Harmonic Inc. — Q1 2016 Form 10-Q
Reporting period: 13-week quarter ended April 1, 2016; comparisons are with the three months ended April 3, 2015. Amounts below are in U.S. dollars.
Business context and reporting period
Harmonic designs and sells video infrastructure products and services. Its operating segments are Video and Cable Edge. On February 29, 2016, it acquired Thomson Video Networks (TVN), a video-compression business based in France, for provisional consideration of approximately $84.6 million. TVN contributed approximately $2.9 million of revenue and $5.5 million of net loss after the acquisition date, so the quarter includes only about one month of TVN results.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $81.8 million | $104.0 million | Down 21% |
| Gross profit / gross margin | $40.7 million / 49.7% | $55.0 million / 52.9% | Margin down 3.2 percentage points |
| Operating income (loss) | $(20.8) million | $0.0 million | Prior-year result was $13,000 profit |
| Net loss | $(25.2) million | $(2.7) million | Loss widened |
| Net loss per share, diluted | $(0.33) | $(0.03) | |
| Cash flow from operations | $(5.4) million | $1.9 million | |
| Cash flow from investing | $(64.8) million | $5.9 million | Includes $69.5 million net cash paid for TVN |
| Cash flow from financing | $0.7 million | $(1.0) million |
Revenue fell in both segments: Video was $65.0 million, down 6% (about 10% lower excluding TVN); Cable Edge was $16.8 million, down 52%. Segment operating results were losses of $7.3 million for Video and $1.9 million for Cable Edge. The largest driver of the revenue decline was Cable Edge, as customers deferred purchases ahead of DOCSIS 3.1 and CCAP technology transitions.
At April 1, 2016, cash and cash equivalents were $57.0 million and short-term investments were $19.2 million, totaling $76.2 million. Current assets were $256.4 million and current liabilities $161.9 million. Total debt obligations were $153.6 million: $128.3 million principal on 4.00% convertible senior notes due 2020 and $25.3 million of debt and capital leases assumed with TVN. Cash declined $69.2 million during the quarter. Management said cash and short-term investments were expected to fund principal cash needs for at least 12 months.
Material changes versus the prior comparable period
- Revenue decreased $22.2 million, with declines in all geographic regions; APAC fell 31%, EMEA 20%, and the Americas 19%.
- Gross margin declined, primarily reflecting lower Cable Edge revenue and lower sales of higher-margin video servers, with some effect from TVN’s cost structure.
- Operating expenses rose to $61.4 million from $55.0 million. R&D increased 6%, SG&A increased 5%, and restructuring charges rose to $2.6 million from $44,000.
- Interest expense increased following the convertible-note issuance. The quarter also included a $1.5 million impairment charge on the Vislink investment; the prior-year period included a $2.5 million impairment of the VJU investment.
- Cash and short-term investments fell from $152.8 million at year-end 2015 to $76.2 million, principally reflecting the TVN acquisition payment and operating cash use.
Outlook, management commentary, risks and unusual items
- Management cited customer caution and delayed spending amid transitions to IP, virtualization, Ultra HD/4K, DOCSIS 3.1 and CCAP architectures. First CableOS shipments were anticipated in the second half of 2016; this was an expectation, not a quantified revenue forecast.
- Harmonic expected approximately $20 million of 2016 spending in aggregate on the 2016 restructuring plan and TVN acquisition/integration costs. The company estimated approximately $20 million of synergies from restructuring and integration, anticipated within two years.
- The TVN purchase-price allocation and consideration remained provisional. Approximately $8.0 million of contingent consideration was accrued but unpaid, and up to $13.5 million could remain in escrow for up to 18 months. The company also recorded $2.4 million of liabilities for TVN employee equity plans, expected to be paid in Q2 2016.
- TVN brought approximately $27.6 million of French R&D tax-credit receivables, subject to government audit and collection timing; management noted seller indemnification for their validity and recoverability. The acquired goodwill and intangibles were also subject to measurement-period estimates.
- Customer concentration remains material: the ten largest customers represented about 40% of quarterly revenue, and Time Warner Cable represented more than 13%. The filing identifies customer spending, technology adoption, competition, supplier concentration, international operations and foreign exchange as key risks.
- Avid’s Media Grid patent case was remanded for a new infringement trial after an appellate court vacated the prior noninfringement verdict; a claim-construction hearing was scheduled for May 27, 2016. A separate Avid Spectrum case was stayed after the appellate court affirmed the patent-review decision. Harmonic said it could not estimate reasonably possible losses.
- The company reported no off-balance-sheet arrangements. Disclosure controls were assessed as effective; TVN was excluded from internal-control assessment during integration, with exclusion expected through December 31, 2016.
Important facts for investors to verify
- Whether CableOS shipments and customer adoption began on the expected second-half 2016 schedule, and whether they offset continuing Cable Edge declines.
- Whether the projected $20 million of savings is achieved within two years and how it compares with restructuring and integration costs.
- Final TVN purchase consideration, acquired-asset valuations, tax-credit recoveries, and the timing and amount of contingent and employee-plan payments.
- Cash generation, liquidity, and repayment obligations, including the $128.3 million convertible-note principal due in 2020 and the acquired French borrowings.
- Progress and potential exposure in the Avid litigation, as well as developments in customer concentration and major customer spending.