As per the table above from Belden’s investor presentation, the company’s Belden’s Broadcast Solutions segment includes broadcast stalwart Grass Valley, along with PPC, a provider of components used by cable MSO, and KVM switch provider ThinkLogical.
Q4 2017 Broadcast Revenues Impacted by Revenue Recognition Issues
The company attributed much of the year-over-year revenue shortfall to the negative impact of revenue recognition issues.
“Most of our businesses performed in line with our expectations during the fourth quarter, with the exception of an isolated situation in our Broadcast Solutions segment,” said Belden CEO John Stroup, shown below speaking at the 2017 Devoncroft Media Technology Business Summit.
“We had expected to recognize revenue on $36 million of product that was shipped in 2017, but we were unable to do so as a result of technical U.S. GAAP revenue recognition requirements that our team identified during the year-end closing process. We now expect these 2017 shipments to be recognized as $36 million in revenue and $22 million in EBITDA in 2018.”
On the company’s earnings call, Belden Chief Financial Officer Henk Derksen provided additional detail on the accounting issues that prevented the company from recognizing $36 million of broadcast revenue in the quarter: “We expected to recognize revenue on $36 million of orders in our Broadcast segment that shipped prior to the end of 2017. However, we are unable to do so, as a result of technical U.S. GAAP revenue recognition requirements, said Derksen.
These revenue recognition issues appear to be related to the shipment of IP-based systems, which either include or are sold through third-parties. As the industry transitions to IP-based operations for production, playout, and delivery, more and more products (from all suppliers) are likely to involve some sort of third-party, many vendors may begin to face accounting challenges similar to those encountered by Grass Valley in Q4 2017.
Derksen provided additional detail on the revenue recognition shortfall, saying: “[IIP n] certain transactions, our broadcast IT business shipped products through third-party logistics providers, or 3PLs. On all of these shipments, legal title and the risk of loss transferred to the customers at the time of the shipment, and we were entitled to receive payment. However, we did not meet all of the technical delivery criteria for revenue recognition under U.S. GAAP. Clearly, we’re disappointed with this outcome. That said, we are pleased that we identified this matter as part of our year-end closing process. Ultimately, we view this issue as a delay and have increased our 2018 guidance accordingly to reflect an incremental $36 million in revenue and $22 million in EBITDA.”
According to Derksen, these revenues will be recognized over the first three quarter of 2018. “The $36 million that we couldn’t recognize in the fourth quarter and will recognize in 2018 will layer in $15 million in Q1, $15 million in Q2, and $6 million in the third quarter,” said Derksen. “We have to modify some of our terms and conditions with our customers. That will take a little bit of time. So I don’t want you to expect that all the $36 million to reverse completely in Q1.”
Shipments of IP-based Products Accelerate
Despite the accounting issues, the company appears increasingly confident about the transition to IP-based operations.
Stroup said Q4 2017 was Grass Valley’s strongest-ever quarter for sales of IP-based systems, and predicted that IP shipments would accelerate in the future, thanks to the adoption of new standards and increasing custom confidence in IP-based solutions. “We think [the finalization of the SMPTE 2110 standard is] an important development and certainly going to be helpful moving into 2018. We had our strongest quarter ever in IT-based product revenues in the fourth quarter. It was over $5 million. And it was to 36 different customers. So, it’s clear that our customers are getting more confident, more comfortable with the technology. I think they view us as really one of the only solutions that meets the open standard. As we’ve talked about, we have some competitors that have done very well, but their systems and their solutions are far more closed than what we’re offering and what the standard dictates. So, I think that the Grass Valley business, from a product point of view, is very well positioned moving into 2018.”
Positive Outlook for 2018
Belden provided an upbeat outlook for its broadcast business in 2018. Stroup told analysts “I would expect our Broadcast segment to be in that range [3% – 5% organic growth], maybe towards the higher end, because when we report our organic growth in 2018, we’re going to give it based on what our actual revenues were in 2017 versus our actual revenues in 2018. So obviously our Broadcast segment is going to have a lot of tailwind coming into 2018. So I would expect that all of our platforms are going to be somewhere around 3% to 5%. The Broadcast segment may be on the higher end, maybe 5%, maybe a little bit higher given the fact that they have that $36 million of revenue coming into the year.
Full Year 2017 Broadcast Results
For the full year 2017, revenues in the Broadcast Solutions segment was $725.1 million, down 5.8% from $769.6 million in 2016.
© Devoncroft Partners 2009-2018. All Rights Reserved.