Harmonic Inc. — Q3 2018 Form 10-Q
Business context and reporting period. Harmonic develops video delivery software, products and services, and cable access solutions. This unaudited report covers the quarter ended September 28, 2018, and the first nine months of fiscal 2018. Its two segments are Video and Cable Access.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $100.6 million | $92.0 million | $289.9 million | $257.3 million |
| Gross profit | $50.1 million | $47.0 million | $148.9 million | $121.2 million |
| Gross margin | 49.8% | 51.1% | 51.4% | 47.1% |
| Operating loss | $3.7 million | $14.2 million | $12.3 million | $62.8 million |
| Net loss | $7.8 million | $15.6 million | $24.4 million | $71.1 million |
| Basic and diluted loss per share | $0.09 | $0.19 | $0.29 | $0.88 |
For the nine months, operating cash flow was $5.7 million, versus cash used of $6.0 million a year earlier. Investing activities used $4.6 million and financing activities provided $2.6 million. Cash, cash equivalents and restricted cash increased $3.1 million to $61.9 million; balance-sheet cash and cash equivalents were $61.7 million.
At September 28, 2018, total assets were $506.4 million and current assets were $187.2 million, against current liabilities of $137.3 million. Convertible notes had $128.3 million principal outstanding and a $113.2 million carrying value; other debt and capital lease obligations totaled $20.8 million. The company had no cash borrowings on its $15 million revolving facility, though $2.7 million was committed as security for letters of credit. It reported compliance with the facility’s covenants.
Changes versus the prior comparable period
- Q3 revenue grew 9%; nine-month revenue grew 13%. Cable Access revenue increased 257% in Q3 and 163% year to date, primarily from CableOS-related hardware, software and services.
- Video revenue declined 13% in Q3 and 3% year to date. Management attributed the decreases to product mix, reduced professional-services activity and comparison with stronger prior-year Q3 results.
- Nine-month gross margin rose 4.3 percentage points, primarily reflecting more favorable Cable Access margins; Q3 gross margin fell 1.3 points, mainly due to Video product mix.
- Operating and net losses narrowed substantially, alongside lower SG&A, lower restructuring charges and improved segment performance. SG&A declined 20% in Q3 and 15% year to date.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided. Management said existing liquidity should fund principal cash needs for at least the next 12 months, while noting additional financing may be needed for strategic opportunities or to strengthen the company’s financial position.
- Management described CableOS as gaining momentum, but said deployments remain at an early stage and may face near-term challenges. CableOS customer evaluation and sales cycles can be lengthy.
- Customer concentration increased: the top ten customers represented 42% of Q3 revenue and 35% year to date, versus 28% and 26% in the prior-year periods. Comcast accounted for 16% of Q3 revenue and 15% year to date.
- Revenue recognition standard Topic 606 was adopted in 2018 using the modified retrospective method. It increased reported nine-month revenue by $1.5 million and reduced net loss by $1.8 million versus prior guidance; prior-year figures were not restated, limiting direct comparability.
- The Comcast warrant reduced Q3 revenue by $0.8 million and nine-month revenue by $1.2 million through amortization. A further warrant tranche vested in July 2018; its estimated $2.3 million value is to be amortized against revenue as related Comcast sales occur.
- Other notable exposures include $45.1 million of non-cancelable purchase commitments, $42.6 million of future operating lease payments, and $3.5 million of remaining Avid settlement payments due in 2019 and 2020. The filing says litigation outcomes and possible losses in other matters cannot be estimated clearly.
- Key risks include dependence on customer capital spending, concentrated customers, competitive and pricing pressure, successful adoption of CableOS and video software offerings, supply-chain and international operating risks, foreign exchange, tax uncertainties and potential cash requirements related to debt.
Important facts for investors to verify
- Whether CableOS deployments and customer purchases continue to grow enough to offset declining Video revenue, and how segment profitability develops.
- Whether customer concentration, especially Comcast’s share of revenue, increases and whether Comcast adopts and expands use of CableOS.
- Operating cash flow, receivables and working-capital trends, alongside the company’s stated 12-month liquidity expectation.
- Debt repayment and conversion terms: the $128.3 million notes mature December 1, 2020, and the filing notes that conversion could require cash settlement under certain circumstances.
- Potential variability from Topic 606 estimates, the Comcast warrant’s revenue reductions, French R&D tax-credit recoverability, and unresolved legal or tax matters.