Harmonic Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 29, 2024; unaudited. Comparisons are with the three months ended March 31, 2023, unless noted. Dollar amounts are in millions except per-share data.
Business context and results
Harmonic provides broadband access solutions and video delivery products and services. It reports Broadband and Video segments, and classifies revenue as appliance and integration or SaaS and service. Results reflected customer order and project delays in both segments, with particularly weak Video performance.
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $122.1 | $157.6 | Down 23% |
| Gross profit / margin | $63.1 / 51.7% | $84.1 / 53.3% | Margin down 1.6 percentage points |
| Operating income (loss) | $(9.5) | $11.2 | Declined $20.7 |
| Net income (loss) | $(8.1) | $5.1 | Basic and diluted EPS: $(0.07), versus $0.05 and $0.04 |
| Operating cash flow | $26.8 | $6.3 | Improved $20.6 |
| Capital expenditures | $1.9 | $2.3 | Cash used in investing: $1.9 |
| Cash and cash equivalents | $84.3 at March 29 | $84.3 at Dec. 31, 2023 | Nearly unchanged |
Appliance and integration revenue fell 29% to $81.6 million; SaaS and service revenue fell 6% to $40.5 million. Broadband revenue was $78.9 million, down 21%, and segment operating income fell 57% to $8.6 million. Video revenue was $43.2 million, down 25%, and its operating loss widened to $7.4 million from $1.4 million. Consolidated operating results also included $3.8 million of unallocated corporate expense and $6.9 million of stock-based compensation.
Financial position, debt and liquidity
- At March 29, current assets were $300.8 million and current liabilities $274.8 million. Accounts receivable was $105.9 million and inventory $86.6 million.
- Quarter-end debt included $115.1 million carrying value of 2.00% convertible notes and $15.1 million of other debt; the company reported $130.6 million aggregate principal indebtedness. It said $119.9 million was scheduled to become due within 12 months.
- Financing cash outflow was $23.9 million, including $21.7 million used to repurchase approximately 1.7 million shares. Approximately $73.2 million remained under the $100 million repurchase authorization at quarter-end.
- Management said existing funding sources were expected to provide adequate liquidity for the 12 months following March 29, 2024. Sources included cash, receivables and credit facilities; no receivables had been sold under the $30 million receivables purchase arrangement at quarter-end.
Material changes, outlook and unusual items
- Revenue declined mainly because a Broadband customer delayed orders during a technology transition and Video customers delayed orders and projects. Management also cited lower Video support renewals; SaaS revenue grew $1.3 million, partly from new customers.
- Gross margin contracted primarily because of unfavorable Broadband product mix, partly offset by a higher contribution from Video SaaS and services.
- In Q1, Harmonic initiated Video restructuring estimated to cost approximately $17 million in total. It recorded $3.5 million of charges and expects substantially all remaining charges through the end of 2024.
- Following a strategic review, the Board determined current market conditions did not support its value-creation objectives for the Video business. The go-forward plan is to pursue profitable growth through scalable opportunities, operational streamlining and cost optimization; the Board said it remains open to alternatives.
- After quarter-end, on April 18, 2024, the company settled conversion of all $115.5 million principal of its 2024 Notes, paying $115.5 million in cash and delivering 4.6 million shares. It funded the settlement with $75 million drawn on the revolving facility and $40 million on the term facility. At that date, $45 million remained available on the revolver and none on the term facility.
- In April, Harmonic decided to reduce its leased San Jose headquarters space and sublease excess space. Depending on subleasing results, it expects a $5.5–$6.5 million impairment charge in the quarter ending June 28, 2024.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management described slow Video customer capital spending as a near-term headwind, while continuing to pursue cOS broadband deployments and cloud-based video opportunities.
- CEO Patrick Harshman is retiring; Nimrod Ben-Natan was appointed successor, effective June 11, 2024. The filing identifies risks from customer spending and concentration, technology transitions, competition, geopolitical disruption affecting Israel and Ukraine, suppliers, cybersecurity, foreign exchange and debt covenants. Litigation outcomes and any loss range were not reasonably estimable.
Key facts for investors to verify
- Whether Broadband customer order delays and Video project delays ease, and whether segment revenue and margins recover.
- Progress and costs of the Video restructuring, and whether the announced strategy changes or a strategic alternative emerges.
- The cash, share dilution and debt implications of the April convertible-note settlement, including compliance with credit-facility covenants.
- Actual headquarters lease impairment and sublease outcomes, compared with the estimated $5.5–$6.5 million charge.
- Customer concentration: the top 10 customers represented about 65% of Q1 revenue; Comcast about 29% and Charter about 17%.