Harmonic Exceeds Revenue Guidance for Q2. Anticipates Double-Digit Operating Margins by Q4

Posted by Josh Stinehour
Aug 10 2016

Harmonic announced revenue for second quarter of 2016 of $109.5 million, an increase of 6% versus Q2 2015 and an increase of 33% versus the preceding quarter Q1 2016.  Guidance for Q2 2016 had been for revenue in the range of $102 million – $107 million.  Meaning, the quarter’s revenue result exceeded the high-end of previous guidance. Harmonic_Logo

The quarter’s growth was primarily the result of revenue contribution from the Thomson Video Networks (“TVN”) acquisition, which closed in late February.  TVN contributed approximately $18 million in revenue for the quarter.  Management is expecting TVN to contribute $55 million to $60 million for the full year.

Included below is a slide from Harmonic’s earning presentation, which highlights several updates with the Company’s Video Business.  Of particular note, Harmonic’s VOS platform – for software bundles, COTS servers, and pure virtual machines – exceeded 75% of video encoding sales during the quarter.

harmonic-slide

GAAP gross margins were 46.9% for the second quarter, a 599 basis point decline versus the 52.8% recorded in Q2 2015 and a 288 basis point decline when compared to the 49.7% gross margins in Q1 2016.  Harmonic attributed the gross margin declines to a less favorable product mix and delays in recognizing software and services revenue.

For the quarter, Harmonic recorded a GAAP net loss of $20.4 million or $(0.27) per diluted share.  This compares to a net loss of $0.3 million or ($0.01) per share in Q2 2015 and a net loss of $25.2 million or ($0.33) per share in Q1 2016. This brings Harmonic’s GAAP net loss for the first six months of 2016 to $45.6 million.

The GAAP figures include several non-cash items or one-item items such as restructuring charges, amortization of intangibles, stock-based compensation, and inventory write-downs.  On a non-GAAP basis Harmonic’s net loss for the first six months of 2016 was $8.4 million.  One of the larger one-time items are charges related to the restructuring and integration of TVN.  Management is anticipating these costs in the in the range of $22 million to $24 million for 2016.

In its conference call with analyst, Harmonic confirmed it remains on track to realize $20 – $22 million of annual synergy savings from the integration of TVN.  The full impact of these savings will begin with the start of 2017.  Management believes the savings, combined with higher revenue levels will result in the Company achieving double-digit non-GAAP operating profit in Q4 2016.

“…as a percent of revenue our OpEx in Q3 and Q4 will be lower and particular in Q4 we’ll be at probably I think the lowest point that Harmonic has had for OpEx as a percent of revenue in a number of years and I think the most important point is with the operating expense run rate that we expect to have we will be in a position to generate double-digit operating profit in 2017 without a significant increase in revenue” said Harmonic’s CEO Patrick Harshman on the Company’s earnings call with management.

Bookings for the second quarter of 2016 were $117.3 million, an increase of 18.1% versus the year earlier period, and a 7.0% increase versus the preceding quarter.

The Company’s total backlog and deferred revenue was $190 million, up 57.7% and 5.8%over Q2 2015 and Q1 2016, respectively.  This is the highest level of backlog and deferred revenue in Harmonic history.

On a geographic basis:

  • Revenue from the Americas region contributed $57.7 million for the quarter, a decrease of 4.4% versus the prior year and a sequential increase of 17.8% against the preceding quarter. Americas accounted for 53% of Harmonic’s revenue for Q2 2016, a decline versus the 58% from Q2 2015, and also a decline when compared to the 59% contribution recorded in Q1 2016
  • Revenue from the EMEA region was $33.4 million for Q2 2016, an increase of 22.3% versus Q2 2015, and a substantial increase of 68.5% against the preceding quarter. The EMEA region was responsible for 31% of Harmonic’s revenue in the quarter, an increase versus the 27% contribution from Q2 2015, and a further increase from the 25% contribution in Q1 2016.  The strong performance in EMEA is likely attributable to the TVN acquisition.  At the time of the acquisition 50% of TVN’s revenue came from the EMEA region.
  • APAC revenue was $17.6 million during the quarter, a 14.4% increase against Q2 2015, and a 35.6% increase against Q1 2016. APAC represented 16% of Harmonic’s revenue for the quarter, a slight increase versus the 15% contribution in Q2 2015, and equivalent to the contribution in Q1 2016

On a product line basis:

  • Video products revenue for the quarter was $62.2 million, an increase of 10.8% compared to Q2 2015, and a significant increase of 6% versus Q1 2016. As a percent of total sales, video products represented 57% of revenue in Q2 2016.  This compares to 54% in year-earlier period Q2 2015 and 54% in the preceding quarter Q1 2016.  TVN contributed $18 million to Video products revenue in the quarter.  Management is expected continued sequential growth from Video products in Q3 and Q4.
  • Cable Edge revenue was $15.8 million during the quarter, a decrease of 26.2% versus Q2 2015, though an increase of 17.3% compared to the preceding quarter. Cable Edge represented 14% of revenue in Q2 2016, a decrease versus the 21% contribution in Q2 2015, and a decrease against the 16% of revenue recorded in Q1 2016.  A continued near-term decline of Harmonic’s legacy EdgeQAM technology is anticipated.  Harmonic remains on schedule to ship its CableOS product line in the fourth quarter of this year.
  • Services and support revenue amounted to $30.9 million in Q2 2016, an increase of 20.2% against Q2 2015, and an increase of 27.5% versus Q1 2016. Service and support revenue was 29% of revenue for Q2 2016, an increase over the 25% from Q2 2015, and a decrease against the 30% from Q1 2016

On a segment basis:

  • Broadcast and Media sales were $43.8 million during the quarter, a year-over-year increase of 12.2%, and a substantial rise of 43.4% against the preceding quarter. Broadcast and Media was responsible for 40% of revenue for the second quarter of 2016, a slight percent increase from the 38% in both Q2 2015 and Q1 2016.
  • Service Provider sales were $64.9 million in the second quarter, a 1.4% year-over-year increase, and an increase of 26.6% versus Q1 2016. Service Provider represented 60% of revenue in the quarter, a slight decrease from 62% contribution in Q2 2015, and a decrease from the 62% contribution during Q1 2016.

Operating Expenses:

  • Research and development (“R&D”) expense was $26.5 million for the quarter, an increase of 21.5% compared to Q2 2015, and an increase of 12.5% against Q1 2016. Expressed as a percentage of total revenue, R&D expense represented 24.3% of sales in the quarter.  This is up from 21.2% in Q2 2015, though down from the 28.8% in Q1 2016.
  • SG&A expense was $36.5 million for the quarter, an increase of 16.7% versus Q2 2015, and a rise of 11.1% compared to Q1 2016. As a percentage of total sales, SG&A was 33.5% of revenue in the quarter.  This compares to 30.3% in Q2 2015 and 40.2% in Q1 2016.

The increases in both operating expense categories was driven by the integration of TVN operations.

The Company’s cash position ended the second quarter of 2016 at $65.3 million, down from $76.2 million from the end of Q1 2016.  The decrease in cash was primarily due to an increase in accounts receivable.

Harmonic ended the second quarter with 1,403 employees, up from 1,019 at the end of Q1 2016.  The TVN acquisition added approximately 438 employees.

Business outlook:

For Q3 2016 management is anticipating total revenue in the range of $104.5M – $109.5M and GAAP gross margins of 50.0% – 51.0%.  Operating loss is expected between $12.5 million and $10.5 million with net loss of between $12.5 million to $10.5 million.

Video revenue is expected to contribute between $92.5 million and $95.5 million in the upcoming quarter with Cable Edge accounting for revenue of $12.0 million to $14.0 million.

Also, as part of the earning release, Management increased full year guidance to a GAAP revenue expectation of $408 million to $418 million for 2016.  Video revenue is now anticipated between $348 million to $353 million and Cable Edge revenue is expected between $60.0 million and $65.0 million.

Commenting on quarter’s results, Mr. Harshman stated, “So putting it all together here, our strong order book, positive market demand trends, and strong internal execution enable us to remain confident in delivering the double digit operating profit we targeted in Q4 as we exit the year.”

 

 

Related Content:

Press Release: Harmonic Q2 2016 Earnings Announcement

Press Release: Harmonic Q2 2016 Earnings Presentation

 

 

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