Harmonic Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 1, 2021; comparisons are to the periods ended September 25, 2020. Dollar amounts below are in millions unless stated otherwise.
Business context
Harmonic provides video delivery products and software, including SaaS, and software-based cable access solutions. It reports two segments: Video and Cable Access. Revenue is categorized as appliance and integration (primarily hardware, licenses and professional services) and SaaS and service (recurring platform fees and support).
Financial results and changes
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Revenue | $126.3 | $94.9 | $351.3 | $247.3 |
| Gross profit / margin | $66.2 / 52% | $48.9 / 52% | $181.8 / 52% | $123.4 / 50% |
| Operating income (loss) | $5.4 | $(1.6) | $3.7 | $(29.2) |
| Net income (loss) | $1.5 | $(5.4) | $(6.6) | $(42.7) |
| Diluted EPS | $0.01 | $(0.06) | $(0.07) | $(0.44) |
| Operating cash flow | Not provided for the quarter | $33.7 | $(2.4) |
- Q3 revenue rose 33%; nine-month revenue rose 42%. Appliance and integration revenue increased 45% in Q3 and 63% year to date, while SaaS and service revenue increased 9% and 7%, respectively.
- Video revenue increased 26% in Q3 and 29% year to date. Cable Access revenue increased 43% and 64%, respectively, driven by greater CableOS customer penetration and new deployments.
- Video segment gross margin improved, while Cable Access segment margin declined in Q3, which management attributed to product mix and higher freight and shipping costs. Consolidated gross margin was flat in Q3 and improved two percentage points year to date.
- Operating results improved substantially from the prior-year periods, although the company remained in a net loss for the first nine months of 2021. Higher revenue and lower restructuring and intangible amortization charges contributed; research and administrative costs increased, including employee compensation and performance-based stock compensation.
- Nine-month operating cash flow improved to $33.7 million from $(2.4) million. Investing cash outflow was $10.6 million, primarily capital expenditures; financing cash inflow was $7.6 million. Cash increased $29.8 million to $128.4 million.
Balance sheet, debt and liquidity
- At October 1, 2021, cash and equivalents were $128.4 million, accounts receivable net was $75.4 million, current assets were $291.2 million and current liabilities were $203.7 million.
- Convertible notes had $153.2 million aggregate principal outstanding: $37.7 million due 2022 and $115.5 million due 2024. The 2022 Notes became convertible as of quarter-end; their $36.6 million net carrying amount was classified as current. The 2024 Notes’ net carrying amount was $97.6 million. Other debt totaled $18.6 million on the balance sheet.
- Management identified cash, receivables and a $25 million revolving credit facility as principal liquidity sources, and said existing liquidity should fund expected cash needs for at least 12 months. The filing does not clearly state the facility’s unused availability.
- $83.0 million of cash was held outside the United States and considered indefinitely reinvested; repatriation could result in additional taxes if not previously accrued.
- Contractual obligations totaled $360.8 million, including $153.2 million of convertible debt, $132.5 million of purchase commitments and $44.9 million of operating leases.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management described improving sales activity and deployments but cautioned that COVID-19 and supply-chain disruption, component shortages, freight costs and availability could continue to affect results.
- Customer concentration is significant: the top 10 customers represented 59% of Q3 revenue and 56% for the first nine months. Comcast represented 23% and 25%, respectively. Comcast’s CableOS license includes commitments, but slower or smaller-scale deployments could weigh on results.
- Management cited customer capital-spending patterns, competition, product transitions to cloud/SaaS and software-based cable access, supplier concentration, long CableOS sales cycles and quarter-to-quarter transaction timing as key business risks.
- The company is evaluating adoption of ASU 2020-06, which it expects to reduce non-cash interest expense but increase diluted share count by approximately 19.9 million shares under the if-converted method.
- An OFAC investigation concerning historical Iran-related transactions by acquired Thomson Video Networks remains ongoing; Harmonic said it is cooperating and does not anticipate a material impact, though penalties or other consequences remain possible. The filing also discusses ordinary-course litigation whose potential loss cannot be reasonably estimated.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether CableOS deployments and SaaS customer additions sustain the reported revenue growth, and how much growth reflects a recovery from COVID-affected 2020 comparisons.
- Supply availability, inventory build-up and freight costs; inventory rose to $51.9 million from $35.0 million at year-end 2020.
- Cash requirements for the 2022 Notes, including possible cash settlement following conversion, and the status and availability of the revolving credit facility.
- Customer concentration and Comcast deployment pace, alongside the company’s ability to diversify customers and maintain segment margins.
- Outcomes of the OFAC inquiry and litigation, and any resulting financial exposure.