Harmonic Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are to the quarter and six months ended July 1, 2022. Amounts are in U.S. dollars unless stated otherwise.
Business context
Harmonic supplies video delivery software, products and services, and broadband access solutions. It reports two segments, Video and Broadband, and classifies revenue as appliance and integration (primarily non-recurring) or SaaS and service (recurring).
Financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $156.0m | $157.4m | $313.6m | $304.9m |
| Gross profit | $84.9m | $82.4m | $169.0m | $151.6m |
| Gross margin | 54% | 52% | 54% | 50% |
| Operating income | $10.0m | $15.1m | $21.1m | $17.6m |
| Net income | $1.6m | $14.8m | $6.6m | $13.3m |
| Diluted earnings per share | $0.01 | $0.14 | $0.06 | $0.12 |
Q2 revenue was down 1% year over year; six-month revenue increased 3%. Appliance and integration revenue declined 9% in Q2, while SaaS and service revenue grew 26% and reached 29% of revenue, versus 23% a year earlier. Management attributed gross-margin improvement mainly to product mix and lower freight costs. Lower Q2 operating income and net income reflected higher operating expenses and a higher tax provision; the prior-year comparison also benefited from a $4.2m gain on the Encoding.com investment sale.
Segments: Q2 Video revenue fell 23% to $58.9m, with segment operating income of $0.1m versus $11.3m. Broadband revenue rose 20% to $97.1m, and segment operating income increased 78% to $18.1m. For the first six months, Video revenue declined 18% to $116.2m and the segment recorded a $1.3m operating loss; Broadband revenue grew 21% to $197.4m and operating income rose to $38.2m. Broadband growth was attributed to increased customer penetration, new deployments and FTTP expansion.
Cash flow and liquidity: Cash from operations was negative $10.3m for the first six months, compared with negative $5.7m a year earlier. Investing cash flow was negative $3.8m; financing cash flow was negative $5.5m. Cash declined $18.6m from year-end to $71.0m. At June 30, current assets were $331.5m and current liabilities $287.7m. The company reported a $25.0m revolving credit facility maturing October 2025; the filing does not clearly state the amount available under it.
Debt: Total debt principal was $130.9m, including $115.5m principal on 2.00% convertible notes due September 1, 2024. The notes’ $114.4m net carrying amount was classified as current, and $119.3m of aggregate debt was scheduled to become due within the following 12 months. The notes were convertible as of June 30, 2023; Harmonic elected to settle their principal in cash.
Changes, outlook and risks
- Management said existing cash and other funding sources were expected to provide adequate liquidity for the 12 months following June 30, 2023, as well as the long term. No specific revenue or earnings guidance was provided.
- Remaining performance obligations were $663.8m; a majority was expected to be recognized as revenue over the next 12 months, with the balance thereafter.
- Top 10 customers contributed 68% of Q2 revenue. Comcast represented approximately 47%, versus 37% in Q2 2022, creating significant customer concentration and deployment risk.
- Management cited economic uncertainty, customer spending and project timing, competition, technology transitions, supply-chain dependencies, foreign exchange, and geopolitical conditions as risks. It specifically noted potential disruption to outsourced engineering in Ukraine and operations in Israel.
- Income tax provision rose to $7.5m in Q2 and $12.6m for the six months, largely due to reduced U.S. tax loss and credit carryforwards and required capitalization of research and development costs.
- Legal matters arise in the ordinary course, including intellectual-property claims. The company said outcomes and possible losses could not be reasonably estimated. OFAC closed its review of historical Iran-related transactions in February 2023 with a Cautionary Letter and no penalties; future enforcement action was not precluded.
- No share repurchases occurred in the first half of 2023. Approximately $94.9m remained under the $100m authorization, which runs through February 2025.
Important facts for investors to verify
- How the sharp year-over-year decline in Video revenue and profitability compares with future SaaS growth and customer adoption.
- Comcast’s share of revenue and the pace and scale of its CableOS deployments.
- Cash generation, working-capital needs and funding plans for the $119.3m of debt due within 12 months, particularly the 2024 notes.
- Whether Broadband growth and margin expansion continue, and whether Video SaaS growth can offset lower appliance sales.
- Any developments in litigation, supply-chain and geopolitical exposures, and the potential effect of tax requirements on cash taxes and earnings.