Shares in Casa Systems fell 7% Tuesday after an analyst downgraded the stock over concerns that a flurry of network virtualization activity involving a rival vendor will threaten Casa's core cable business.
Raymond James analyst Simon Leopold downgraded its rating on Casa to "Underperform" from "Market Perform" as Harmonic continues to gain traction with CableOS, its virtual converged cable access platform (CCAP), as well as nodes and other network equipment that support the cable industry's drive toward a distributed access architecture (DAA).
In addition to a big enterprise licensing agreement with Comcast, Harmonic has made progress worldwide, announcing this week that it had locked down a new five-year international contract for DAA deployments that will be worth more than $55 million. That deal is on top of another agreement worth more than $50 million with another unnamed international service provider that is on track to start volume deployments in the current quarter.
Harmonic has not named those international partners, but Leopold believes that one of them is Liberty Global, one of Casa's biggest customers.
"Liberty has a complex structure, with semi-autonomous operations in various countries, so gauging the threat to Casa of Liberty's adoption of Harmonic's virtual CCAP is hard to quantify," Leopold wrote in an emailed research note. However, "we think it erodes Casa's core cable trends."
Leopold's concern about Casa also extends to Charter Communications, the vendor's largest customer. Charter's capital spending is in a free fall -- Q2 2019 capex totaled $1.6 billion, down from $2.4 billion in the year-ago quarter. Charter said the drop was primarily driven by the completion of DOCSIS 3.1 network upgrades along with reduced spending on customer premises equipment.
"We think Charter has a focus on FCF [free cash flow], and will sweat assets for a while," Leopold wrote. "Ultimately, we expect it resumes investment in capacity, and we think it most likely embraces an upgrade strategy consistent with Casa's product strategy, but this may not occur for multiple quarters."
While Casa's core cable business struggles amid the virtualization threat and as cable operators pause some spending while they mull their next-gen access network strategies, Leopold said Casa's recent $115 million acquisition of NetComm Wireless could help the vendor diversify its business.
NetComm, a fixed wireless vendor, has contracts with some big names, including AT&T, Bell Canada and Australia's NBN Co. Ltd. It pulled down about $140 million in revenues in 2018, and Leopold expects NetComm's revenue contribution to rise to about $200 million by 2020.
"Initially we questioned the deal, and now we see it as its [Casa's] best hope," Leopold wrote.
Casa is scheduled to announce its Q2 results Wednesday afternoon.
- Casa systems completes NetComm acquisition
- Casa Systems seeks wireless gains amid wireline pains
- Casa Systems buys AT&T's fixed wireless equipment supplier for $115M
- Harmonic sheds more light on big 'CableOS' deal with Comcast
- Casa Systems Sees Bottom Fall Out in Q1
— Jeff Baumgartner, Senior Editor, Light Reading