Harmonic Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Harmonic provides video delivery products and services, including SaaS, and software-based cable access solutions. The quarter ended July 2, 2021; comparisons are with the quarter ended June 26, 2020. The company reports Video and Cable Access segments. Unless noted, amounts below are in U.S. dollars.
Key financial metrics
- Revenue: Q2 revenue was $113.4 million, up 53% year over year. Appliance and integration revenue rose 86% to $78.6 million; SaaS and service revenue increased 10% to $34.9 million.
- Profitability: Gross profit was $60.5 million and reported gross margin was 53%, versus $37.8 million and 51% a year earlier. Operating income was $2.1 million, compared with an operating loss of $9.6 million. Net loss narrowed to $2.0 million from $15.4 million; diluted loss per share was $0.02 versus $0.16.
- First half: Revenue was $225.0 million, up 48%; gross profit was $115.7 million, with a 51% margin. Operating loss was $1.7 million and net loss was $8.1 million, versus losses of $27.6 million and $37.4 million, respectively, in the prior-year period.
- Segments: Q2 Video revenue increased 34% to $63.4 million, with a 59.3% gross margin and $1.6 million operating income. Cable Access revenue rose 89% to $50.1 million, with a 47.0% gross margin and $5.0 million operating income. Both segments reported operating losses in the prior-year quarter.
- Cash flow: First-half operating cash flow was $18.4 million, versus $0.9 million. Investing used $7.7 million, primarily reflecting property and equipment purchases; financing provided $6.2 million. Cash and cash equivalents increased $16.5 million to $115.2 million.
- Liquidity and debt: At July 2, cash was $115.2 million, current assets $301.1 million, and current liabilities $186.4 million. Convertible notes had a combined carrying value of $132.6 million and principal of $153.2 million: $37.7 million of 4.375% notes due 2022 and $115.5 million of 2.00% notes due 2024. The company also reported $19.6 million of other debt obligations in its contractual-obligations table. A $25 million revolving credit facility was listed as a liquidity source; the filing text does not clearly state whether it was drawn.
- Other metrics: Deferred revenue was $68.4 million on the balance sheet; contract assets were $13.9 million. The Comcast CableOS agreement had $57.9 million allocated to remaining performance obligations, expected to be recognized over the next 24 months. Cash held outside the U.S. was $76.3 million.
Material changes versus the prior comparable period
- Revenue gains reflected recovery in Video appliance and integration activity after COVID-related disruption in 2020, along with higher CableOS deployments and increased SaaS customers and support contracts.
- Management attributed improved gross margin primarily to favorable product mix. Segment operating results improved with revenue growth, partly offset by higher employee compensation and performance-based stock compensation.
- Research and development expense rose 27% to $24.8 million in Q2; selling, general and administrative expense rose 24% to $33.6 million. Interest expense declined 14% to $2.6 million, primarily following repayment of the 2020 Notes in December 2020.
- Accounts receivable increased to $100.6 million from $66.2 million at year-end, and inventory rose to $43.0 million from $35.0 million. Operating cash flow benefited from improved results but included a $36.7 million use of cash from the increase in receivables.
Outlook, risks, contingencies, and unusual items
- Management said existing liquidity should fund principal cash needs for at least the next 12 months. It gave no specific revenue or earnings guidance in the supplied filing text.
- COVID-19 remained a source of uncertainty, including possible customer delays, supply-chain constraints, material availability and pricing, and operational effects. Management said activity had improved but remained cautious amid renewed outbreaks and supply-chain pressures.
- Customer concentration is material: Comcast represented approximately 31% of Q2 revenue, and the top 10 customers represented 55%. Slower Comcast deployments, reduced orders, or customer and industry consolidation could adversely affect results.
- Other key risks include dependence on cable, broadcast and media spending; competition and technology transitions; long CableOS sales cycles; reliance on limited-source components and contract manufacturers; and foreign-exchange, international operations, and cybersecurity risks.
- The company disclosed an ongoing U.S. Treasury OFAC inquiry, initiated by a March 2020 administrative subpoena, concerning transactions involving Iran by Thomson Video Networks before its acquisition. Harmonic said it was cooperating and did not anticipate a material impact, but noted potential penalties and other adverse consequences.
- Litigation, including intellectual-property claims, arises in the ordinary course. The company said it could not predict outcomes or reasonably estimate possible losses; no amounts were accrued for the disclosed indemnification provisions.
- Convertible notes require cash interest and may require cash settlement upon conversion or repurchase in specified circumstances. The 2022 Notes mature in December 2022. The company was evaluating adoption of ASU 2020-06, which it expected to reduce non-cash interest expense but increase diluted-share calculations by approximately 19.9 million shares under the if-converted method.
- Contractual obligations totaled $328.3 million, including $95.8 million of purchase commitments, $47.2 million of operating leases, and $153.2 million of convertible-debt principal. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether revenue growth and improved margins persist, particularly as appliance and integration revenue makes up a larger share of sales.
- Comcast’s deployment pace and the company’s exposure to its largest customers; confirm customer concentration in subsequent filings.
- Receivables collection, inventory levels, and supply availability, given their effects on working capital and cash flow.
- Liquidity and cash requirements for the 2022 Notes, including any conversion, refinancing, or repayment plans and the status of the revolving facility.
- Developments in the OFAC inquiry and any material litigation, intellectual-property, or indemnification exposure.
- COVID-19 and supply-chain effects, and progress in scaling CableOS and SaaS offerings without margin deterioration.