Harmonic Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Harmonic provides video delivery and broadband access products, software and services. This unaudited report covers the three months ended March 31, 2023; comparisons are with the three months ended April 1, 2022, except balance-sheet comparisons, which are with December 31, 2022. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Prior comparable period |
|---|---|---|
| Revenue | $157.6 million | $147.4 million; up 7% |
| Appliance and integration revenue | $114.8 million | $113.0 million; up 2% |
| SaaS and service revenue | $42.9 million | $34.5 million; up 24% |
| Gross profit and reported gross margin | $84.1 million; 53% | $69.2 million; 47% |
| Operating income | $11.2 million | $2.5 million |
| Net income (loss) | $5.1 million | $(1.5) million |
| Diluted earnings (loss) per share | $0.04 | $(0.01) |
| Cash from operating activities | $6.3 million | $(27.5) million |
| Capital expenditures | $2.3 million | $2.4 million |
| Cash and cash equivalents at period-end | $90.9 million | $89.6 million at year-end 2022 |
Revenue growth reflected higher Broadband deployments and greater SaaS usage, partly offset by lower Video appliance sales. Management attributed higher overall gross margin primarily to favorable product mix and lower freight costs. Research and development expense rose 16% to $33.5 million, and selling, general and administrative expense rose 7% to $39.3 million. Net interest expense declined to $0.7 million, primarily because the 4.375% convertible notes matured and were repaid in 2022.
Broadband revenue increased 23% to $100.4 million; segment operating income was $20.1 million versus $8.1 million. Video revenue decreased 13% to $57.3 million, and its segment operating result moved to a $1.4 million loss from $3.1 million income, reflecting lower appliance sales and higher SaaS-related development investment. The filing’s segment note reports total segment gross profit of $84.9 million, while the consolidated statements and MD&A report $84.1 million; the filing text does not explain this difference.
At March 31, 2023, current assets were $338.1 million and current liabilities were $305.9 million. Total liabilities were $368.0 million. Debt included $114.2 million carrying value of 2.00% convertible notes due September 2024 and $16.0 million of other debt. The notes were classified as current because they were convertible under their terms; the company had elected to settle principal in cash. Management stated that $118.9 million of aggregate principal debt was scheduled to become due in the following 12 months. Cash included $65.7 million held outside the United States.
The company generated $6.3 million from operations, used $2.3 million in investing activities and used $3.4 million in financing activities; cash increased $1.3 million, including the effect of exchange rates. Inventory rose to $131.6 million from $120.9 million at year-end. Remaining performance obligations were $631.6 million, the majority expected to be recognized over the next 12 months.
Outlook, commentary, risks and unusual items
Harmonic provided no numerical revenue or earnings guidance in the supplied filing text. Management said existing liquidity was expected to be adequate for the 12 months following March 31, 2023 and over the long term, while noting that additional financing might be considered and may not be available on favorable terms or at all. Strategy centers on growth in CableOS software-based broadband solutions and transition of Video toward SaaS and cloud-based delivery.
- Customer concentration is substantial: Comcast represented approximately 47% of Q1 revenue, versus 31% a year earlier; the top 10 customers represented 68%, versus 70%.
- Key risks include customer spending and large-deal timing, intense competition, SaaS and broadband technology transitions, supply-chain concentration, inventory obsolescence, foreign exchange, macroeconomic and geopolitical uncertainty, and operations or engineering resources in Ukraine and Israel.
- The company reported no Q1 share repurchases; approximately $94.9 million remained under its $100 million authorization, which expires in February 2025.
- OFAC closed its review of historical Iran-related transactions in February 2023 with a cautionary letter and no penalties; the filing says renewed attention could occur if additional information warrants it.
- Ordinary-course legal claims include intellectual-property matters; the company said possible losses or a range of loss could not be reasonably estimated. Disclosure controls were assessed as effective, with no material Q1 change in internal control over financial reporting.
- The CFO’s resignation became effective March 3, 2023, and an interim CFO was appointed while the company searched for a permanent successor.
Important facts for investors to verify
- Reconcile the filing’s $84.1 million consolidated gross profit with the $84.9 million total shown in the segment note.
- Review the timing and cash impact of the convertible notes, including their current classification, conversion terms and stated debt maturities.
- Track Comcast’s deployment pace and concentration, as well as the durability of Broadband growth and Video SaaS adoption.
- Monitor inventory growth, supplier availability, customer collections and operating cash flow conversion.
- Assess progress on the CFO search and developments in litigation, geopolitical exposures and the OFAC matter.