Harmonic Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited quarterly results, including Q4 2018.
Business context
Harmonic sells video processing, production and playout products and services, including cloud and SaaS offerings, and cable access solutions, including its software-based CableOS platform. In 2018, 54% of revenue came from the Americas, 27% from EMEA and 19% from APAC.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $403.6 million | $358.2 million |
| Gross profit / margin | $209.2 million / 51.8% | $169.8 million / 47.4% |
| Operating loss | $5.0 million | $70.9 million |
| Net loss | $21.0 million | $83.0 million |
| Net loss per diluted share | $0.25 | $1.02 |
| Cash from operations | $12.3 million | $3.1 million |
| Cash and cash equivalents at year-end | $66.0 million | $57.0 million |
Revenue increased 13%, mainly reflecting a $52.1 million increase in Cable Access revenue, partially offset by a $5.6 million decline in Video revenue. Cable Access growth came from CableOS hardware, software and services. Gross-margin improvement reflected stronger Cable Access margins and a more favorable Video product mix. Lower operating expenses also contributed to the narrower operating loss.
Q4 2018: Revenue was $113.7 million, gross profit was $60.3 million (53.1% margin), and net income was $3.3 million, or $0.04 per diluted share. This compared with Q4 2017 revenue of $101.0 million and a net loss of $11.5 million. Management attributed Q4 profitability to higher revenue, stronger gross margins and lower operating expenses; a $1.0 million foreign-subsidiary valuation-allowance release also benefited Q4 tax results.
FY 2018 investing cash use was $6.9 million, including $7.0 million of property and equipment purchases. Operating cash flow less those purchases was approximately $5.2 million. Quarterly cash-flow data is not separately provided in the filing text.
Liquidity, debt and material changes
Year-end working capital was $60.3 million, versus $29.7 million in 2017. Current assets were $196.7 million and current liabilities $136.4 million. Debt included $128.25 million principal amount of 4.0% convertible notes due December 1, 2020, plus $19.9 million of other debt and capital lease obligations. The $15 million revolving credit facility was undrawn; the company reported covenant compliance. Management said available liquidity was expected to cover planned needs for at least 12 months.
Video revenue decreased 2% to $313.8 million as customers shifted from traditional broadcast products and some SaaS deployments slowed. Cable Access revenue rose 134% to $90.9 million. The company continued restructuring and cost controls; FY 2018 restructuring and related charges were $3.8 million, down from $6.6 million. The adoption of ASC 606 increased FY 2018 reported revenue by $1.0 million and reduced net loss by $1.0 million versus the prior accounting guidance; prior-year results were not restated.
Outlook, risks and unusual items
No quantified revenue or earnings guidance is provided. Management expects continued migration toward software-centric, cloud/SaaS video solutions and CableOS, while cautioning that CableOS remains in early deployments and has long customer sales and qualification cycles.
- Customer concentration increased: Comcast represented 15% of FY 2018 revenue; the ten largest customers represented 37%. Comcast’s warrant may cover up to 7.8 million shares at $4.76 per share, subject to vesting conditions; $1.2 million was recorded as a revenue reduction from warrant amortization in 2018.
- Convertible notes mature in 2020 and may require cash settlement, depending on conversion and settlement choices. The carrying amount was $114.8 million; principal is $128.25 million.
- Other significant exposures include competition and pricing pressure, uncertain adoption of new technologies, reliance on limited-source suppliers and contract manufacturers, international and foreign-exchange risks, and potential inventory obsolescence. Goodwill was $240.6 million; the 2018 annual impairment test found no impairment.
- The Avid litigation was settled in 2017 and dismissed with prejudice. Remaining settlement payments were $1.5 million in Q2 2019 and $2.0 million in Q3 2020. The filing says other litigation losses cannot be reasonably estimated.
- French R&D tax-credit receivables totaled approximately $26.5 million at year-end, expected to be recovered over 2019–2022; recovery remains subject to government review. The company reported a $4.1 million income-tax provision despite a pretax loss.
- Operating leases were expected to add approximately $23 million of right-of-use assets and lease liabilities upon adoption of the new lease standard in 2019. The independent auditor gave an unqualified opinion and concluded internal control over financial reporting was effective.
Investor verification priorities
- Verify the pace, profitability and customer breadth of CableOS deployments, including Comcast’s purchases and warrant vesting.
- Track Video revenue trends, SaaS subscription growth and the effect of product mix on gross margins.
- Assess cash generation, working-capital needs and the ability to address the 2020 convertible-note maturity.
- Monitor collection of French R&D tax credits, tax exposures and any changes to deferred-tax valuation allowances.
- Review the impact of lease-standard adoption and remaining restructuring and litigation-related payments.