Harmonic Inc. — Q1 2019 Form 10-Q
Reporting period: 13 weeks ended March 29, 2019; comparisons are to the three months ended March 30, 2018. Harmonic provides video delivery products and services, including SaaS, and cable access solutions. It reports Video and Cable Access segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenue | $80.1 million | $90.1 million | Down 11% |
| Appliance and integration revenue | $52.4 million | $64.0 million | Down 18% |
| SaaS and service revenue | $27.7 million | $26.1 million | Up 6% |
| Gross profit / gross margin | $41.8 million / 52.2% | $47.2 million / 52.4% | Margin down 0.2 percentage points |
| Operating loss | $8.4 million | $9.3 million | Loss narrowed |
| Net loss / diluted loss per share | $11.3 million / $0.13 | $13.7 million / $0.16 | Loss narrowed |
| Operating cash flow | $4.2 million | $(6.6) million | Improved $10.8 million |
| Cash and cash equivalents at period end | $69.9 million | $66.0 million at Dec. 31, 2018 | Up $3.9 million |
Operating cash generation benefited from working-capital movements, including collections of accounts receivable; it should not be read as evidence of positive net earnings. Capital expenditures were $1.7 million. Gross margin remained nearly flat despite lower revenue, which management attributed partly to a higher software mix.
Segments and material changes
- Video: Revenue was $67.2 million, down 6% year over year. Segment operating income was $2.0 million, approximately flat. Management cited delayed bookings as customers considered SaaS offerings, which generally take longer to close than appliance sales.
- Cable Access: Revenue was approximately $13.0 million, down about 30%. Segment operating loss was approximately $5.8 million, compared with a loss of about $1.5 million. Management cited later timing of CableOS hardware shipments and lower CableOS software and support sales, which reduced high-margin revenue.
- Revenue declined in the Americas by 30%; EMEA increased 21%, while APAC was down 1%. The top 10 customers represented 39% of revenue, versus 42% a year earlier; no single customer exceeded 10% in Q1 2019.
- Operating expenses declined, including R&D down 9% and SG&A down 10%, mainly reflecting lower compensation, headcount reductions and expense controls. Restructuring charges were $0.4 million, versus $1.8 million.
Debt, liquidity and commitments
- Cash was $69.9 million; current assets were $181.1 million and current liabilities $134.1 million, implying working capital of approximately $47.0 million. The company reported compliance with its credit facility covenants.
- Convertible notes had $128.3 million principal outstanding, bear 4.0% interest and mature December 1, 2020. Their balance-sheet carrying value was $116.4 million. The company also had $19.5 million of other debt and finance lease obligations, including $7.1 million current.
- A $15 million receivables-based revolving credit facility was undrawn, with $1.8 million committed as security for letters of credit. Management said existing liquidity was expected to be adequate for at least the next 12 months.
- Contractual obligations totaled $244.3 million, including $45.0 million of purchase commitments, $32.0 million of operating lease payments, and $3.5 million remaining under the Avid settlement. The filing reported no off-balance-sheet arrangements.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management expects shipment and cash-flow timing to fluctuate and says SaaS transaction cycles may delay near-term revenue. CableOS adoption and deployments remain at an early stage, with potential near-term challenges.
- Key risks include customer capital-spending delays and concentration, competitive and pricing pressure, reliance on suppliers and contract manufacturers, execution of the SaaS and CableOS transitions, foreign currency exposure, and the possibility of needing additional capital. Q1 revenue fell 11%, largely due to shipment and booking timing and reduced Cable Access sales.
- Management cited a one-time $0.8 million tax benefit from releasing a valuation allowance at a foreign subsidiary. Gross unrecognized tax benefits were approximately $17.5 million; tax audits and the recoverability of French R&D tax credits are also relevant uncertainties. French R&D tax credit receivables totaled $27.4 million and are subject to government audit.
- The company adopted lease accounting Topic 842, recognizing approximately $23.3 million of lease assets and liabilities without an impact on earnings or cash flows. Adoption of Topic 718 produced a $1.4 million opening retained-earnings adjustment related to Comcast warrants.
- The Avid patent cases were settled and dismissed with prejudice; $3.5 million remained payable as of quarter-end. The filing says outcomes and potential losses from other ordinary-course legal matters cannot be predicted or reasonably estimated.
Important facts for investors to verify
- Whether the deferred Video bookings and CableOS shipments materialize later in 2019, and whether recurring SaaS and service revenue continues to grow.
- Whether Cable Access sales and segment losses improve as CableOS deployments expand, especially given the sharp decline in high-margin software and support sales.
- Whether operating cash flow remains positive after the benefit of Q1 working-capital movements, and whether liquidity remains adequate ahead of the 2020 convertible-note maturity.
- Progress on collecting French R&D tax credits, related audit exposure, and the company’s ability to manage its substantial purchase and other contractual commitments.
- Potential dilution or cash requirements if convertible notes become convertible, and the effect of Comcast warrant vesting and associated customer purchases.