HARMONIC INC. Q3 FY2026 earnings call

• Strategic Growth Engines: Management outlined three core growth engines: Connectivity ($5.4B TAM), Intelligence, and Edge AI Compute. The strategy focuses on extending DOCSIS leadership, expanding fiber into telco markets, and leveraging the COS platform.
• Product Launches & Adoption: Sensei, an open intelligence fabric, launched after strong trials; Beacon is now live at 25 operators. Oyster Plus and Perl One XL are shipping in volume. Recon, developed with Comcast, provides real-time fiber monitoring.
• Customer Acquisition: Added nine new customers across seven countries, including regional Tier 1 operators like Liberty Latin America, TDC (Denmark), and a major operator in Belgium. Deployed COS footprint now serves 167 customers and ~53 million CPE devices.
• Operational Efficiency: Sensei delivered immediate value by pinpointing field issues rapidly. Integration of COS Loop data into Sensei is underway with proof-of-concept launches.
• Supply Chain Management: Secured memory supply through aggressive front-running purchases, benefiting margins in H1 2026 despite rising costs.

Total revenue for the third quarter of 2026 reached $148.8 million, representing a 64% year-over-year increase and significantly exceeding the high end of guidance. Gross margin was recorded at 52.1%. The 'Rest of Market' segment, defined as all revenue excluding the two largest customers by subscriber count, demonstrated exceptional growth with a 101% year-over-year increase and a 39% sequential rise. This segment accounted for 46% of total revenue in Q3, up from previous quarters, and represented over 60% of new bookings. The top two customers collectively contributed 54% of total revenue (37% and 16% respectively).

• Full Year 2026 Revenue: Raised to $545–$555 million (previously $505–$525 million), reflecting a midpoint increase of approximately 6.8%.
• Full Year 2026 Gross Margin: Raised to 52.1%–52.4% (previously 51%–52%).
• Full Year 2026 Operating Profit: Raised to $118–$124 million.
• Full Year 2026 EPS: Raised to $0.80–$0.84 (previously lower midpoint).
• Q4 2026 Revenue: Expected between $141–$151 million.
• Q4 2026 Gross Margin: Expected between 51%–52%, impacted by elevated memory costs.
• Q4 2026 Operating Profit: Expected between $28–$34 million.
• Q4 2026 EPS: Expected between $0.19–$0.23.
• Cost Factors: Guidance includes ~$3M in net increased memory costs not passed to customers in Q4. Other component costs (silicon, PCBs) expected to rise in 2027, with plans to pass increases to customers where appropriate.

• Component Supply Costs: Memory costs remain elevated and are expected to persist into 2027. Additional cost pressures from silicon and PCBs are anticipated.
• Market Competition: Hyper-competitive broadband market requiring operators to balance quality of experience with operating cost control.
• Satellite Broadband: While currently limited to rural areas, satellite competition may sharpen customer focus on network efficiency, though it does not currently alter investment priorities.
• Geopolitical Factors: External factors such as the situation in the Middle East may impact business operations or supply chains.
• Stranded Costs: Approximately $7.6M in stranded costs from the video business sale are included in full-year guidance, though ~30% are expected to be eliminated by Q2 2027.

Q: Analyst asked about the competitive threat from satellite broadband and whether it changes customer investment priorities. / A: CEO stated that while satellite broadband is active in rural areas, it does not fundamentally change customer priorities. Customers remain focused on delivering the best quality of experience at the lowest possible cost within their operating envelope. The presence of satellite simply sharpens the focus on network competitiveness rather than altering strategic direction.

Q: Analyst asked how management achieved resilient gross margins given rising memory costs and what drives the Q4 guidance outlook. / A: CFO explained that early front-running of memory purchases benefited H1 margins. Current elevated memory costs (~$3M impact in Q4) reflect market prices. Margins in Q3 and Q4 are similar, and future cost increases in other components (silicon, PCBs) will likely be passed to customers. The guidance reflects prudent management of these external cost factors.

Q: Analyst asked which specific components are seeing price increases and the extent to which pricing will be raised. / A: CFO identified key silicon, PCBs, and other general components as facing price increases throughout 2027. Management intends to raise prices accordingly to mitigate these cost pressures, ensuring margins are protected by passing increases to customers where appropriate.

Q: Analyst asked about the strategy regarding further memory purchases given current inventory levels. / A: CFO clarified that the strategy is to stay ahead of demand by securing supply many quarters in advance. Despite having inventory well into 2027, continued purchasing ensures fulfillment capability for growing Rest of Market demand and has historically saved money by locking in prices before commodity spikes.