "suggests very aggressive pricing" for the initial units. That strategy makes sense, but it indicates that "the competitive landscape for the next generation of cable network equipment will be challenging."
Despite registering slightly better-than-expected results for the third quarter, Harmonic officials fueled that concern further with their financial guidance for the fourth quarter. The company, which produced $122.9 million over the summer months, projects that it will generate $115 million to $125 million of revenue for the fourth quarter, versus analysts' projections of $127 million to $128 million.
In addition to focusing on the developing CCAP market, Harmonic is counting on help from next-generation video compression technology. Harshman said it sees promise in the new High-Efficiency Video Coding (HEVC) standard and for ultra-HD video and some new improvements to the legacy MPEG-2 and MPEG-4 standards. "We're in a number of pretty interesting conversations about work to upgrade MPEG-2 and MPEG-4 before HEVC. There are a lot of MPEG-2 and MPEG-4 boxes out there."
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— Alan Breznick, Cable/Video Practice Leader, Light Reading