Story Stocks^®

Harmonic (HLIT -13%), a supplier of virtualized cable access and video delivery systems, is trading sharply lower following its Q4 report last night. It reported nice upside for Q4, including 33% yr/yr revenue growth to a record $222.2 mln, which was better than expected. The main problem was some pretty significant downside guidance for both Q1 and FY25. Harmonic also announced a new $200 mln share repurchase program, but that does not seem to be having too much impact.

• Most of Harmonic's growth comes from its Broadband segment and that was the case again in Q4. Broadband segment revs jumped 48% yr/yr to $171 mln, while its Video segment posted a 2% decline to $51.1 mln. Both Broadband and Video revenue exceeded internal expectations. The cable industry is transitioning to Unified DOCSIS 4.0, which offers a major upgrade in speed boost that puts cable on par with Fiber operators.
• Harmonic said its 2025 guidance reflected shifts in customer deployment timing as operators transition to Unified DOCSIS 4.0. These trends are industry-wide and Harmonic believes they are short-term in nature. The company expects to resume above market growth in 2026 as adoption of DOCSIS 4.0 accelerates and cable capital spending returns to its long-term growth trajectory.
• Harmonic is navigating the industry-wide transition to unify DOCSIS 4.0 as best it can. While this change is expected to result in a below trend year for Broadband revenue in 2025, Harmonic says its technology leadership position in Unified DOCSIS 4.0 remains clear. Also, despite short-term headwinds in Broadband during 2025, the company still expects to continue to generate strong cash flow.
• Bigger picture, the company believes the broadband industry is at a pivotal turning point. Service providers are facing increasing competition from telco and fixed wireless access providers. To stay ahead, operators must modernize their networks with DAA and virtualized CMTS. These technologies improve network reliability, enhance speeds, lower operating costs etc. Competition is not the only driver as cable operators must also contend with higher demands for bandwidth from subscribers given the surge in live sports streaming, major gaming releases etc.

Overall, it is clear that investors were surprised to see such a shortfall in guidance for 2025. The reasoning makes sense given shifts in customer deployment timing to Unified DOCSIS 4.0. However, a knock on Harmonic is its high customer concentration (Comcast 43% of Q4 revs, Charter at 24%). As such, we have to assume one or both of these made a change in its deployment timing and it is having a huge impact on HLIT's outlook. This is a good illustration of concentration risk. Finally, the silver lining was that HLIT was notably more bullish on the long term, with growth expected to resume in 2026. However, that is down the road and 2025 will be rough in the meantime.