Harmonic Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are with the quarter ended October 1, 2021, and the corresponding nine-month periods unless noted. Harmonic provides video delivery products and services and cable broadband access solutions, reported in Video and Broadband segments. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $155.7 | $126.3 | $460.6 | $351.3 |
| Gross profit / margin | $78.6 / 50% | $66.2 / 52% | $230.2 / 50% | $181.8 / 52% |
| Operating income | $11.4 | $5.4 | $29.0 | $3.7 |
| Net income (loss) | $8.7 | $1.5 | $22.1 | ($6.6) |
| Diluted EPS | $0.08 | $0.01 | $0.20 | ($0.07) |
- Q3 revenue rose 23%; appliance and integration revenue grew 27% to $116.4 million, while SaaS and service revenue grew 14% to $39.3 million. For nine months, the categories increased 40% and 8%, respectively.
- Broadband drove growth: Q3 segment revenue rose 60% to $91.9 million, with operating income of $15.3 million versus $3.9 million. Video revenue fell 7% to $63.8 million and operating income fell to $2.9 million from $7.9 million. Nine-month revenue increased 71% for Broadband and 2% for Video.
- Gross margin declined by 2 percentage points in both comparison periods, primarily because Broadband represented a larger share of revenue. Q3 Video margin also compared with unusually strong prior-year software mix.
- Interest expense fell as adoption of ASU 2020-06 eliminated amortization of convertible-debt discounts. The adoption increased nine-month 2022 net income by $4.2 million and EPS by about $0.04. Nine-month other income included a $4.2 million gain on the sale of the Encoding.com investment.
Cash, liquidity and debt
- Cash and equivalents were $105.3 million at September 30, 2022, down from $133.4 million at December 31, 2021. Current assets were $336.7 million and current liabilities $221.9 million.
- Operating activities used $13.9 million of cash in the first nine months, compared with $33.7 million provided in 2021. The company attributed the change mainly to working-capital use, particularly inventory and prepaid supplier deposits. Inventory rose to $99.0 million from $71.2 million.
- Investing activities provided $0.6 million, including proceeds from the Encoding.com sale; financing activities used $5.0 million. Foreign exchange reduced cash by $9.9 million.
- Aggregate debt principal was $167.7 million; $42.1 million was scheduled to become due within 12 months after quarter-end. The $37.7 million principal amount of 4.375% convertible notes matured December 1, 2022; $115.5 million principal of 2.00% notes matures September 1, 2024. The company elected to settle note principal in cash upon conversion.
- A $25 million revolving credit facility had no amounts drawn as of the report date. An October 28, 2022 amendment extended its maturity to the earlier of October 28, 2025 or, subject to conditions, 90 days before the 2024 notes mature. The company said available funding was expected to cover liquidity needs for at least 12 months.
- The company repurchased approximately 0.6 million shares for $5.1 million during the nine months. About $94.9 million remained under its $100 million authorization, which runs through February 2025.
Outlook, commentary and risks
- No specific revenue, earnings or margin guidance is provided in the supplied filing text. Management described continued CableOS deployments, customer engagements and field trials, and expects ongoing opportunities from streaming, cloud video workflows and software-based broadband access.
- Remaining performance obligations were $504.3 million, with approximately 81% expected to be recognized over the next 12 months; timing and realization remain subject to customer and contract conditions.
- Management cited inflation, rising interest rates, supply-chain disruption and component availability, foreign-exchange volatility, COVID-19 effects, the Russia-Ukraine conflict and geopolitical tensions involving China and Taiwan as sources of uncertainty. It said the future impact could not be reasonably estimated.
- Customer concentration is significant: the top 10 customers represented about 66% of Q3 revenue and 68% of nine-month revenue. Comcast represented approximately 38% and 35%, respectively, versus 23% and 25% in the comparable 2021 periods.
- Other key risks include customer spending and project timing, competition and pricing, dependence on limited-source suppliers and contract manufacturers, inventory obsolescence, outsourced engineering resources in Ukraine, and execution of CableOS and SaaS transitions. The company also disclosed an ongoing OFAC inquiry regarding historical transactions involving Iran; it said it was cooperating and did not anticipate a material impact.
- Legal claims and proceedings arise in the ordinary course, including intellectual-property matters. The company stated that possible losses or ranges could not be reasonably estimated; no indemnification amounts had been accrued.
- Disclosure controls and procedures were concluded effective at a reasonable assurance level, and no material change to internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether elevated inventory and supplier deposits convert into shipments and cash, and whether operating cash flow improves.
- Whether Broadband growth and margins persist, and whether Video revenue stabilizes amid product and customer transitions.
- The cash impact of the December 2022 notes maturity and the company’s plan for its remaining debt obligations.
- Customer concentration, particularly Comcast’s deployment pace and the effect of large, irregular customer transactions.
- Any material developments in supply constraints, geopolitical exposures, OFAC inquiry or legal proceedings.