Harmonic Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; the filing also reports unaudited quarterly results. Harmonic provides video processing, production and delivery solutions and software-based cable access systems, primarily to communications, broadcast and media customers.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $402.9 million | $403.6 million | Down 0.2% |
| Gross profit / margin | $223.0 million / 55.4% | $209.2 million / 51.8% | Margin up 3.6 percentage points |
| Operating income (loss) | $13.1 million | ($5.0 million) | Improved |
| Net loss | ($5.9 million) | ($21.0 million) | Loss narrowed |
| Net loss per share | ($0.07) | ($0.25) | Improved |
| Cash from operations | $31.3 million | $12.3 million | Up $19.0 million |
| Cash and cash equivalents | $93.1 million | $66.0 million | Up $27.1 million |
| Working capital | $59.5 million | $60.3 million | Down $0.8 million |
FY2019 operating cash flow exceeded net income, while investing activities used $10.3 million, mainly for property and equipment. Financing activities provided $6.3 million. Gross-margin improvement reflected a higher software mix. Research and development expense was $84.6 million, or 21.0% of revenue, versus $89.2 million, or 22.1%, in FY2018.
Revenue mix and segment trends
- Revenue categories: Appliance and integration revenue was $275.8 million, down from $287.6 million. SaaS and service revenue rose to $127.1 million from $116.0 million. The company changed category presentation in 2019 and retrospectively reclassified prior periods.
- Video: Revenue fell 11% to $278.0 million; segment operating income declined to $15.8 million from $26.2 million. Management attributed the revenue decline primarily to a shift from appliance sales toward software and SaaS offerings.
- Cable Access: Revenue increased 37% to approximately $124.9 million, and segment operating income rose to $22.2 million from a loss of $1.8 million. Growth reflected additional CableOS deployments and Comcast software-license revenue.
- Customer concentration: Comcast represented 23% of FY2019 revenue, compared with 15% in FY2018. The ten largest customers accounted for 49% of revenue, up from 37%.
- Q4 FY2019: Revenue was $122.2 million, gross profit $61.7 million (50.5% margin), and net income $5.6 million, or $0.06 per diluted share. FY2019 quarterly results were uneven; Q3 included $37.5 million of Comcast CableOS software-license revenue and a 65.3% gross margin.
Debt, liquidity and material transactions
- At year-end, principal debt included $45.8 million of 4.00% convertible notes due December 2020, $115.5 million of 2.00% convertible notes due September 2024, and $17.2 million of other debt, primarily French government-agency financing. The 2020 Notes became convertible under their terms at December 31, 2019 and were classified as short-term; the filing says the company intended to settle note principal in cash.
- Harmonic issued the 2024 Notes in September and used approximately $109.6 million of proceeds to repurchase $82.5 million principal of the 2020 Notes. The repurchase produced a $5.7 million debt-extinguishment loss.
- A new secured revolving facility provides up to $25 million, subject to a borrowing base, and matures October 31, 2020. There were no borrowings at year-end; $0.3 million of letters of credit were outstanding. The company reported compliance with facility covenants and expected available liquidity to cover at least the next 12 months.
- Comcast elected enterprise pricing for CableOS, committing to $175 million in license fees over four years, subject to potential incentive credits; it paid an initial $50 million in 2019. Remaining transaction price allocated to performance obligations was $102.5 million at year-end, to be recognized over the following three to four years.
- The Comcast warrant became fully vested in connection with the license election. Comcast net-exercised it in December, resulting in issuance of 3.2 million shares in total, with some shares delivered in January 2020. Warrant amortization reduced FY2019 revenue by $13.6 million.
- Contractual obligations totaled $306.0 million, including convertible debt, leases, purchase commitments, French debt and a remaining $2.0 million Avid settlement payment. The company had $62.3 million in non-cancelable inventory and other purchase commitments.
Outlook, risks and unusual items
- Management emphasized continued transition toward software-centric video products and recurring SaaS revenue, alongside expansion of CableOS. It noted customer caution around new video technologies and that CableOS remained in early field trials and deployments; the filing provides no quantified FY2020 revenue or earnings guidance.
- Key risks include dependence on customer capital spending and large transactions; rising customer concentration and Comcast exposure; long CableOS evaluation and deployment cycles; intense competition and pricing pressure; and execution risks in the shift to software and SaaS.
- Other material exposures include reliance on limited-source suppliers and contract manufacturers, international operations and foreign-exchange movements, inventory obsolescence, and potential disruption from political instability or disease outbreaks. The filing specifically identifies the novel coronavirus as a potential business and supply-chain risk as of its filing date.
- FY2019 included $4.5 million of restructuring charges and a $5.7 million debt-extinguishment loss. The tax benefit included approximately $2.0 million from changes to the global tax structure and a $0.8 million valuation-allowance release. A full valuation allowance remained against U.S. deferred tax assets.
- Goodwill was $239.8 million; the annual impairment test found no impairment, though future impairment remains possible. Routine litigation matters were not quantified; the Avid patent cases were settled in 2017, with $2.0 million still payable in 2020.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal control were effective.
Important facts for investors to verify
- Track whether CableOS deployments and Comcast’s license commitments convert into recognized revenue and cash on the expected schedule, including the effect of incentive credits and warrant-related revenue reductions.
- Assess the sustainability of gross-margin gains and whether SaaS and service growth can offset continued declines in Video appliance and integration revenue.
- Review near-term liquidity and the repayment, refinancing or conversion plan for the $45.8 million of 2020 Notes, alongside the secured facility’s October 2020 maturity and covenant requirements.
- Monitor customer concentration, especially Comcast’s share of revenue and the exposure to large transactions and customer spending cycles.
- Evaluate cash conversion, working-capital needs, purchase commitments, French R&D tax-credit recoverability and potential tax or litigation outcomes.