Harmonic Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 28, 2019; six-month comparisons are to the period ended June 29, 2018. Amounts are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context
Harmonic provides video delivery software, products and services, as well as cable access solutions. It reports two segments, Video and Cable Access, and is shifting toward software-based products and recurring SaaS and service revenue. The company changed its revenue categories in 2019 to “Appliance and integration” and “SaaS and service”; prior-period figures were reclassified.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $84.9 | $99.2 | $165.0 | $189.3 |
| Gross profit | $43.9 | $51.6 | $85.8 | $98.8 |
| Gross margin | 51.8% | 52.0% | 52.0% | 52.2% |
| Operating income (loss) | $(7.8) | $0.6 | $(16.2) | $(8.7) |
| Net loss | $(11.8) | $(2.9) | $(23.2) | $(16.6) |
| Basic and diluted loss per share | $(0.13) | $(0.03) | $(0.26) | $(0.20) |
| Cash from (used in) operating activities | Not presented quarterly in the supplied cash flow statement | $(4.6) | $3.2 |
Q2 appliance and integration revenue was $54.4 million versus $68.4 million; SaaS and service revenue was $30.4 million versus $30.7 million. For the six months, the respective amounts were $106.8 million and $58.2 million, compared with $132.4 million and $56.9 million.
Revenue declined 14% in Q2 and 13% for the six-month period. Video segment revenue fell 10% in Q2 and 8% year to date; Cable Access revenue fell 34% and 32%, respectively. Management attributed the declines principally to delayed bookings and CableOS hardware shipments, along with longer SaaS sales cycles. Gross margin was broadly stable, which management attributed to a higher software mix.
Q2 R&D expense was $21.3 million, down 1%; SG&A was $29.3 million, up 5%. For the first six months, R&D was $42.7 million, down 5%, and SG&A was $57.3 million, down 3%. Q2 net interest expense was $3.0 million; the six-month amount was $5.9 million, up from $5.6 million.
Cash, debt and liquidity
- Cash and cash equivalents were $58.1 million at June 28, 2019, down from $66.0 million at December 31, 2018. Six-month cash used in operations was $4.6 million; investing used $2.9 million and financing used $0.3 million.
- Current assets were $185.5 million and current liabilities $138.3 million. Accounts receivable was $70.6 million; deferred revenue was $47.3 million on the balance sheet.
- Convertible notes had $128.3 million principal outstanding, bear a 4% coupon and mature December 1, 2020. Their balance-sheet carrying amount was $118.1 million. Other debt and finance lease obligations totaled about $18.1 million.
- A $15 million secured revolving credit facility was undrawn, apart from $2.1 million committed for letters of credit; the company reported compliance with its covenants. Management said available liquidity was expected to cover needs for at least 12 months.
- Contractual obligations totaled $256.8 million, including convertible debt, purchase commitments, leases and other debt. Cash held outside the U.S. was $50.7 million and was considered indefinitely reinvested; repatriation could incur additional taxes.
Outlook, developments and risks
No quantified revenue or earnings guidance is provided in the filing. Management expected Cable Access deployments to increase following Comcast’s CableOS enterprise-license election, while noting that customer deployment timing and the Video SaaS transition create near-term uncertainty. The company also cited customer capital-spending decisions, long sales cycles, competition, customer concentration, technology adoption, foreign exchange, supply-chain exposure and international operations as risks.
Subsequent event: On July 9, 2019, Comcast elected enterprise license pricing for CableOS, effective July 1. Comcast committed to $175 million in software license fees over four years, subject to potential incentive credits, with an initial $50 million payment in 2019. In connection with the election and other purchase commitments, all remaining vesting conditions on Comcast’s warrant were deemed satisfied or waived; the warrant for up to 7,816,162 shares at $4.76 per share was fully vested and exercisable as of July 1. This is a post-quarter event, not Q2 revenue reported in the statements.
Other notable items include $21.8 million of French R&D tax-credit receivables expected to be recoverable from 2020 through 2023 and subject to government audit; a one-time $0.8 million tax benefit from a foreign valuation-allowance release; and $17.3 million of gross unrecognized tax benefits, including interest and penalties. The Avid patent matter was settled; $2.0 million remains payable in 2020. The filing also describes ordinary-course legal exposure for which possible losses could not be reasonably estimated.
Harmonic adopted lease accounting Topic 842 on January 1, 2019, recognizing approximately $23.3 million of additional lease assets and liabilities without an impact on earnings or cash flows. A new headquarters lease commenced in May 2019, with an approximately 11-year term. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether deferred CableOS hardware shipments and Comcast’s enterprise-license commitment translate into deployments, cash receipts and recognized revenue as anticipated.
- The warrant’s potential dilution: up to 7.8 million shares became fully vested and exercisable after quarter-end; verify exercise activity and accounting effects in subsequent filings.
- Ability to improve operating performance and cash generation amid falling revenue, segment losses in Cable Access and the $128.3 million convertible-note maturity in December 2020.
- Recoverability and timing of the $21.8 million French R&D tax credits, and developments in tax audits and unrecognized tax benefits.
- Customer and supplier concentration, the $46.1 million of non-cancelable purchase commitments, and material litigation or other contingencies disclosed in later filings.