Harmonic Inc. — Q1 2020 Form 10-Q
Reporting period: 13 weeks ended March 27, 2020; comparisons are with the three months ended March 29, 2019. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Business context
Harmonic supplies video delivery and production solutions and cable-access technology. It reports two segments: Video and Cable Access. Appliance and integration revenue is primarily non-recurring; SaaS and service revenue is recurring.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $78.4 million | $80.1 million | Down 2% |
| Gross profit / margin | $36.7 million / 46.8% | $41.8 million / 52.2% | Margin down 5.4 percentage points |
| Operating loss | $18.0 million | $8.4 million | Loss widened |
| Net loss | $22.0 million | $11.3 million | Loss widened |
| Basic and diluted loss per share | $0.23 | $0.13 | Loss per share increased |
| Cash used in operating activities | $11.0 million | Cash provided of $4.2 million | Declined $15.3 million |
| Cash used in investing activities | $11.2 million | $1.7 million | Higher, primarily from capital spending |
Revenue mix: Appliance and integration revenue was $47.8 million, down from $52.4 million; SaaS and service revenue was $30.7 million, up from $27.7 million. Video segment revenue fell 19% to $54.4 million, while Cable Access revenue rose 86% to $24.0 million. Video reported a $6.3 million segment operating loss versus $2.0 million income; Cable Access narrowed its segment operating loss to $3.3 million from $5.8 million.
Margins and expenses: Management attributed lower gross margin mainly to COVID-related reductions in higher-margin appliance and integration activity and increased costs, particularly freight; improved Cable Access software mix partly offset this. R&D expense increased 3% to $22.1 million, and SG&A rose 11% to $31.2 million. Stock-based compensation increased to $6.3 million from $2.1 million. Restructuring charges were $0.6 million, compared with $0.4 million.
Balance sheet, debt and liquidity
At March 27, 2020, cash and cash equivalents were $71.7 million, down from $93.1 million at year-end 2019. Current assets were $231.6 million and current liabilities were $196.7 million. Deferred revenue was $48.7 million current, with $7.1 million long-term. The filing reports no revolving-credit borrowings; $0.3 million of letters of credit were outstanding under the facility.
Debt included $45.8 million principal of 4.00% convertible notes due December 1, 2020, $115.5 million principal of 2.00% convertible notes due September 1, 2024, and approximately $16.3 million of French and other debt. The 2020 notes were currently convertible at quarter-end; the company said it intended to settle note principal in cash. A secured revolving facility provides up to $25 million, subject to borrowing-base limits, and matures October 31, 2020. Harmonic reported compliance with its credit-facility covenants and said available liquidity was expected to cover its needs for at least 12 months.
Changes, outlook and risks
Management said COVID-19 delayed Cable Access deployments and slowed Video appliance transactions, shipments and field work; APAC was affected earlier in the quarter. It expected further Cable Access deployment delays and a modest impact on design-win velocity in Q2, and warned that the pandemic would continue to materially affect results. The filing provides no numerical revenue or earnings guidance and says the full future impact cannot be reasonably estimated. Management described the Video business’s transition toward software and SaaS and the CableOS ramp as strategic priorities, while noting near-term customer spending uncertainty.
Revenue from the top 10 customers increased to 48% from 41% of net revenue. Comcast contributed 17% and Vodafone 12%, versus no customer above 10% in the prior-year quarter. The company cited customer concentration, capital-spending delays, competition, product-transition and deployment risks, and supply-chain dependence. It had approximately $55.3 million of non-cancelable inventory and other purchase commitments. Contractual obligations totaled $295.2 million, including $45.8 million of 2020 note principal scheduled for 2020.
Other items to note: Harmonic recognized $18.0 million of revenue previously included in opening deferred revenue, compared with $21.2 million a year earlier. Comcast’s CableOS license agreement had $98.1 million allocated to remaining performance obligations, expected to be recognized over the next three to four years. The company disclosed a $2.0 million current Avid litigation settlement obligation; it said potential losses from other litigation could not be reasonably estimated. No goodwill impairment was identified.
Key facts for investors to verify
- How the December 2020 convertible-note maturity will be funded or otherwise addressed, including the potential cash effects of conversion.
- Whether cash use, customer collections and deployment delays worsen as COVID-19 impacts extend beyond Q1.
- Whether Video demand and margins stabilize while CableOS deployments and related revenue continue to scale.
- Whether customer concentration remains elevated and Comcast’s planned license deployments occur on the expected timetable.
- Whether purchase commitments, inventory levels and other obligations remain aligned with demand and available liquidity.