Harmonic Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended April 2, 2021, compared with the three months ended March 27, 2020. Harmonic provides video delivery products, software and services, including SaaS, and software-based cable access solutions. Its reportable segments are Video and Cable Access.
Financial performance
| Metric | Q1 2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $111.6 million | $78.4 million | +42% |
| Gross profit | $55.1 million | $36.7 million | +50% |
| Gross margin | 49% | 47% | +2 percentage points |
| Operating loss | $3.8 million | $18.0 million | Loss narrowed |
| Net loss | $6.1 million | $22.0 million | Loss narrowed |
| Diluted loss per share | $0.06 | $0.23 | Improved |
| Cash from operations | $1.7 million | $(11.0) million | Improved |
- Revenue mix: Appliance and integration revenue rose 67% to $80.0 million; SaaS and service revenue increased 3% to $31.6 million. Appliance and integration represented 72% of revenue, up from 61%.
- Segments: Video revenue grew 29% to $70.3 million, with segment operating income of $3.8 million versus a $6.3 million loss. Cable Access revenue grew 72% to $41.2 million, with segment operating income of $1.3 million versus a $3.3 million loss. Segment results are before corporate costs and specified unallocated items; consolidated operations remained loss-making.
- Expenses and other items: R&D increased 6% to $23.5 million; SG&A increased 12% to $34.9 million. Restructuring charges fell to $0.04 million from $0.68 million. Net interest expense was $2.6 million; other income was $1.0 million, mainly reflecting foreign-exchange gains.
- Cash flow and capital spending: Investing cash outflow was $3.6 million, including $3.6 million of property and equipment purchases. Financing provided $4.7 million, mainly from employee stock issuances. Cash increased $2.1 million to $100.8 million.
Financial position and debt
- At April 2, 2021, current assets were $260.7 million and current liabilities were $192.6 million, implying working capital of approximately $68.1 million. Accounts receivable was $85.7 million; deferred revenue on the balance sheet was $63.9 million.
- Convertible notes had $153.2 million of principal outstanding: $37.7 million due in 2022 and $115.5 million due in 2024. Their combined balance-sheet carrying amount was approximately $131.0 million, excluding the separately presented $1.6 million mezzanine-equity amount.
- The 2022 Notes became convertible under their terms at quarter-end after the stock-price test was met. Their $36.1 million carrying amount was classified as current, and the company reclassified $1.6 million of unamortized discount to mezzanine equity. Conversion or repayment may require cash, depending on the company’s election and note terms.
- Other debt was approximately $20.8 million on the balance sheet. The company also reported a $25 million revolving credit facility; the filing does not state that it had been drawn at quarter-end.
- Management said existing liquidity was expected to fund principal cash needs for at least the next 12 months. Contractual obligations totaled $295.3 million, including $68.1 million of purchase commitments and $11.4 million of interest on convertible debt.
Changes, outlook and risks
- Management attributed the revenue rebound partly to COVID-19 disruption in the prior-year quarter, when customer transactions, shipments and deployments were delayed. It also cited higher Video demand, increased penetration of existing CableOS customers and new deployments. SaaS and service revenue was comparatively steady.
- Management reported improving sales activity and deployments in the second half of 2020 and Q1 2021 as restrictions eased and customers adapted, but said pandemic effects remained uncertain. Supply-chain constraints and pricing or availability of materials and components remained concerns.
- No specific revenue or earnings guidance was provided. Management’s strategy emphasizes cloud and SaaS video workflows and continued development and deployment of CableOS software-based cable access solutions.
- Customer concentration increased: the top 10 customers accounted for approximately 61% of quarterly revenue versus 48% a year earlier. Comcast represented 23% of revenue; SES represented 16%.
- Key risks include dependence on customer capital spending and large transactions; COVID-19 and supply-chain effects; competition and technology transitions; execution and adoption of CableOS and SaaS offerings; reliance on limited-source components, contract manufacturers and channel partners; and foreign-exchange exposure.
- The company disclosed an OFAC administrative subpoena seeking information about Iran-related transactions by Thomson Video Networks before its 2016 acquisition. Harmonic said it was cooperating and did not anticipate a material impact, while noting potential penalties and reputational risks. Routine legal matters were disclosed, but the company said it could not reasonably estimate possible losses; no indemnification amounts were accrued.
- Disclosure controls were assessed as effective at a reasonable assurance level, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track whether appliance and integration growth persists and how recurring SaaS and service revenue develops.
- Assess whether CableOS deployments translate into sustained revenue and segment profitability, and monitor customer concentration and Comcast deployment pace.
- Review liquidity and cash needs in light of the 2022 Notes’ current classification, possible cash conversion or repayment, and the 2024 Notes’ maturity.
- Monitor component supply, contract manufacturer capacity, purchase commitments and any continuing COVID-19 impacts.
- Follow developments in the OFAC inquiry and other legal, intellectual-property and regulatory matters.