This company is set to explore new markets as cutting-edge technology continues to evolve, says Paul McWilliams of Next Inning Technology Research.
I recently spoke at great length with Harmonic (HLIT) CEO Patrick Harshman. He has been and continues to be a very straight shooter who cares about and respects HLIT stockholders.
As I wrote when HLIT announced it would sell its access division, I'm happy with that decision, and realize it will take a quarter or so to make all the necessary adjustments to the operating model.
The sale was completed during the first quarter, and I think the transition and the process will weigh on operating results to at least some degree during the first half.
However, with the ability now to extract access data from what HLIT historically reported as "edge and access," I can now more clearly see the weakness in edge sales that occurred in Q4 2012. And while there was a very nice sequential rebound, the weakness was still apparent in Q1 2013.
Patrick and I spoke about this very candidly, and Patrick volunteered his view that since Cisco Systems (CSCO) has released its own edge product that supports its modular Cable Modem Termination System (CMTS), HLIT has lost share in applications that have not also required the switched digital video (SDV) and/or Video on Demand (VoD) capabilities that the HLIT universal edge QAM supports. Systems requiring those features are still going mostly (if not almost exclusively) to HLIT.
HLIT also does very well in supporting edge and modular CMTS at the edge in Ericsson (ERIC) installations. However, at the bottom line, CSCO has absorbed some share that was formally HLIT's.
The other factor that has recently impacted aggregate edge demand—particularly in mature markets—is the anticipation by customers of moving to a Converged Cable Access Platform (CCAP). In a CCAP architecture, the edge QAM and complete CMTS functions are combined. As a result, the service providers save money and have the ability/flexibility to expand service capabilities.
I think the aggregate demand flow will continue to be more uneven than usual, and the normal air pocket that is caused by some service providers waiting for CCAP will extend into the second half. This will make year-over-year comparisons challenging through Q3, since there was a fairly robust demand cycle that began in mid-2011.
Going forward, we will start to see more serious trials and some initial deployments of CCAP during Q2 2013. But I think it will take another quarter or two before it moves the revenue needle to any meaningful degree.
The transition to CCAP architecture is good for HLIT. HLIT has historically been the market share leader in edge QAM, and even with the expansion of CSCO's capabilities, HLIT still leads the market.
The transition to CCAP opens a new market opportunity for HLIT that is several times larger than the aggregate edge QAM market. And given HLIT's positioning and CCAP design approach, I think it will be a material net positive by the first half of 2014.
While first-half results will be below my expectations, my thesis for HLIT has been a second-half story driven in part by the beginning of the ramp in demand for CCAP and High Efficiency Video Coding (HEVC). While there are clearly execution risks attached to both of these drivers, the thesis remains intact, and with it, my second half target range of $7.50 to $8.50.
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