Harmonic Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 29, 2017; financial statements are unaudited. Comparisons are with the quarter ended September 30, 2016, and the nine-month periods then ended. Harmonic provides video infrastructure products and services through its Video and Cable Edge segments.
Financial performance
- Revenue: Q3 revenue was $92.0 million, down 9% year over year. Product revenue fell to $58.2 million from $70.3 million, while services revenue rose to $33.9 million from $31.1 million. Nine-month revenue was $257.3 million, down 12%.
- Gross profit and margin: Q3 gross profit was $47.0 million, with a 51.1% margin versus 50.7%. Nine-month gross profit was $121.2 million, with a 47.1% margin versus 48.9%.
- Operating results and earnings: Q3 operating loss was $14.2 million versus $11.9 million; net loss was $15.6 million, or $0.19 per share, versus $16.0 million, or $0.21 per share. For nine months, operating loss was $62.8 million versus $50.8 million, and net loss was $71.1 million, or $0.88 per share, versus $61.9 million, or $0.80 per share.
- Cash flow: Nine-month operating cash use was $6.0 million, improved from $12.6 million used in the prior-year period. Investing used $2.2 million, compared with $68.4 million, largely because the prior-year period included the TVN acquisition. Financing provided $1.3 million. Cash and cash equivalents declined $5.6 million to $50.0 million.
- Liquidity and debt: At September 29, cash was $50.0 million, accounts receivable was $71.6 million, and current assets were $176.1 million against current liabilities of $146.3 million. Short-term investments were nil. Convertible notes had $128.25 million principal outstanding and a $107.3 million balance-sheet carrying amount; other debt and capital leases totaled $22.9 million. A new secured revolving facility provides up to $15 million, subject to borrowing-base limits; no amounts were drawn at quarter-end.
- Segments: Q3 Video revenue was $84.2 million, down 8%, and segment operating income was $7.0 million versus $4.9 million. Cable Edge revenue was $7.9 million, down 22%, and segment operating loss widened to $5.4 million from $4.8 million. Nine-month segment operating losses worsened in both Video and Cable Edge.
Changes, outlook and notable items
- Management attributed Video product weakness to customers shifting from traditional linear broadcast/pay-TV systems toward OTT software solutions. Video services revenue increased. Cable Edge weakness reflected reduced purchases of legacy EdgeQAM products as customers prepared for virtualized DOCSIS 3.1 and CCAP architectures.
- Management expected Cable Edge revenue to improve in Q4 2017, with more significant improvement through 2018. The filing gives no quantitative company-wide revenue or earnings guidance. Management said existing cash was expected to fund principal cash needs for at least 12 months, while noting that additional capital might be needed if expectations proved incorrect.
- Q3 gross margin improved on product mix, but year-to-date margin declined amid lower service margins and higher obsolescence charges for legacy broadcast video inventory. Nine-month operating losses also reflect revenue declines and continued CableOS development spending.
- Harmonic initiated a 2017 restructuring plan in Q3 to align costs with declining revenue, recording $2.4 million of charges for workforce reductions and a facility closure. Total restructuring and related charges were $2.6 million in Q3. TVN integration costs were expected to continue through the remainder of 2017.
- The Avid patent cases were settled on October 19, 2017, after quarter-end, with a multi-year cross-license and dismissal with prejudice. Harmonic recorded a $6.0 million Q3 settlement expense and liability; $2.5 million was paid October 24, with the remaining $3.5 million due in 2019 and 2020.
- Other risks include dependence on customer capital spending and a concentrated customer base, technology-transition execution and CableOS adoption, competition and pricing, inventory obsolescence, international and foreign-exchange exposure, and litigation. The top 10 customers represented 26% of nine-month revenue; no single customer exceeded 10%.
- Harmonic planned to adopt the new revenue-recognition standard effective January 1, 2018, and was still assessing the impact. Management identified potential changes in timing for software licenses with undelivered features, services subject to acceptance, and capitalization of contract acquisition costs.
Important facts for investors to verify
- Whether OTT and CableOS adoption can offset continued declines in legacy Video and Cable Edge revenue, and whether the stated Cable Edge recovery materializes.
- Whether operating cash flow and liquidity remain adequate given ongoing losses, debt service, restructuring costs, and contractual commitments.
- The timing and realization of French R&D tax-credit receivables, including related audit and collection risks, and the associated French government-agency debt.
- Potential effects of the 2018 revenue standard on reported revenue, margins, and contract-cost accounting.
- Execution and costs of restructuring and TVN integration, and whether goodwill or legacy inventory faces impairment or further write-downs.