Harmonic Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Harmonic designs and sells video infrastructure products and services through its Video and Cable Edge segments. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are to the periods ended July 1, 2016. TVN, acquired in February 2016, is included in Video.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $82.3m | $109.6m | $165.3m | $191.4m |
| Gross profit | $33.8m | $51.0m | $74.2m | $91.7m |
| Gross margin | 41.1% | 46.6% | 44.9% | 47.9% |
| Operating loss | $(27.4)m | $(18.1)m | $(48.6)m | $(38.9)m |
| Net loss | $(31.5)m | $(20.7)m | $(55.5)m | $(45.9)m |
| Diluted loss per share | $(0.39) | $(0.27) | $(0.69) | $(0.59) |
Revenue and margins. Q2 product revenue was $50.2m versus $77.4m; services revenue was $32.1m versus $32.2m. Video revenue fell 19% to $73.4m, while Cable Edge revenue fell 53% to $8.9m. Management attributed the Video decline mainly to customers shifting from legacy products toward OTT subscriptions and softer legacy demand; Cable Edge weakness reflected customer deferrals during the transition from EdgeQAM to DOCSIS 3.1 and converged cable access architectures. Lower service margins and higher obsolescence charges on legacy broadcast inventory contributed to lower gross margin.
Cash flow and liquidity. Cash from operations was $2.6m for the first half, versus cash used of $8.3m in the prior-year period. Investing activities provided $1.0m, compared with $67.9m used in 2016, which included the TVN acquisition. Financing activities used $7.1m; cash declined $2.8m to $52.9m. At June 30, current assets were $172.8m and current liabilities $145.2m. Management said cash on hand was expected to fund principal cash needs for at least 12 months. $39.6m of cash was held in foreign subsidiaries and could incur additional U.S. tax if repatriated.
Debt and obligations. Convertible notes had $128.25m principal outstanding, due December 2020, with a 4% coupon; their balance-sheet carrying value was $105.9m. Other debt and capital lease obligations totaled $16.4m, including $7.1m current. The filing lists $242.3m of contractual obligations, including leases, purchase commitments, debt and interest. No off-balance-sheet arrangements were reported.
Material changes and management outlook
- First-half revenue declined 14%; Video revenue fell 5% and Cable Edge fell 51%. The first-half Video comparison benefited from two additional months of post-acquisition TVN revenue.
- Segment operating results weakened: Q2 Video recorded an $8.9m operating loss versus $0.5m income a year earlier; Cable Edge recorded a $7.4m loss versus $0.5m loss.
- Management did not provide formal numerical revenue or earnings guidance. It said Cable Edge revenue was not expected to improve significantly before Q4 2017 at the earliest. Customers remained cautious about investments in next-generation IP architecture and Ultra HD; management expects growth opportunities from software-centric video and OTT services, and from CableOS/DOCSIS 3.1 adoption.
- After quarter-end, Harmonic committed to a worldwide workforce restructuring to align costs with continued revenue declines. Estimated costs are approximately $2.8m, with actions expected to extend through Q4 2017. The company also expected some TVN integration costs to continue during 2017.
- Harmonic planned to adopt the new customer revenue standard effective January 1, 2018, likely using the modified retrospective method, but had not finalized that method or quantified the impact. Potential effects include timing of software-license and professional-services revenue and capitalization of contract-acquisition costs.
Risks, contingencies and unusual items
- Demand depends on customer capital spending and technology transitions; delayed adoption of new products could prolong weakness in legacy Video and Cable Edge sales. The top 10 customers represented 30% of Q2 revenue and 25% of first-half revenue; no single customer exceeded 10%.
- Q2 included $1.1m of restructuring and related charges. The company had a $7.2m TVN voluntary departure plan liability at June 30, with estimated future payments extending through 2020.
- Avid patent litigation remained unresolved; the court consolidated the cases and set a November 6, 2017 trial date. The company said potential losses could not be reasonably estimated and an adverse result could require damages, royalties or limits on product sales.
- French R&D tax-credit receivables totaled approximately $24.3m, expected to be recoverable from 2018–2021 and subject to French government audit. Related French government-agency borrowings were $13.6m.
- The company’s $0.2m Pebble Beach Systems investment had fallen sharply in value; a $0.1m Q2 decline was recorded in other comprehensive loss rather than earnings because management did not deem the decline permanent. The stated maximum remaining exposure was approximately $0.5m.
- Other material risks include customer and supplier concentration, competition and pricing pressure, foreign-exchange movements, inventory obsolescence, execution of CableOS and OTT strategies, and potential impairment of $240.6m of goodwill.
Important facts for investors to verify
- Whether revenue trends stabilize, particularly legacy Cable Edge demand and adoption of CableOS/DOCSIS 3.1, and whether the stated Q4 timing expectation holds.
- Whether OTT subscriptions and new Video products can replace declining legacy product revenue while restoring gross and segment margins.
- Cash generation, working-capital movements, and the ability to fund obligations given continuing losses, debt maturities and foreign-held cash.
- Recovery and audit status of French R&D tax credits, and payment of the TVN restructuring liabilities.
- Progress and potential financial exposure in the Avid litigation, including the scheduled November 2017 trial.
- The cost, timing and savings from the post-quarter $2.8m restructuring, and the eventual financial-statement effects of adopting the new revenue standard.