Harmonic Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 26, 2020; year-to-date figures cover the six months ended that date. Comparisons are with the corresponding 2019 periods. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
Harmonic supplies video delivery software, products and services, and cable access solutions. It reports two segments: Video and Cable Access. Revenue includes non-recurring appliance and integration sales and recurring SaaS and service revenue. The company said COVID-19 delayed customer deployments and shipments, particularly in Video, and expects pandemic effects to continue.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $74.0 | $84.9 | $152.4 | $165.0 |
| Gross profit | $37.8 | $43.9 | $74.5 | $85.8 |
| Gross margin | 51.0% | 51.8% | 48.9% | 52.0% |
| Operating loss | $(9.6) | $(7.8) | $(27.6) | $(16.2) |
| Net loss | $(15.4) | $(11.8) | $(37.4) | $(23.2) |
| Basic and diluted loss per share | $(0.16) | $(0.13) | $(0.39) | $(0.26) |
- Revenue mix: Q2 appliance and integration revenue was $42.2 million, down from $54.4 million; SaaS and service revenue was $31.8 million, up from $30.4 million.
- Cash flow: For the first six months, operating activities provided $0.9 million, versus cash used of $4.6 million in 2019. Investing activities used $20.8 million, primarily for property and equipment, including the new headquarters; financing activities provided $4.9 million. Cash declined $15.3 million to $77.7 million.
- Balance sheet and liquidity: At June 26, cash was $77.7 million, current assets $207.9 million and current liabilities $145.4 million; working capital was $62.5 million. Total assets were $557.5 million and total liabilities $327.2 million.
- Debt: Convertible notes had $161.3 million aggregate principal outstanding: $8.1 million due 2020, $37.7 million due 2022 and $115.5 million due 2024. Other debt and finance lease obligations totaled $20.3 million. The $25 million revolving credit facility had no borrowings; $0.3 million of letters of credit was outstanding. The company reported compliance with facility covenants.
- Other metrics: Deferred revenue was $54.7 million, compared with $43.5 million at year-end 2019. The Comcast CableOS agreement had $92.6 million allocated to remaining performance obligations, expected to be recognized over three years.
Material changes versus prior periods
- Q2 revenue fell 13% year over year, and first-half revenue fell 8%. Video revenue declined 34% in Q2 and 27% for the first half, while Cable Access revenue rose 100% and 93%, respectively.
- Management attributed Video weakness to COVID-related delays and lower appliance demand, as well as the planned transition from appliances to SaaS. Cable Access growth reflected the CableOS ramp.
- Q2 gross margin decreased 0.8 percentage points. Lower contribution from higher-margin Video appliance and integration activity was partly offset by improving Cable Access software mix and hardware margins.
- Q2 net loss widened to $15.4 million from $11.8 million. The first-half net loss widened to $37.4 million from $23.2 million, while operating expenses were broadly level year over year for the first half.
- In June, Harmonic exchanged $37.7 million principal of 2020 notes for the same principal amount of 2022 notes. The exchange was accounted for as a debt extinguishment and resulted in a $0.8 million loss. The 2022 notes bear 4.375% interest and mature in December 2022.
- Property and equipment purchases rose to $20.8 million for the first half from $2.9 million, mainly for the new headquarters under construction.
Outlook, risks and unusual items
- Management gave no numerical revenue or earnings guidance in the provided filing text. It expects current liquidity to fund planned needs for at least 12 months, but cautioned that additional financing may be needed and could be difficult or costly amid pandemic-related market disruption.
- Management expects COVID-19 to continue materially affecting results, including through delayed customer spending, deployments and field work. The filing says effects were expected to continue in the second half of 2020; the full impact could not be reasonably estimated.
- Customer concentration increased: the top 10 customers accounted for 48% of Q2 revenue and 46% of first-half revenue, versus 42% and 39% in 2019. Comcast represented 19% of Q2 and 18% of first-half 2020 revenue.
- Risks include concentrated customer and industry spending, long CableOS sales cycles, competition and pricing pressure, reliance on limited suppliers and contract manufacturers, international and foreign-exchange exposure, and uncertainty around product transitions and customer adoption.
- The company reported $52.5 million of non-cancelable purchase commitments and $296.7 million of total contractual obligations. It reported no off-balance-sheet arrangements.
- Legal matters include ordinary-course litigation and claims whose outcomes and potential losses could not be reasonably estimated. The company disclosed a March 2020 OFAC administrative subpoena concerning transactions involving Iran by acquired Thomson Video Networks and said it was cooperating. A $2.0 million Avid litigation settlement liability was included in current liabilities and contractual obligations.
- Harmonic received COVID-19 relief loans of $5.6 million in France and $0.5 million in Switzerland. It also deferred $0.8 million of employer payroll taxes under the CARES Act.
Important facts for investors to verify
- Whether COVID-related customer delays and reduced Video appliance demand continue, and whether CableOS growth can offset that weakness.
- Cash use and capital expenditure requirements, including completion costs for the new headquarters, against management’s 12-month liquidity assessment.
- Debt repayment and conversion terms, especially the $8.1 million of 2020 notes maturing in December 2020 and the potential cash or dilution effects of note conversions.
- Customer concentration and the timing and scale of Comcast’s CableOS deployments and related license revenue.
- Developments in the OFAC inquiry, Avid settlement payments and other legal or regulatory matters.
- The company’s ability to meet purchase commitments and manage supplier, inventory and deployment risks amid pandemic disruption.