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Harmonic CEO: We Want to Be No. 1 in Cable Virtualization, DAA

Jeff Baumgartner
4/29/2019

Harmonic CEO Patrick Harshman said his company is ready to attack a cable access market that has long been dominated by Arris, Cisco Systems and Casa Systems.

Harmonic hopes to tilt the competitive landscape in its favor as cable operators in North America and in Europe get ready to move ahead with access network virtualization activities and gear up to deploy a distributed access architecture (DAA) that pushes fiber deeper into the network in order to bulk up on capacity and decentralize their network power and space requirements.

"Our ambition, over the next several years, is to be number one in this space -- I'll be clear about it," Patrick Harshman, Harmonic's president and CEO, said Monday on the company's Q1 2019 earnings call. "In our view, the company that is number one in virtualized [networks] and DAA is going to be number one in this market."

Harshman's confidence comes as Harmonic expects to see deployments of its DAA-focused fiber nodes and CableOS -- Harmonic's software-powered, virtual converged cable access platform (CCAP) designed to run on off-the-shelf servers -- begin to ramp up significantly with tier 1 customers starting in Q2 and throughout the rest of 2019.

He said four of the top eight North American and European cable operators are in commercial trials with CableOS. Overall, Harmonic has 32 commercial deployments and field trials of CableOS underway, with more than 670,000 cable modems now connected to that new, virtualized platform. While that number of modems represents a mere drop in the bucket with respect to the size of the overall broadband market, it still represents a 24% increase for Harmonic from the prior quarter.

Among those Tier 1 cable operators, one is on the cusp of moving ahead with volume deployments in Q2, and the other three are expected to follow by Q3, Harshman said.

Harmonic hasn't identified all of them, but Comcast, which is aggressively pursuing a distribute access architecture, is among the known major MSOs working with Harmonic on a virtualized CCAP initiative.

Harshman declined to give a lot of detail on the status of the Comcast agreement and subsequent rollout, but said the relationship is "extremely important to our company… It is a top priority of our business [and], in general, of our CableOS initiative."

But he was also clear that Harmonic's momentum in this area is coming from a variety of cable operators, including small- and mid-sized MSOs. Some operators in that group aren't deploying DAA at all, but are instead ripping and replacing legacy DOCSIS 3.0 products with new, virtualized DOCSIS 3.1 platforms powered by CableOS. "That's turning out to be an interesting market on its own," Harshman said

That expected ramp-up of DAA and CableOS activity has enabled Harmonic to reiterate its full year 2019 guidance -- total revenues of $385 million to $430 million, with $100 million to $130 million from its cable access segment.

Operational hiccups along the way
But that road has been bumpy, as Harshman acknowledged that getting CableOS fully qualified and deployed in DAA environments has taken longer than originally anticipated given the higher degree of product integrations. Rather than involving just the cable modem termination system component, DAA deployments also must work with a lot of other external networking equipment, address both legacy and new IP-delivered services and with old and new set-top boxes.

"The pie has gotten larger but also more complex," Harshman said, noting that this additional complexity has manifested itself in a longer deployment cycle.

And whether Harmonic can leap ahead of other vendors such as Arris (now part of CommScope), Casa or Cisco in any area involving the cable access network will also depend on how they are reacting to this shift in the market.

Though all three vendors have talked up plans centering on cable access network virtualization, Harshman believes that Harmonic has a head start in part because its video product line has already shifted from purpose-built hardware to software-based, cloud-native systems.

"We have not heard of anything else even being demoed in the lab successfully [and] competitively," he said. "It's hard to imagine that there is a serious threat in the near-term competitively around the cloud-native or virtualized aspect of this. It doesn't mean we're overconfident… but it's not something we see as a realistic risk in the near-term."

Video biz pivots to SaaS
On the video side, Harmonic is seeing some momentum with a new software-as-a-service model that represents a pivot from its broadcast appliance business, as existing partners and some new customers partner up to streaming video on public or hybrid public/private clouds.

Harmonic has been working with Amazon Web Services for its SaaS efforts, but recently did a deal with Microsoft Azure, with Akamai on board as the content delivery network partner. Harmonic's SaaS customer base grew 32% since the previous quarter, from 19 to 25, and about 6.5 million consumers were being serviced by that product at the end of Q1 2019, up 70% year-over-year.

While the rest of 2019 looks promising for Harmonic, the company didn't enjoy a banner Q1. Total revenues of $80.1 million were down 11.2% year-on-year, with cable revenue down 29%, and video revenue down 6.4%.

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— Jeff Baumgartner, Senior Editor, Light Reading

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Jeff Baumgartner
Jeff Baumgartner
4/30/2019 | 1:25:26 PM
A less bullish, more cautious view
At least one analyst doesn't share quite the same level of enthusiasm as Harmonic does regarding CableOS momentum. George Notter, analyst with Jefferies, has a more cautious, less bullish view.

"While we like the customer progress they're making with CableOS, it's not a given that their efforts will translate into meaningful commercial deployments at larger MSOs" Notter explained in a research note.

He said it's hard to tell the difference between "significant trial-sized deployments – which can drive significant incremental revenue for a company the size of Harmonic – versus broad-scale, network-wide footprint deployments."

Notter suspects that Harmonic does not yet have any network-wide deployment commitments from Tier 1s, and that scalability and network integration might continue to be "sticking points" for customers.

And he notes that Harmonic starting shipping CableOS in late 2016, so Notter's still in "show-me" mode on that product.

He continues to have a "hold" rating on Harmonic shares. JB
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