Harmonic Inc. — Q1 2018 Form 10-Q
Reporting period: 13-week quarter ended March 30, 2018; comparative period ended March 31, 2017. Harmonic sells video delivery products and services and cable access solutions through its Video and Cable Access segments.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net revenue | $90.1 million | $82.9 million |
| Gross profit / margin | $47.2 million / 52.4% | $40.4 million / 48.7% |
| Operating loss | $9.3 million | $21.2 million |
| Net loss | $13.7 million | $24.0 million |
| Basic and diluted loss per share | $0.16 | $0.30 |
| Net cash used in operating activities | $6.6 million | $3.1 million |
Revenue grew 9% year over year. Video segment revenue fell 3% to $71.7 million, while Cable Access revenue rose 115% to $18.5 million, primarily on CableOS software and services. Gross margin improved 3.5 percentage points, reflecting product mix and higher professional-services margins. R&D expense decreased 6% to $23.5 million and SG&A fell 10% to $31.2 million, with management citing headcount reductions and cost controls.
Video reported segment operating income of $2.0 million versus a $5.8 million loss; Cable Access reported a $1.5 million loss versus a $6.1 million loss. These segment measures exclude specified corporate and other costs. The company changed its allocation methodology for professional-services revenue and sales costs beginning in Q4 2017; management said applying the updated methodology to the prior-year quarter would shift $1.1 million of operating result from Video to Cable Access.
Cash, liquidity and debt
At March 30, 2018, cash and cash equivalents were $52.0 million, down from $57.0 million at year-end; cash, cash equivalents and restricted cash totaled $52.3 million. Current assets were $181.8 million and current liabilities were $142.4 million. The company used $6.6 million in operating cash, spent $1.8 million on property and equipment, and reported a $6.4 million net decrease in cash, cash equivalents and restricted cash.
Convertible notes had $128.3 million principal outstanding, due December 2020, with a 4.0% coupon; their balance-sheet carrying value was $110.2 million. Other debt and capital lease obligations totaled $23.0 million. The company had a $15 million secured revolving credit facility, with no borrowings through quarter-end, and reported compliance with its covenants. Management expected existing liquidity to fund its current plan for at least 12 months.
Changes, outlook and notable items
- Accounting change: Harmonic adopted ASC 606 using the modified retrospective method. It increased reported Q1 revenue by $0.8 million and reduced net loss by $0.5 million versus the prior revenue standard. Prior-year results were not restated. Adoption also changed opening accumulated deficit and the accounting for contract assets, professional services and certain sales commissions.
- Business outlook: No specific quarterly or full-year revenue or earnings guidance is provided. Management described CableOS deployments and customer engagements as progressing, but still at an early stage with potential near-term challenges. Video customers remained cautious on investment in new technologies; the company is transitioning toward software-centric and SaaS offerings.
- Restructuring: A 2018 plan covering 53 employees generated $1.8 million of Q1 charges; related activities were expected to be completed in 2018. Total restructuring liabilities were $7.2 million at quarter-end.
- Customer concentration: The top 10 customers represented 42% of revenue, compared with 26% a year earlier. Comcast alone contributed 14% of Q1 revenue.
- Commitments and contingencies: Contractual obligations totaled $259.7 million, including $46.5 million of operating leases, $38.7 million of purchase commitments, $4.3 million of TVN voluntary departure plan obligations and $3.5 million remaining Avid settlement payments. The Avid cases were settled and dismissed with prejudice in 2017. Gross unrecognized tax benefits, including interest and penalties, were approximately $19.3 million.
- Principal risks highlighted: Customer capital-spending variability and concentration; competition and pricing pressure; long CableOS sales cycles and adoption risk; dependence on international markets, suppliers and contract manufacturers; foreign-exchange exposure; litigation and tax uncertainty; and the ability to sustain liquidity while funding operations and development.
Key investor verification points
- Track whether CableOS adoption and revenue growth continue, and whether they improve Cable Access profitability without relying on favorable segment cost allocations.
- Assess cash burn, working-capital movements, access to the revolving facility and the ability to meet debt and contractual obligations.
- Monitor Comcast and top-customer exposure, including whether customer concentration increases or orders become less predictable.
- Compare future reported revenue and margins with prior periods carefully because Q1 2018 uses ASC 606 while Q1 2017 was not restated.
- Review the resolution and cash impact of tax uncertainties, French R&D tax-credit recoverability, restructuring liabilities and remaining Avid settlement payments.