Harmonic Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 25, 2020; comparisons are with periods ended September 27, 2019. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context
Harmonic supplies video delivery software, products and services, including SaaS offerings, and software-based cable access solutions. It reports Video and Cable Access segments. Appliance and integration revenue is primarily non-recurring; SaaS and service revenue is recurring.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $94.9 | $115.7 | $247.3 | $280.7 |
| Gross profit | $48.9 | $75.5 | $123.4 | $161.3 |
| Gross margin | 51.6% | 65.3% | 49.9% | 57.5% |
| Operating income (loss) | $(1.6) | $22.5 | $(29.2) | $6.4 |
| Net income (loss) | $(5.4) | $11.7 | $(42.7) | $(11.5) |
| Diluted EPS | $(0.06) | $0.12 | $(0.44) | $(0.13) |
- Q3 revenue fell 18%; nine-month revenue fell 12%. Appliance and integration revenue was $63.3 million in Q3 and $153.2 million year to date; SaaS and service revenue was $31.6 million and $94.1 million, respectively.
- Video revenue declined 9% in Q3 and 21% year to date. Cable Access revenue declined 28% in Q3 but increased 11% year to date. The prior-year Q3 included $37.5 million of Comcast CableOS software-license revenue, affecting comparisons.
- Q3 net loss included $0.8 million of income tax provision and $2.8 million of net interest expense. Nine-month results included a $0.8 million loss on debt extinguishment.
- Operating cash flow was $(2.4) million for the first nine months, versus $1.1 million generated a year earlier. Investing cash flow was $(26.2) million, largely reflecting property and equipment purchases, including the new headquarters. Cash declined $22.2 million to $70.8 million.
Balance sheet, debt and liquidity
- At September 25, cash and cash equivalents were $70.8 million, current assets $214.0 million and current liabilities $145.8 million. Total liabilities were $324.9 million; stockholders’ equity was $234.5 million.
- Convertible-note principal totaled approximately $161.3 million: $8.1 million of 4.00% notes due December 1, 2020; $37.7 million of 4.375% notes due December 1, 2022; and $115.5 million of 2.00% notes due September 1, 2024. Other debt and finance lease obligations totaled $21.1 million.
- The 2020 notes were convertible as of quarter-end. In June, Harmonic exchanged $37.7 million principal of the 2020 notes for an equal principal amount of 2022 notes; the exchange generated a $0.8 million extinguishment loss.
- The $25 million secured revolving facility had no borrowings at quarter-end. On October 30, 2020, its maturity was extended to October 30, 2022, with revised interest rates. Harmonic reported compliance with its credit-facility covenants at September 25.
- Management stated that available liquidity was expected to fund planned needs for at least 12 months, while noting that additional financing could be needed and might be difficult or costly to obtain.
Management commentary, outlook and key risks
- Management said Q3 sales activity, transactions and deployments improved in both segments as restrictions eased and customers adapted, but expects COVID-19 to continue to materially affect results. It could not reasonably estimate the full future impact.
- Video demand was affected by delayed projects and lower appliance demand, as well as the ongoing transition toward SaaS. Management described CableOS deployments and customer engagement as progressing, but cautioned that customer spending delays could slow progress near term.
- Revenue concentration remains significant: the top 10 customers generated 54% of Q3 and 47% of nine-month revenue. Comcast contributed 20% and 19%, respectively; Vodafone contributed 12% and 10%.
- Comcast’s CableOS agreement had $85.5 million allocated to remaining performance obligations, expected to be recognized over the next 11 quarters. Actual deployment pace and customer investment decisions remain important uncertainties.
- Other exposures include approximately $50.9 million of non-cancelable inventory and other purchase commitments; reliance on limited suppliers and contract manufacturers; competition and pricing pressure; foreign-exchange and international operating risks; and potential debt repayment or conversion cash needs.
- The company disclosed an OFAC administrative subpoena seeking information about historical Iran-related transactions involving an acquired business; Harmonic said it was cooperating and did not anticipate a material impact, but noted potential penalties and other adverse consequences. It also disclosed ordinary-course litigation for which loss amounts could not be reasonably estimated.
- No numerical revenue or earnings guidance was provided in the supplied filing text. Management noted that interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Track whether COVID-related customer delays persist and whether Video appliance demand and SaaS growth recover.
- Assess CableOS deployment timing, Comcast’s license-related revenue recognition and customer concentration.
- Monitor cash burn, capital spending, purchase commitments and liquidity against the December 2020 note maturity and covenant requirements.
- Review future disclosures on debt repayment or conversion, the extended revolving facility and any financing needs.
- Follow developments in the OFAC inquiry, litigation and other contingencies, and evaluate potential effects on cash flow or operations.