Harmonic Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 29, 2023; comparative periods ended September 30, 2022. Harmonic provides video delivery and broadband access products, software and services through its Video and Broadband segments.
Financial performance and liquidity
| Metric | Q3 2023 | Nine months 2023 |
|---|---|---|
| Revenue | $127.2 million, down 18% year over year | $440.8 million, down 4% |
| Appliance and integration revenue | $84.8 million, down 27% | $310.7 million, down 12% |
| SaaS and service revenue | $42.4 million, up 8% | $130.1 million, up 19% |
| Gross profit / gross margin | $61.7 million / 48%, versus $78.6 million / 50% | $230.7 million / 52%, versus $230.2 million / 50% |
| Operating income (loss) | $(8.6) million, versus $11.4 million | $12.5 million, versus $29.0 million |
| Net income (loss) | $(6.5) million, or $(0.06) per diluted share | $0.2 million, versus $22.1 million; diluted EPS was reported as $0.00 |
| Operating cash flow | $0.8 million provided for the nine months, versus $13.9 million used in the prior-year period |
At September 29, cash and cash equivalents were $75.6 million and short-term investments were $6.3 million, compared with $89.6 million of cash at year-end 2022. Total liabilities were $333.0 million and stockholders’ equity was $340.8 million. The company reported $130.3 million of aggregate debt principal, including $115.5 million of 2.00% convertible notes due September 1, 2024. Management said $119.5 million of debt was scheduled to come due within 12 months. A $25 million revolving credit facility matures October 28, 2025; the filing does not clearly state the amount available to draw. Management believes current funding sources are adequate for the 12 months following quarter-end.
Material changes and management commentary
- Appliance and integration sales fell amid customer order deferrals, inventory management and delayed projects. SaaS and service growth reflected new customers, increased usage and support demand.
- Video revenue declined 19% in both the quarter and nine-month period. Broadband revenue fell 18% in Q3 but rose 7% for the nine months. Segment operating income and margin are non-GAAP measures: Video reported a Q3 operating loss of $6.1 million, while Broadband reported operating income of $6.1 million.
- Q3 gross margin contracted mainly because of unfavorable appliance product mix; nine-month margin improved, principally due to Broadband mix and lower shipping costs. Operating expenses increased year over year in the nine-month period.
- Management cited slower capital spending and project delays in Video, and customer inventory-related order delays in Broadband. The company continues investing in its Video SaaS transition and software-based broadband cOS solutions.
- Harmonic began a formal strategic review of its Video business, with advisors assessing alternatives. It has received indications of interest, but there is no established timetable and no assurance the review will lead to a transaction.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management says interim results are not necessarily indicative of full-year results.
- Remaining performance obligations were $627.2 million; 48% was expected to be recognized within 12 months. This is contracted revenue, not a guarantee of future results.
- Customer concentration is significant: the top 10 customers represented about 64% of Q3 revenue and 65% for the nine months. Comcast accounted for approximately 41% and 45%, respectively.
- The 2024 Notes require cash settlement of principal upon conversion; their near-term maturity and cash requirements are material liquidity considerations. The company also identified possible need for additional financing, which may not be available on acceptable terms.
- Risks include customer spending delays, competition and technology transitions, supply-chain reliance, foreign exchange and geopolitical disruptions—including the conflicts affecting Ukraine and Israel—and litigation and intellectual-property claims. The company said possible litigation losses could not be reasonably estimated.
- Management maintained a full valuation allowance against $97 million of domestic net deferred tax assets, judging realization not more likely than not. The nine-month tax provision was $10.2 million despite only $0.2 million of net income.
- The nine-month 2022 comparison included a $4.2 million gain on the sale of an Encoding.com investment; no corresponding gain was reported in 2023. No share repurchases occurred in the first nine months of 2023.
Most important facts for investors to verify
- Progress and outcome of the Video strategic review, including any transaction, separation costs or impact on remaining operations.
- Timing and funding plan for the 2024 Notes maturity and other debt due within 12 months; confirm actual availability under the revolving facility.
- Whether Video customer project delays ease and SaaS growth can offset lower appliance sales, while monitoring Broadband customer orders and deployments.
- Cash conversion and working-capital trends, particularly changes in receivables, deferred revenue and inventory reserves.
- Customer concentration, especially Comcast’s revenue share and the pace and scale of its cOS deployments.