Vendor market share in the cable access network won't flip overnight, but recent stock assignments to two key vendors in that sector -- Arris and Harmonic -- signal that the balance of power is starting to tilt in Harmonic's favor.
Raymond James late last week upgraded Harmonic to "Outperform," based in large part on the momentum it's riding with its virtual Converged Cable Access Platform and its tightened ties to Comcast. At the same time, the analyst firm handed a downgrade to CommScope, to "Outperform" from "Strong Buy," based largely on the rough start to 2019 at recently acquired Arris.
Wall Street seemed to take heed, as Harmonic shares shot up almost 9% last Friday (June 14) when the upgrade was announced, while CommScope shares dipped 3% that same day.
In a research note, Raymond James analyst Simon Leopold said Harmonic's big bet on developing and deploying a vCCAP product, called CableOS, is poised to pay off as the cable network transitions toward a software-based model. Notably, Harmonic has a warrants deal with Comcast based in part on CableOS adoption. According to industry sources, Comcast is also pursuing a path to license its variant of CableOS developed with Harmonic to other cable operators under a syndication model similar to what Comcast has created for its X1 video platform.
To amplify Harmonic's confidence in this area, company President and CEO Patrick Harshman declared in April: "Our ambition, over the next several years, is to be number one in this space -- I'll be clear about it."
Leopold's 2019 sales estimate for Harmonic rises to $403 million, up from $386 million, with $476 million in sales expected for 2020, and climbing to $517 million in 2021. The analyst has also set a price target of $6.75 a share. Harmonic shares were trading at $5.72 in Wednesday morning action.
The analyst also gives Harmonic credit for a "reinvention" and its pivot from its legacy cable access business, centered on edge QAM products, to a virtual CCAP (with a focus on software and the emerging remote PHY infrastructure), moves made as the company "stood to become irrelevant."
Reinvention is certainly one view on the matter. Multiple industry sources familiar with Harmonic's transition noted that the vendor has bet its future, particularly in the area of the cable access network, on success with Comcast.
"Harmonic sold its soul to Comcast," an exec with a competing vendor said.
But that's clearly a simplistic view, as Harmonic has made some progress with CableOS with many other operators around the world, citing dozens of deployments and trials. Harmonic had some 670,000 cable modems connected to the new platform by the end of Q1 2019. That's a small number of modems in the grand scheme, but still represented a 24% jump from the prior quarter.
Leopold, meanwhile, said he believes that Harmonic has also scored a deal with Liberty Global for a deployment in Europe as part of the 32 deployments and trials for its virtual CCAP shared by Harmonic in April.
"With key reference accounts secured and a lead over legacy platform competitors, Harmonic seems poised for success," the analyst wrote. "During our recent Silicon Valley visit [with Harmonic], we discussed the scenario of holding a third of the virtual CCAP market by 2023 (~$500M); we consider this a stretch, but not inconceivable."
Leopold also outlined some potential future paths for Harmonic. Under the bear case, operators are using the vendor as a "stalking horse" to encourage other vendors to accelerate their vCCAP efforts.
He's not counting on Harmonic being acquired, but sees Cisco Systems as the most likely suitor, with Nokia as a secondary possibility, if that path were taken. Even at an enterprise value of nearly $500 million, it would be a "small deal" for Cisco or Nokia, Leopold stressed.
Arris performance not up to par
Leopold has a different view on CommScope, which wrapped up its acquisition of Arris back in April.
He downgraded CommScope to "Outperform" from "Strong Buy" due to expectations that the Arris business is poised to perform worse than once expected.
"The 1Q19 ARRIS results were poor and can be explained; however, the prospects for recovery from the CCAP portion of ARRIS have dimmed because we believe operators will transition to virtualized architectures to the detriment of incumbent leader ARRIS," he wrote.
While Arris does support virtualization via its flagship E6000 platform and is expected to release a fully virtualized product, the vendor "has been slow to embrace the transition," he said. "Although ARRIS will participate, we expect it faces price compression and share loss."
Arris has some serious turf to protect, as Leopold notes that the vendor currently has more than 50% of the CCAP market. Another issue on the horizon: operators may deploy remote PHY nodes from a wide range of vendors, causing some incumbents, like Arris, to lose some of their grip on that section of the cable access network market.
"ARRIS' position has deteriorated, but it remains a critical supplier to cable uppers that must invest to evolve networks," Leopold concluded.
Still, all cable network and CPE vendors are in for a rocky 2019. Leopold expects US cable capex to decline nearly 11% this year. The good news is that he expects Q1 to be the low-water mark, as US cable capex plummeted 22% versus the prior year period, and sees spending patterns improving further out into 2019.
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- Cable Access Network Spending Falls 38% in Q1
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- Harmonic Nets NCTC Hunting License for 'CableOS'
- Casa Systems Sees Bottom Fall Out in Q1
- Subdued Cable Spending Hits Arris
- CommScope Wraps $7.4B Deal for Arris
— Jeff Baumgartner, Senior Editor, Light Reading