Harmonic Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter ended June 29, 2018; year-to-date figures cover the six months ended that date. Comparatives are the quarter and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Business context and reporting period
Harmonic sells video processing, production and playout products and services, and cable access solutions. Its Video segment serves broadcast, media and service-provider customers; Cable Access includes its software-based CableOS platform. The company is shifting toward software-centric video products and SaaS subscriptions, while pursuing virtualized cable access solutions.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $99.2 | $82.3 | $189.3 | $165.3 |
| Gross profit | $51.6 | $33.8 | $98.8 | $74.2 |
| Gross margin | 52.0% | 41.1% | 52.2% | 44.9% |
| Operating income (loss) | $0.6 | $(27.4) | $(8.7) | $(48.6) |
| Net loss | $(2.9) | $(31.5) | $(16.6) | $(55.5) |
| Basic and diluted loss per share | $(0.03) | $(0.39) | $(0.20) | $(0.69) |
Q2 revenue grew 20%, led by Cable Access and higher Video sales. Cable Access segment revenue was $20.2 million, up 126%; Video segment revenue was $79.2 million, up 8%. Segment figures include revenue before warrant amortization; the company recorded a $0.3 million Q2 reduction to net revenue for the Comcast warrant. Gross-margin improvement reflected a more favorable mix of higher-margin software and stronger professional and support services margins.
Q2 operating expenses were $51.0 million, down from $61.2 million a year earlier, including lower R&D and SG&A costs associated with reduced headcount and cost controls. Despite the improvement, Harmonic remained loss-making for the first half of 2018.
Cash flow and liquidity: First-half operating cash flow was $3.2 million, versus $2.6 million in 2017; investing cash use was $3.2 million, versus $1.0 million provided; financing cash use was $3.9 million, versus $7.1 million. Cash, cash equivalents and restricted cash declined $4.4 million to $54.4 million; balance-sheet cash and cash equivalents were $54.1 million. Current assets were $179.1 million and current liabilities $138.8 million. Management said current liquidity was expected to be adequate for at least 12 months.
Debt: Convertible notes had $128.3 million principal outstanding, due December 2020, with a 4% coupon; carrying value was $111.7 million. Other debt and capital lease obligations totaled $16.0 million. No cash borrowings were outstanding under the $15 million revolving credit facility; $2.4 million was committed to letters of credit. The company reported compliance with facility covenants.
Material changes versus the prior comparable period
- Revenue increased $16.8 million in Q2 and $24.0 million year to date. Cable Access was the main growth driver; Video grew more modestly, while APAC revenue declined.
- Q2 gross margin expanded 10.9 percentage points, and operating results improved from a substantial loss to modest operating income. First-half net loss narrowed by $38.9 million.
- Top 10 customers accounted for 38% of Q2 revenue and 36% year to date, compared with 30% and 25%, respectively, in 2017. Comcast represented 15% of Q2 revenue and 14% year to date.
- Cash and cash equivalents fell $2.9 million from December 31, 2017; total liabilities were $285.0 million versus $289.7 million.
Outlook, accounting, risks and unusual items
- Outlook: No specific revenue or earnings guidance was provided. Management cited progress in CableOS deployments, field trials and customer engagements, but said adoption remains early and near-term challenges may continue. Video customers remained cautious about investment in next-generation IP architecture and Ultra HD. SaaS transition, customer spending timing and product adoption may affect results.
- Accounting change: Harmonic adopted ASC 606 on January 1, 2018 using the modified retrospective method; prior-year results were not restated. Adoption increased reported Q2 revenue by $0.4 million and improved operating results by $0.8 million; first-half revenue increased $1.3 million and operating results improved $1.3 million versus previous guidance.
- Restructuring: The 2018 workforce-reduction plan covered 55 employees and generated $1.8 million of charges through June 29; completion was expected during 2018. Total restructuring liability was $6.1 million.
- Commitments and contingencies: Contractual obligations totaled $245.6 million, including $42.4 million of operating leases, $38.7 million of purchase commitments, and convertible debt and interest. The Avid patent cases were settled and dismissed; $3.5 million of settlement payments remained due in 2019 and 2020. The filing says other litigation outcomes and potential losses could not be estimated.
- Other notable items: The company reported approximately $24.0 million of French R&D tax-credit receivables, subject to government audit. On July 31, 2018, after quarter-end, a Comcast warrant tranche covering 1,172,425 shares vested following acceptance of field trials.
- Principal risks: Dependence on customer capital spending and a concentrated customer base; uncertain CableOS adoption and long sales cycles; intense competition and technology shifts; supplier and contract-manufacturer concentration; international, foreign-exchange and geopolitical exposure; and the risk of losses, working-capital pressure or additional financing needs.
Important facts for investors to verify
- Whether CableOS growth and Comcast engagement translate into sustained sales, and how the warrant affects reported revenue and potential dilution.
- Whether improved margins and lower operating expenses are sustainable, given the company’s continuing first-half operating and net losses.
- Customer concentration, including the contribution of Comcast and the top 10 customers, and the effect of large, uneven transactions.
- Cash conversion and liquidity needs, including the timing of $128.3 million in convertible-note principal due in 2020, French R&D tax-credit collections, and contractual commitments.
- Potential effects of ASC 606, restructuring, tax positions, litigation and other contingencies on future reported results and cash flows.