Harmonic Exceeds Expectations in Q2 2013 Thanks to Strength in Broadcast and Media Markets

Posted by Joe Zaller
Jul 29 2013

Harmonic announced that it revenue for the second quarter of 2013 was $117.1M, a decline of 4% versus the same period a year ago, and an increase of 15% versus the previous quarter. The company’s  largest customer for the second quarter of 2013 was Comcast, at 11% of revenue.

Q2 results were presented on a pro-forma basis, excluding revenue from the Harmonic’s cable Access HFC business, which was sold to Aurora Networks for $46m on March 5, 2013.

Harmonic CEO Patrick Harshman said that although the quarter started off slowly in January, momentum built throughout February and March, and the company “saw better linearity throughout the quarter than we’ve seen for some time.”  Harshman added that “the second quarter also saw the percentage of domestic business increase, with particular strength from the broadcast and media market, driving our product mix towards higher-margin video processing and production and playout products.”

Investors like the results, which exceeded the expectations of equity analysts as well as Harmonic’s previously issued guidance of Q2 or revenue in the range of $105m to $115m, and sent the company’s shares higher following the announcement.

The GAAP net loss for the quarter was $3.4m, or ($0.03) per share, compared with a GAAP net loss of $3.9m, or ($0.03) per share, during the same period last year, and a GAAP net loss of $9.5m, or ($0.08) per share, in the previous quarter.

On a non-GAAP basis, the company posted net income of $5.6m, or $0.05 per share, compared with non-GAAP net income of $6.5m, or $0.06 per share last year, and a non-GAAP net loss of $2.7m, or ($0.02) per share, for the first quarter of 2013,

Bookings in the second quarter of 2013 were $126.3 million, compared with $110.1 million for the first quarter of 2013 and $128.5 million for the second quarter of 2012.

Harshman noted that bookings “significantly exceeded revenues in the quarter,” and were driven by continuing improvement in the Europe, Middle East, and Africa region and strong performance and Latin America. Harshman also said that the company’s broadcast and media market, and its Omneon business, “continue[s] to be strong and notably drove progress in our domestic business.” However, Harshman said that demand from US Pay-TV service providers continue to be soft.

 

On a geographic basis:

international markets accounted for 53% of total revenue in the quarter, down from 54% last year, and down from 58% last quarter.

Harmonic’s CFO Carolyn Aver said “while our international revenues grew in absolute dollars, the biggest growth in dollars came from the US; strongest in broadcast and media, but also in telco, satellite, and cable. Video processing represented 53% of revenue, up from 49% in the second quarter of 2012.”

 

On a product line basis:

  • Video processing represented 53% of revenue, up from 49% in the second quarter. Harshman said that strength from the broadcast and media market drove Harmonic’s product mix towards higher-margin video processing products, including positive progress around its new CCAP platform.

 

  • Production and playout (Omneon product sales minus associated service revenue) represented 19% of revenue this quarter compared to 17% for the same quarter last year, and 22% last quarter.

 

  • Cable edge business represented 11% of revenue, a decrease from 19% of revenue last year, and 17% of revenue last quarter. Aver said: “It is worth noting that in this quarter last year we had higher Edge revenue but lower gross margin, as we sold more of the hardware platform, or the razors. This quarter, we sold more software licenses into that equipment, or the razor blades, which resulted in lower revenue dollars but higher gross margin.”

 

  • Service and support revenue was 17% of revenue this quarter, up from 15% last year and down from 19% last quarter.

 

 

On a segment basis:

  • Broadcast & media represented 40% of revenue, up from 33% last year, and 38% last quarter. The company attributed the increase in broadcast sales to the continuing success of cross-selling video products from both Harmonic and Scopus into this customer base. Harshman said that Harmonic has made progress with broadcast and media companies globally, and that the company sees these organizations as a large and growing opportunity. He said the company’s Spectrum ChannelPort solution is “gaining real market traction,” and that the company had a “big competitive win with a new account, taking us to significant projects now in three of the top five US media companies so far this year.”

 

  • Cable represented 36% of revenue, down from 44% last year, and 39% last quarter.  Aver said that the company believes cable revenues will increase “back to the historical range” once its new NSG Pro product is deployed in the market. Harshman noted that “while the US Pay-TV operator market has, of late, represented a challenging space for us due to where they are in technology cycles, it’s important to remember that the levels of consumer penetration and high RPUs mean that they will always have tremendous buying power.”

 

  • Satellite and telco represented 24% of revenue versus 23% of revenue last year and last quarter.

 

Q2 2013 Revenue Details:

 

Harmonic Q2 2013 Revenue Mix

 

GAAP gross margin was 49% and GAAP operating margin was (4%) for the second quarter of 2013, compared with 45% and (15%), respectively, for the first quarter of 2013, and 45% and (3%), respectively, for the same period of 2012.

Non-GAAP gross margins were 54% in the quarter, better than previously issued guidance of 51.5% to 52.5%. The non-GAAP operating margin was 6%, compared with 51% and (3%), respectively, for the first quarter of 2013, and 50% and 7%, respectively, for the same period of 2012.

Aver attributed the margin expansion in the quarter to greater sales of higher margin video processing products, particularly in the cable edge category, than to sales of new software licenses on existing hardware platforms.

Aver went on to say that the company’s margins “started in the 40s and have moved up. We certainly expected, with the sale of the Access business, that low 50% would move to, call it, 52% or 53%, and for some time, we’ve targeted the mid-50s as the place we want to go. I don’t think this says we’re there yet. I think it shows that when we do well in video processing and P&P, those are definitely our highest gross margin products. And that has a big influence on how our margins come out. Also, as more and more of our products have more of the software component, and we get to quarters where we’re delivering a lot of licenses, that as well has a big impact on the margins.”

Non-GAAP operating expenses for this quarter were $56.1 million, up from $55.2 million in the first quarter of 2013, and up from $52.4 million in the second quarter of 2012.   Non-GAAP operating expenses were higher than the previous guidance of $54m to $55m. The company said the increase in operating expenses was due to costs related to bringing our new products to market, as well as increased costs related to litigation.

Harmonic generated approximately $24.8m of cash from operations in the second quarter, and used approximately $85.6m, excluding related costs, for its repurchase of approximately 12 million shares in the tender offer and approximately 1.8 million shares under its previously announced share repurchase program.

The Company also announced it will expand its existing share repurchase program by $85 million, providing for a total of approximately $100 million of share repurchases going forward. Since April 2012, Harmonic has authorized the repurchase of $220 million of its common stock, and has repurchased approximately $120 million of its common stock to date.

Harmonic ended the quarter with 1,078 employees, slightly down from 1096 at the end of the previous quarter. Cash at the end of the second quarter was $161.7m, down $66.6m from $228.3 at the end of the first quarter of 2013. quarter.  The decrease in cash was due primarily to repurchasing of the company’s stock.  Backlog and deferred revenue at the end of the second quarter was $132.5m, compared to $126.3m as of March 29, 2013.

 

Business Outlook

Aver said the company is “cautiously optimistic about our international business and our domestic broadcast and media business,” and noted that the company expects some project revenue that was previously booked to be recognized in the third quarter of 2013.

Therefore, Harmonic expects Q3 2013 revenue to be in a range of $115m to $125m in the third quarter of 2013.  Q3 GAAP gross margins are expected to be in the range of 45% to 46% . Q3 GAAP operating expenses are expected to be in the range of $60.5m to $61.5m.  Q3 Non-GAAP gross margins Are expected to be in the range of 50% to 51% . Q3 Non-GAAP operating expenses are expected to be in the range of $54.5m to $55.5m.

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© Devoncroft Partners 2009 – 2013. All Rights Reserved.

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Related Content:

Press Release: Harmonic Announces Second Quarter 2013 Results

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Previous Quarter: Harmonic Revenue Declines 14 Percent in Q1 2013

Previous Year: Euro Weakness Offsets Strength in US for Harmonic in Q2 2012

Activist Investor Targets Harmonic

Harmonic Announces $100 Million Stock Buyback, New Chairman

Broadcast Vendor M&A: Harmonic Divests Low Margin Cable Access Business to Aurora Networks for $46 Million

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