Harmonic Inc. — Q1 2011 Form 10-Q
Reporting period: 13 weeks ended April 1, 2011; comparative quarter ended April 2, 2010. Unaudited results. Harmonic designs and sells video infrastructure products and solutions. Results include Omneon, acquired in September 2010, from its acquisition date.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net revenue | $132.8 million | $84.8 million |
| Gross profit / gross margin | $61.9 million / 47% | $40.8 million / 48% |
| Operating income (loss) | $(0.1) million | $2.5 million |
| Net income | $0.5 million | $5.3 million |
| Diluted earnings per share | $0.00 | $0.05 |
| Cash used in operating activities | $7.7 million | $3.0 million |
- Revenue grew 57%. Product revenue was $115.9 million and service revenue $17.0 million. Video processing revenue rose 64% to $63.8 million; production and playout contributed $20.9 million, principally reflecting Omneon; edge and access revenue fell 12% to $31.2 million.
- Operating expenses increased to $61.9 million from $38.3 million. R&D was $26.1 million, SG&A $33.6 million and operating-intangible amortization $2.2 million. Gross margin declined one percentage point, largely because amortization included in cost of revenue rose to $5.1 million from $2.1 million.
- Pre-tax loss was $0.1 million, compared with pre-tax income of $2.5 million. A $0.6 million tax benefit resulted in $0.5 million net income; the prior-year tax benefit was $2.8 million.
- At April 1, cash and cash equivalents were $59.7 million and short-term investments $57.6 million, totaling $117.3 million, versus $120.4 million at year-end. Current assets were $356.1 million and current liabilities $112.2 million. The filing reports no bank borrowings; total debt is not clearly presented as a separate metric.
- Investing activities used $38.9 million, mainly for $41.8 million of investment purchases and $5.0 million of capital expenditures, partly offset by investment maturities and sales. Financing provided $9.6 million, primarily employee stock-plan proceeds.
Material changes versus the prior comparable quarter
- Revenue growth reflected stronger worldwide demand for video processing, Omneon production and playout sales, and higher service activity. International revenue rose 75% to $73.9 million; U.S. revenue rose 38% to $59.0 million.
- Edge and access revenue declined, primarily because of lower sales of edge products for cable applications. Despite higher gross profit dollars, the gross margin eased from 48% to 47%.
- Higher compensation, headcount, facilities costs, stock-based compensation and acquisition-related amortization increased expenses. Net income fell to $0.5 million from $5.3 million.
- Operating cash use worsened to $7.7 million from $3.0 million, with working-capital outflows including higher receivables and payments of incentive compensation and other liabilities.
- Harmonic prospectively adopted revised multiple-deliverable revenue rules for applicable transactions originating or materially modified after December 31, 2010. Reported quarterly revenue was $132.8 million versus pro forma $131.7 million under prior guidance; management reported no material impact.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expects 2011 capital expenditures of $12–16 million and believes available liquidity will meet contemplated cash needs for at least 12 months.
- The $10 million bank credit line matures June 2, 2011. No amount was drawn, and Harmonic was compliant with its $35 million minimum-liquidity covenant at quarter-end.
- Management expects approximately $16.4 million of additional intangible amortization in cost of revenue and $6.7 million in operating expenses during the remaining nine months of 2011.
- Key risks include dependence on customer capital spending and large transactions, customer and international-market concentration, competitive and pricing pressure, supply constraints, foreign-exchange movements, and successful integration of Omneon. Comcast represented 11% of quarterly revenue and 16% of net receivables; the ten largest customers represented approximately 35% of revenue.
- Unrecognized tax benefits were approximately $53.3 million; the 2008 and 2009 U.S. tax returns were under IRS examination. The company anticipated a $3.2 million decrease in unrecognized tax benefits over the next 12 months due to statute expirations.
- Arris patent litigation was settled in April 2011 for $1.3 million, paid, and dismissed. Interkey litigation seeks approximately $1.7 million; Harmonic disputes the claim and recorded no provision. The filing warns that adverse intellectual-property claims or customer indemnification demands could be material.
- Harmonic was assessing possible effects of Japan’s March 2011 earthquake and tsunami; it had not experienced significant supply or order disruptions to date and could not yet quantify future effects. Disclosure controls were deemed effective at a reasonable-assurance level; Omneon control integration remained in progress.
Important facts for investors to verify
- Whether revenue growth and margins persist when separating underlying demand from Omneon’s contribution, and whether edge and access sales recover.
- Receivables collection, operating cash flow, investment liquidity and compliance with the credit-line covenant and its approaching maturity.
- Integration progress and expected benefits of Omneon, including the effect of acquired-intangible amortization and stock-based compensation.
- Outcomes of the IRS examinations, uncertain tax positions, Interkey litigation and any intellectual-property indemnification claims.
- Potential customer, supplier or order disruption from economic conditions, international exposure, currency movements or Japan-related events.