Harmonic Inc. (NASDAQ:HLIT) Q4 2023 Earnings Call Transcript
Harmonic Inc. (NASDAQ:HLIT) Q4 2023 Earnings Call Transcript January 29, 2024
Harmonic Inc. beats earnings expectations. Reported EPS is $0.13, expectations were $0.1. Harmonic Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Fourth Quarter and Full Year 2023 Harmonic Earnings Conference Call. My name is Litzi and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Please note that this conference is being recorded. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to David Hanover, Investor Relations. David, you may begin.
David Hanover: Thank you, operator. Hello, everyone, and thank you for joining us today for Harmonic's Fourth Quarter and Full Year 2023 Financial Results Conference Call. With me today are Patrick Harshman, President and Chief Executive Officer, and Walter Jankovic, Chief Financial Officer. Before we begin, I'd like to point out that in addition to the audio portion of the webcast we've also provided slides for the 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.
We refer you to documents Harmonic filed with the SEC including our most recent 10-Q and 10-K reports and the 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 have 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 operation, and some of this information is included in the press release, the remainder of this 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?
Patrick Harshman: Well, thanks, David, and welcome, everyone, to our fourth quarter call. Today, we reported our fourth quarter and full year results wrapping up 2023 with another quarter of solid performance including record total company revenue driven by continuing strong demand for our market-leading broadband and video streaming solutions. Key highlights for the quarter included record broadband revenue demonstrating our Broadband business remains firmly on track for sustained multi-year growth, record Video SaaS revenue, exceeding $50 million for the year, powered by growing sports streaming success, and execution of a new $160 million credit facility, enhancing our financial flexibility. We also delivered strong new bookings during the quarter with a book-to-bill of 1.2 and in 2023 with over $653 million of backlog and deferred revenue and positioning us well for 2024 and the coming years.
Moving now to our Broadband segment, we delivered segment revenue of $115.2 million, up 52% sequentially and 20% year-over-year. The number of global customers deploying our solution reached 108 million, up 19% year-over-year with corresponding 26.3 million DOCSIS cable modems now served worldwide, approximately 15% of cable modems deployed globally, again highlighting the substantial DOCSIS growth opportunity still in front of us. We had several new customer wins during the fourth quarter, including a new Top 10 North American operator for whom we made initial shipments. Our pipeline of new customers remained strong, mostly by the expanding breadth and depth of our competitive advantages. An important area of expanding competitive differentiation for Harmonic is DOCSIS 4.0. Our software core has seamlessly accommodated the new standard as have our Remote PHY edge device designs.
We're successfully powering several early DOCSIS 4.0 deployments launched late in the year and we are uniquely positioned as the go-to-partner for any operator planning a DOCSIS 4.0 launch or skilled deployment in 2024 or 2025. As a reminder, our DOCSIS 4 nodes are fully backward compatible with DOCSIS 3.1. So the availability of DOCSIS 4 RF amplifiers is not a requirement for any operator who chooses to go forward and deploy Harmonics 4.0 capable nodes in 2024. And we expect at least one key customer to make a big move to DOCSIS 4.0 enabled edge devices during 2024 leading to a slower pace of deployment early in the year as 4.0 node deployment expertise scales up followed by a heavier deployment pace in the second half. Another important aspect of our broadband business is that we had greater revenue diversification during the fourth quarter with both Comcast and Charter contributing greater than 10% of our revenue.
While at different places in their respective DAA architecture deployment journeys, we're grateful to be working with both of these industry leaders and are incredibly focused on supporting their respective strategic initiatives. Augmenting our growing multi-year pipeline of DOCSIS opportunities, we also continue to make solid progress during the fourth quarter on building a synergistic fiber-to-the-home business. In the fourth quarter, we secured several new fiber customer wins spanning existing cable and non-cable fiber-first operators. We also announced a couple of compelling new fiber products that significantly expand our addressed market and our ability to compete with incumbent fiber-to-the-home competitors. Early customer response to these new products has been very encouraging.
We're ramping up our fiber specialist sales team and we remain very much on track to make fiber a strong strategic and financial contributor to our business. So in summary on Broadband, our Broadband business continues to be well-positioned with unique and powerful technology advantages, solid customer relationships, strong backlog, and a rich array of new business opportunities that give us confidence in our multi-year growth outlook. We finished 2023 with solid execution and considering our customers' positive feedback, we're confident in our ability to carry the strong execution forward through 2024 and beyond. So turning now to our Video segment. The highlight of the quarter was again SaaS revenue, $13.2 million, up 26% year-over-year. Total segment revenue was $51.9 million, down from $68.3 million a year ago, while gross margin was a record 64.6%.
These results reflect our continued intentional SaaS transformation and some macroeconomic headwinds overseas impacting our Appliance business. As mentioned previously, SaaS revenue for the year topped $50 million, up about 47% year-over-year mainly driven by streaming sports, live sports. During the fourth quarter, we continued to see existing customers expand usage and new customers adopt and begin to launch services with our SaaS solution. This positive momentum has carried into 2024. Earlier this month, our SaaS powered the largest live streaming event ever in the US, a testament to our exceptional technology and service capabilities. The market visibility of this extremely successful event has already translated into additional boost -- an additional boost to our sales -- SaaS sales pipeline.
Our targeted ad monetization is key to the rationale for moving live content, especially live sports to streaming and it's an important adjacent growth opportunity for us. As you may recall, we rolled out a new ad insertion SaaS earlier in 2023 and it was great to see several initial wins with this new service during the fourth quarter. On the Appliance side of the business, which as a reminder is more capital intensive for our customers, we saw revenue stabilize despite several continuing instances of project delays associated with financing and other macroeconomic headwinds, particularly internationally. Our domestic Video Appliance business remained solid as does our overall pipeline and competitive position. Finally regarding Video, our strategic review process is ongoing and continues to be a very high priority for us.
Walter will speak more about this shortly. So, in conclusion, we ended 2023 on a solid note and with a robust backlog. This highlights the continued demand we're seeing from our customers and the strong footing we have for further growth in 2024 and beyond. With that let me turn it over to you, Walter, for a deeper discussion of our results and outlook.
Walter Jankovic: Thanks, Patrick, and thank you all for joining us today. Before I discuss our quarterly results as well as our outlook, I'd like to remind everyone that the financial results I'll be referring to are provided on a non-GAAP basis. As David mentioned earlier, our Q4 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. Our fourth quarter results were consistent with our expectations and above the midpoint of our guidance range on the top as well as the bottom line. Additionally, we exceeded the midpoint of revenue guidance in both Broadband and Video. Before reviewing our Q4 2023 financials in detail, I'll call out the highlights here on slide seven.
For the quarter, we reported revenue of $167.1 million, which was an all-time company record and included record broadband revenue of $115.2 million. We also reported EPS of $0.13, bookings of $196.5 million, a strong book-to-bill of 1.2, and near-record backlog and deferred revenue of $653.2 million. In a few moments I will provide detailed Q1 and full year 2024 guidance, prior to that, I'd like to highlight a few key points regarding our guidance. For our Broadband business, we expect full year 2024 revenue to increase 24% year-over-year at the midpoint of our guidance. Based on the momentum we expect to see in the second half of 2024, we anticipate 2025 Broadband revenue growth to accelerate on a year-over-year basis. As Patrick mentioned earlier, we are well-positioned with our leading technologies, strong backlog, and our customer success to drive continued multi-year growth.
With regards to Video, we are guiding conservatively for FY'24 due to the ongoing strategic review. Turning to slide eight. Total Q4 revenue was up nearly 2% year-over-year and 31.4% on a sequential basis. This quarter-over-quarter increase was due to growth in our Broadband segment. Looking more closely at Broadband, Q4 revenue was a record $115.2 million, an increase of 20% year-over-year. As anticipated, during the fourth quarter, we benefited from the initial shipments of another large Tier 1 customer. In Video, Q4 revenue was $51.9 million, while video appliance sales were lower due to the factors I noted on our last earnings call, Video revenue included SaaS revenue of $13.2 million or 25.4% of segment revenue for the quarter, up 26% from the prior year.
Video SaaS revenue growth continues to be driven by live sports streaming expansions and new customer wins. We continue to focus on growing our SaaS business and Video while maximizing our profitability in appliances despite current macroeconomic headwinds. In our last earnings call, we announced the initiation of a formal strategic review process for our Video business, due in part to indications of interest we had received from a number of parties. We are continuing the strategic review process and it remains a top priority for us. Having said that, as previously noted, node specific timetable has been established for the completion of the review. We are not providing any further details on this process unless and until a definitive agreement has been reached and our Board approves the transaction or decides to conclude the review.
Turning back to our fourth quarter results, we had two customers representing greater than 10% of total revenue during the quarter with Comcast representing 41% of total revenue and Charter representing 15% of total revenue. The total company gross margin was 49.3% for Q4'23 reflecting decreased gross margin in the Broadband business segment sequentially. Broadband gross margin was 42.4% for Q4'23, down 520 basis points year-over-year due to product mix. To offer additional clarity, during Q4, we shipped out an extremely high mix of edge products that possess relatively lower margins compared to other products in our portfolio. Video gross margin was 64.6% in Q4'23, an all-time record for the business segment, even taking into consideration today's macroeconomic headwinds and project delays that we've discussed previously.
This margin improvement occurred across both SaaS and Appliances. Moving down the income statement on slide nine, Q4'23 operating expenses were $63.4 million, up slightly both on a sequential and year-over-year basis. Adjusted EBITDA for Q4'23 was $21.7 million comprised of $21.9 million from Broadband and negative $0.2 million from Video. Adjusted EBITDA for Broadband was in line with our expectations, while Video beat our expectations due in part to the gross margin strength previously discussed. This all translated into Q4'23 EPS of $0.13 per share in line with our prior guidance and compared with $0.00 in Q3'23 and $0.17 per share for Q4'22. We ended the fourth quarter of 2023 with a calculated diluted weighted average share count of 115.7 million compared to 116.7 million in Q3'23 and 117.3 million in Q4'22.
The sequential decrease is primarily due to the decreased convertible debt dilution of 1.1 million shares. Turning to the order book. Q4 bookings were $196.5 million. The book-to-bill ratio was strong at 1.2 for the quarter. For both Q3'23 and Q4'22, our book-to-bill ratios were 0.8. As we stated previously, over time we expect this ratio to normalize and approach the historical benchmark of greater than 1. For Q4, we were above 1 after being below 1 last quarter. Turning to the balance sheet on slide 10, we ended Q4'23 with cash of $84.3 million. The net $2.3 million sequential increase in cash and short-term investments was due to a few factors. Cash from operations provided $6.3 million due predominantly to a decrease in inventory and inventory-related deposits, offset by an increase in accounts receivable.
We also used $2.7 million in the purchase of fixed assets. Turning to accounts receivables and days sales outstanding at the end of Q4'23, DSO was 76 compared to 78 in Q3'23 and 59 in the prior year period. The prior year period was lower due to a large customer taking an early payment discount. Days inventory on hand was 89 days at the end of Q4'23 compared to 145 at the end of Q3'23 and 140 at the end of Q4'22. The inventory decline in the quarter was a result of strong sales in Q4 and lower in feed as we continue to tighten our supply chain. Turning to capital allocation. Our top priority remains driving our future growth. When appropriate, we will strategically invest in building inventory as we've done in the past to meet strong demand.
In line with this strategy, in December we closed a five-year $160 million credit facility that included a $120 million revolving credit line and a $40 million delayed draw term loan. This new credit facility allows us to repay our 2024 convertible notes outstanding while providing us with ample liquidity and flexibility to support our multi-year growth plans. As of today, we have not borrowed on this facility. Tomorrow, Tuesday, January 30th, we will issue a notice to holders to redeem the entire $115.5 million aggregate principal amount of our outstanding 2024 convertible notes. As a result, holders of the convertible notes will have the right to convert their notes to shares of Harmonic common stock under the terms of the indenture. We elected to settle any such conversions by paying cash equal to the principal amount and delivering common stock for any conversion value over par.
We expect to use, our credit facility and cash on hand to fund the cash portion of the redemption and complete the redemption in Q2 of this year. Additionally, with our enhanced liquidity position, we intend to step up our stock buybacks available under our current authorization of $100 million of which $5 million has been used to date. With that in mind, we plan to prudently manage our balance sheet by maintaining overall net leverage of around two times or less and available liquidity of no less than $100 million going forward. In summary, due to the actions we've taken to strengthen our balance sheet, we believe we have sufficient available liquidity to continue funding our growth plans while returning capital to our shareholders through increased stock repurchases.
As we said previously, the timing and amount of any stock repurchases will depend on a variety of factors including the price of Harmonic's common stock, market conditions, corporate needs, and regulatory requirements. At the end of Q4, total backlog and deferred revenue was $653.2 million. Our strong backlog reflects continued demand from our large broadband customers and growing Video SaaS commitments. Just over 50% of our backlog and deferred revenue have customer request dates for shipments of products and for providing services within the next 12 months. Lastly, we generated $3.5 million in free cash flow during the quarter. Before reviewing the guidance, I would like to mention that given the ongoing strategic review process, we have decided to hold off on setting a date for the next Analyst Day.
We expect to revisit this in the future. Let's now review our non-GAAP guidance for the first quarter beginning on slide 11. We expect broadband to deliver revenue between $70 million to $80 million, reflecting a technology transition at one of our largest customers. Gross margins between 46% to 47% due to product mix. Gross profit between $32 million to $38 million and adjusted EBITDA between $4 million to $8 million. For the full year, we expect revenue between $460 million to $500 million. Gross margins between 46.5% to 48.5%, gross profit between $214 million to $243 million, and adjusted EBITDA between $95 million to $119 million. For Broadband, we expect to see a return to top-line growth in the second half of the year and the potential to hit record quarterly revenue during that timeframe.
Today's guidance and wider range also reflects anticipated shifts in the timing of certain project deployments related to customers that are transitioning to new technologies. In 2025, we expect our growth rate to accelerate from 2024 levels as our larger customers ramp up their spend levels in the second half of 2024, which should build greater momentum as we enter 2025. For our Video segment in Q1 on slide 12, we expect revenue in the range of $40 to $50 million, gross margin in the range of 60% to 61%, gross profit in the range of $24 million to $31 million, and adjusted EBITDA to range from negative $8 million to negative $2 million. For the full year, we expect revenue between $195 million to $210 million, gross margins between 60% to 62%, gross profit between $117 million to $130 million, and adjusted EBITDA to range from negative $7 million to positive $2 million.
For Video, we continue to be conservative, reflecting the ongoing strategic review and other macroeconomic factors I mentioned earlier. Turning to slide 13, for the first quarter of 2024, we expect total company revenue in the range of $110 million to $130 million, gross margin in the range of 51.1% to 52.4%, gross profit to range from $56 million to $69 million, adjusted EBITDA to range from negative $4 million to positive $6 million. A weighted average diluted share count of 111.7 million to 115.2 million and EPS to range from a loss of $0.06 to a profit of $0.02. And for the full year, we expect revenue between $655 million to $710 million, gross margins between 50.5% to 52%, gross profit between $331 million to $373 million, adjusted EBITDA between $88 million to $121 million.
A weighted average diluted share count of 114.6 million and EPS to range from $0.49 to $0.72. In summary, we reported solid fourth quarter results including record total company and Broadband segment revenue. We believe our Broadband segment continues to be well-positioned for future growth. In addition, our Video segment continued its strategic transformation and shift to SaaS during the fourth quarter. Thank you everyone for your attention today, and now I will turn it back to Patrick for final remarks before we open up the call for questions.
Patrick Harshman: Thanks, Walter. In summary, as Walter just said, Harmonic delivered another strong quarter, capping a year of solid financial and operational execution despite industry-wide challenges. The company continues to be exceptionally well-positioned for sustained growth and create greater value for our shareholders. We remain focused and confident in our ability to execute, and we appreciate your confidence in us. With that let's now open up the call for some questions.
See also 20 Leading Cities For Startups In The US and 16 Most Undervalued Quality Stocks To Buy According To Hedge Funds.
To continue reading the Q&A session, please click here.
