Harmonic Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the periods ended October 1, 2010. Amounts below are in millions of dollars unless stated otherwise. Harmonic designs and sells video infrastructure products and services; it reports one business segment.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $138.9 | $104.8 | $405.7 | $285.1 |
| Gross profit / margin | $64.0 / 46% | $47.5 / 45% | $187.6 / 46% | $134.0 / 47% |
| Operating income | $3.8 | $1.6 | $5.1 | $8.1 |
| Net income (loss) | $3.5 | $(0.4) | $4.5 | $9.4 |
| Diluted EPS | $0.03 | $(0.00) | $0.04 | $0.10 |
- Revenue drivers: Q3 revenue increased 33%; nine-month revenue increased 42%. Growth reflected Omneon’s production and playout products, stronger video-processing demand, and higher edge/access and service revenue. Production and playout revenue was $26.6 million for Q3 and $73.0 million year to date.
- Costs and margins: Q3 gross margin improved one percentage point, while nine-month margin declined one point. Higher acquired-intangible amortization weighed on year-to-date margin. R&D and SG&A spending rose with headcount and activity following Omneon; operating expenses increased 31% for the nine months.
- Cash flow: Operating activities provided $20.4 million in the first nine months, versus $1.2 million in the prior-year period. Investing used $55.0 million, including purchases of investments and $12.4 million of capital expenditures; financing provided $13.3 million, principally from employee stock plans. Cash and cash equivalents decreased $21.3 million to $75.2 million.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $140.9 million at September 30, up from $120.4 million at December 31, 2010. No borrowings were outstanding on the $10 million bank line. The company reported compliance with its covenant, with a 3.61-to-1 ratio against a 1.75-to-1 minimum. Current liabilities were $108.5 million and total liabilities were $179.4 million.
Material changes and notable items
- Revenue growth includes the effect of the September 2010 Omneon acquisition; the prior-year comparison included Omneon only from its acquisition date. Comcast represented 12% of Q3 revenue and 11% of nine-month revenue, down from 26% and 19%, respectively, in the comparable 2010 periods.
- New multiple-deliverable revenue guidance was adopted prospectively in Q2 2011. For transactions within scope, reported revenue exceeded the amount under the former method by $6.8 million for Q3 and $12.1 million for the nine-month period; the company said there was no material impact from changes in its estimated selling prices.
- Unrecognized tax benefits, including interest and penalties, were approximately $58.4 million at quarter-end. The company anticipated a $5.0 million decrease over the following 12 months from statute expirations, subject to possible IRS challenge; 2007–2010 returns were under IRS examination.
- Omneon-related excess-facility accrual was $3.0 million at September 30. The company recorded an additional $0.5 million provision in Q1 2011.
Outlook, risks and contingencies
- The filing provides no formal revenue or earnings guidance. Management said existing liquidity was expected to meet presently contemplated cash needs for the next 12 months, while noting that needs could change.
- Thailand flooding disrupted supplies of disk drives and optical lasers. Harmonic expected higher product costs in Q4 2011 and Q1 2012, and estimated it might be unable to record up to $2.0 million of Q4 revenue on projected sales of a product. It could not confirm timely sourcing of all Q1 component requirements; a shortfall could materially affect the access product line.
- In October 2011, Avid sued over two patents relating to the Omneon Media Grid, seeking injunctive relief and damages. Harmonic was evaluating the claims and could not predict the outcome. A separate Interkey contract suit sought approximately $1.7 million; Harmonic disputed the claim and had recorded no provision. The Arris patent matter was settled in April 2011 for $1.3 million.
- Other key risks include customers’ capital-spending decisions and concentration, international exposure and currency movements, competitive pricing and technology shifts, reliance on contract manufacturers and limited-source components, and execution of Omneon integration. Management noted sluggish global growth in Q3 and possible continued weakness.
Most important facts for investors to verify
- Whether component sourcing after the Thailand floods constrained Q4 2011 or Q1 2012 shipments, revenue, or gross margin.
- How much reported growth and profitability reflect Omneon, and whether the acquired business delivered expected integration benefits.
- Whether operating cash generation is sustainable given receivables, inventory, deferred revenue, and compensation-payment timing.
- The status and potential financial exposure of the Avid and Interkey matters, and of the IRS examinations and uncertain tax positions.
- Whether customer concentration, international demand, and the 2011 revenue-recognition change affected comparability or revenue timing.