Harmonic Beats Expectations in Q2 2018 as Both Video and Cable Accelerate

Joe Zaller | August 1, 2018

By: Joe Zaller 2018/08/01 3:23:53 pm

Harmonic announced revenue for the second quarter of 2018 of $99.1 million, an increase of 20% versus Q2 2017 and an increase of 10% versus the preceding quarter Q1 2018.  The revenue results exceeded the earlier guidance for Q2 2018 ($88 million – $98 million).

Together with Q1 2018 results, the first half 2018 revenue grew 15% compared to the first half of 2017.

Harmonic’s CEO Patrick Harshman participated as a panelist at the Devoncroft Summit during the 2018 NAB Show (second from left in below).  Patrick’s comments during the panel discussion of CEOs were optimistic about market conditions and that optimism has clearly proven well-founded given Harmonic’s strong results during the first part of 2018.

Devoncroft Summit 2018: Technology Supplier C-Suite Panel(Pictured above from left to right: Joe Zaller, President Devoncroft; Patrick Harshman CEO Harmonic; Jeff Rosica CEO Avid; John Stroup CEO Belden; Michael Hallen CEO Vizrt)

GAAP gross margins were 52% for the second quarter, a substantial 1,110 basis point increase versus the 41.1% recorded in Q2 2017 and a 20 basis point increase when compared to the 52.0% gross margins in Q1 2018.  Gross margin improvement was driven by Harmonic’s CableOS offering, which both experienced strong growth and is characterized by a higher software component than Harmonic’s historical Cable Access products.

Operating income for the quarter was $0.6 million compared to operating losses of $27.4 million and $9.3 million during the year-over-year and preceding quarters.  It is worth adding emphasis on the positive GAAP operating income result, as it was the first such quarter of positive GAAP operating income for Harmonic since the first quarter of 2015 (twelve quarters or over three calendar years).   Harmonic’s Video segment, however, has experienced four consecutive quarters of positive operating income.

For the quarter, Harmonic recorded a GAAP net loss of $1.1 million or $(0.03) per diluted share owing to charges associated with interest expenses.  Again, this compares quite favorably to a net loss of $30.9 million or ($0.39) per share in Q2 2017 and a net loss of $11.5 million or ($0.16) per share in Q1 2018.

The improvement in profitability was accomplished through revenue and gross margin performance, but also a series of restructuring initiatives.  In each of the past three years, Harmonic has instituted a restructuring plan.  In the first quarter of 2016, Harmonic recorded a $20M restructuring charge related to a worldwide reduction of 118 employees in connection with the acquisition of Thomson Video Networks.  The 2017 restructuring plan included a $2.5M charge in the third quarter to “better align its operating costs with the continued decline in its new revenues.”  The most recent restructuring announcement occurred in the first quarter of 2018 where Harmonic took a $1.8M charge for the elimination of 53 employees, primarily in the United States.

While Harmonic’s Cable Access segment receives the majority of equity analyst attention (for good reason, as it doubled in size during the quarter), there were several notable developments disclosed by management on the Company’s video segment.

As per the slide above, Harmonic’s technology is now powering 34,000 live and OTT channels worldwide, and its SASS business accelerated again. This indicates the company is successfully navigating the transition of its business model from hardware to software – something that virtually all media technology suppliers are grappling with to a greater or lesser degree.

“We’re seeing clear evidence of our growth initiatives gaining momentum and driving improved financial performance,” said Harshman. “As a reminder, our objective has been to transition our historically broadcast video-centric appliance business to a more profitable and predictable over-the-top centric software and SaaS business.”   Consistent with these remarks the company, called attention to 2 separate $1 million-plus SaaS customer wins.  One deal was with an incumbent international mobile operator launching a streaming service and the other a US start-up offering a skinny bundle service.

On a geographic basis:

  • Revenue from the Americas region contributed $52.9 million for the quarter, an increase of 30% versus the prior year and a sequential increase of 8.3% against the preceding quarter. Americas accounted for 53% of revenue for Q2 2018, an increase versus the 49% from Q2 2017, and a slight decline when compared to the 54% contribution recorded in Q1 2018
  • Revenue from the EMEA region was $31.6 million for Q2 2018, an increase of 27% versus Q2 2017, and an increase of 36% against the preceding quarter. The EMEA region was responsible for 32% of revenue in the quarter, an increase versus the 30% contribution from Q2 2017, and the 25% contribution in Q1 2018.
  • APAC revenue was $14.6 million during the quarter, a 13% decrease against Q2 2017, and a 19% decrease against Q1 2017. APAC represented 14% of revenue for the quarter, a slight increase versus the 20% contribution in Q2 2017 and Q1 2018, respectively.


On a product basis:

  • Product revenue was $38.5 million in the quarter, a 21% increase over last year and a 9.4% increase over the preceding quarter. Products contributed 61% of the quarter’s revenue, consistent with both the year-earlier and preceding quarters.
  • Services and support revenue amounted to $30.9 million in Q2 2018, an increase of 20% against Q2 2017, and an increase of 11% versus Q1 2018. Service and support revenue was 39% of revenue for Q2 2018, consistent with both Q2 2017 and Q1 2018.


On a segment basis:

  • Video segment revenue for the quarter was $79.2 million, an increase of 8% compared to Q2 2017, and an increase of 10% versus Q1 2018. Revenue results exceeded the high-end of guidance for the quarter ($76 million).  As a percent of total sales, video products represented 80% of revenue in Q2 2018.  This compares to 89% in year-earlier period Q2 2017 and 80% in the preceding quarter Q1 2018
  • Cable Edge revenue was $20.2 million during the quarter, an increase of 126% versus Q2 2017, and an increase of 9.4% compared to the preceding quarter. Revenue was in line with guidance. Cable Edge represented 20% of revenue in Q2 2018, versus the 11% contribution in Q2 2017, and 20% of revenue recorded in Q1 2018.


On a market basis:

  • Broadcast and Media sales were $45.0 million during the quarter, a year-over-year increase of 13%, and a rise of 19% against the preceding quarter. Broadcast and Media was responsible for 45% of revenue for the second quarter of 2018, a slight percent increase from the 44% in Q2 2017 and 42% in Q1 2018.
  • Service Provider sales were $54.1 million in the second quarter, a 17% year-over-year increase, and an increase of 4% versus Q1 2018. Service Provider represented 55% of revenue in the quarter, a slight decrease from 56% contribution in Q2 2017, and a decrease from the 58% contribution during Q1 2018.


Operating Expenses:

  • Research and development (“R&D”) expense was $21.5 million for the quarter, a decrease of 20% compared to Q2 2017, and a decrease of 8% against Q1 2018. Expressed as a percentage of total revenue, R&D expense represented 22% of sales in the quarter.  This is down from 33% in Q2 2017, and down from the 26% in Q1 2018.
  • SG&A expense was $27.9 million for the quarter, a decrease of 14% versus Q2 2017, and a decrease of 10% compared to Q1 2018. As a percentage of total sales, SG&A was 28% of revenue in the quarter.  This compares to 40% in Q2 2017 and 35% in Q1 2018.

The Company’s cash position ended the second quarter of 2018 at $54 million, up from $52 million at the end of Q1 2018.

Business outlook:
Bookings for the second quarter of 2018 were $107.9 million, an increase of 18% versus the year earlier period, and a 5.1% increase versus the preceding quarter.

The Company’s total backlog and deferred revenue was $230.4 million, up 19% and 2.6%over Q2 2017 and Q1 2018, respectively.  This is the highest level of backlog and deferred revenue in Harmonic history.

For Q3 2018 management is anticipating total revenue in the range of $93M – $103M and GAAP gross margins of 48.4% – 49.5%.  Operating loss is expected between $11.1 million and $4.1 million.

Video revenue is expected to contribute between $70 million and $76 million in the upcoming quarter with Cable Edge anticipated to record revenue of $23.0 million to $27.0 million.

Full year guidance for GAAP revenue is $388 million to $411 million for 2016 with Video revenue expects to contribute full year revenue between $296 million to $309.


Related Content:

Press Release: Harmonic Q2 2018 Earnings Announcement

Harmonic Q2 2017 Revenue Declines 25% as Industry-Wide Structural Shift to Cloud, Software, and SaaS Accelerates


© Devoncroft Partners 2009 – 2018. All Rights Reserved.