Harmonic Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended April 1, 2022; comparisons are with the three months ended April 2, 2021. Dollar figures below are in millions unless noted.
Business context and results
Harmonic supplies video delivery software, products and services, and cable access solutions. It reports Video and Cable Access segments; revenue is also categorized as Appliance and integration and SaaS and service.
- Revenue: $147.4, up 32% year over year. Appliance and integration revenue was $113.0, up 41%; SaaS and service revenue was $34.5, up 9%.
- Segment trends: Cable Access revenue rose 98% to $81.6, driven by existing and new CableOS deployments. Video revenue fell 6% to $65.8, primarily due to broadcast project timing and cessation of sales activity in Russia.
- Gross profit and margin: $69.2 and 47%, versus $55.1 and 49% a year earlier. Management attributed lower margin to unfavorable product mix.
- Operating results: Operating income was $2.5, compared with an operating loss of $3.8. Net loss was $1.5, or $0.01 per diluted share, versus a net loss of $6.1, or $0.06 per share.
- Expenses and taxes: R&D increased 23% to $28.8, primarily due to compensation and headcount. SG&A increased 5% to $36.6. Restructuring charges were $1.2 versus less than $0.1. The $2.7 income tax provision exceeded pretax income of $1.2; the increase included the U.S. requirement to capitalize and amortize R&D expenses.
Cash flow, balance sheet and liquidity
- Cash flow: Operating cash use was $27.5, versus $1.7 provided a year earlier, mainly due to working-capital use. Investing cash use was $2.4 and financing cash use was $2.0. Cash declined $32.7 to $100.7.
- Working capital: Accounts receivable rose to $115.6 from $88.5 at year-end; inventory rose to $81.8 from $71.2. Deferred revenue on the balance sheet was $75.5, while the broader contract liability balance disclosed in the revenue note was $96.5. Remaining performance obligations were $518.6; approximately 82% was expected to be recognized within 12 months.
- Debt: Aggregate principal indebtedness was $170.9, including $37.7 million of 4.375% convertible notes due December 2022 and $115.5 million of 2.00% notes due September 2024, plus other debt. The 2022 notes became convertible as of April 1, 2022 and were classified as current. The company had irrevocably elected to settle note principal in cash upon conversion.
- Liquidity: Current assets were $325.4 and current liabilities $230.9. Harmonic cited $100.7 of cash, $115.6 of net receivables and a $25.0 revolving credit facility as principal liquidity sources. Management said available funding should be adequate for the 12 months following April 1, 2022 and the long term; $79.5 of cash was held outside the United States.
- Other capital actions: The company repurchased 233,327 shares for $2.1 during the quarter under a $100 million authorization expiring in February 2025; approximately $98 million remained available.
Changes, outlook and notable items
- Adoption of ASU 2020-06 on January 1, 2022 eliminated separate equity accounting for convertible-note conversion features and debt-discount amortization. It reduced Q1 net interest expense by approximately $1.4 and net loss per share by about $0.01; it did not affect cash flows.
- Management expects to continue generating positive operating cash flow, while acknowledging that cash flow may fluctuate with demand, shipment timing, collections, inventory and supply conditions. No specific revenue or earnings guidance was provided.
- Management cited ongoing uncertainty from COVID-19, component availability and freight costs, and the possibility of increased supply-chain costs. The filing also highlights customer spending and concentration, long CableOS sales cycles, competition, foreign exchange exposure, and the Ukraine conflict’s potential effect on outsourced engineering resources.
- The top 10 customers accounted for approximately 70% of revenue, versus 61% in the prior-year quarter. Comcast represented 31% of revenue, versus 23%; Intelsat and Vodafone represented 13% and 10%, respectively.
- Legal claims and intellectual-property proceedings may arise in the ordinary course; the company said it could not predict outcomes or reasonably estimate possible losses. It also disclosed an ongoing OFAC investigation concerning transactions involving Iran by an acquired French subsidiary, while stating it did not anticipate a material impact.
Important facts for investors to verify
- Whether CableOS deployment growth continues and whether Cable Access margins withstand product-mix and freight pressures.
- Whether the significant increase in receivables and inventory converts to cash, and whether operating cash flow returns to positive levels.
- Cash requirements and settlement outcomes for the $37.7 million 2022 notes due in December 2022, including any conversion-related cash payments.
- Customer concentration and the timing of large customer projects, particularly Comcast deployments and Video broadcast projects.
- Potential effects of supply constraints, COVID-19, the Ukraine conflict, Russia-related sales cessation, and the OFAC investigation.
- The impact of R&D tax capitalization on future tax expense and the sustainability of reported profitability.