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

Analysis, broadcast industry technology trends, broadcast technology market research, Broadcast technology vendor financials, OTT Video, Quarterly Results | Posted by Joe Zaller
Aug 02 2017

Harmonic announced that its revenue for the second quarter of 2017 was $82.9 million, down 24.9% compared to the previous year, and down 0.8% versus the previous quarter.

Bookings for the second quarter of 2017 were $91.1 million, down 22.3% compared to last year, and up 11.0% compared to the previous quarter.

The company attributed its revenue decline to a slowdown in spending, resulting from a strategic shift in spending at broadcasters and media companies, who the company says are increasingly prioritizing OTT and direct-to-consumer offerings over traditional linear platform deployments.

“Over-the-top software, cloud solutions and related subscription business models are becoming more significant drivers of our Video business,” Harmonic CEO Patrick Harshman told investors during the company’s Q2 2017 earnings call. “While subscription video-on-demand over-the-top platform growth is not news, the drive of traditional media companies and service providers to new unified live over-the-top services targeted at both mobile devices and the big screen in the living room is accelerating faster than we anticipated.”

On a GAAP basis, the Harmonic’s net loss for Q2 2017 was $31.5 million, or $(0.39) per diluted share in Q2 2017. This compares to a GAAP net loss of $20.7 million, or $(0.27) per diluted share last year, and a GAAP net loss of $24 million, or $(0.30) per diluted share last quarter.

In light of Harmonic’s declining revenues and ongoing losses, the company indicated it planned to reign-in costs during the second half of 2017.  Newly-appointed CFO Sanjay Kalra told analysts: “recognizing these accelerating marketplace changes, we have initiated a realignment of our investments, spending and infrastructure to optimally align with customer demand and opportunity… Our combined second half [2017] operating expenses will be $11 million to $15 million below first half operating expenses.”

GAAP gross margins were 41.1% for the quarter, compared to 43.1% last year, and 48.8% last quarter. The company attributed the decline to lower than expected revenue in the quarter.

Non-GAAP gross margins were 47.9%, compared to 53% last year, and 52.1% last quarter. Non-GAAP video product gross margin was 51.4%, compared to 56.1% last year, and 54.9% last quarter. Non-GAAP cable edge gross margin was 19% during Q2 2017, compared to 38.3% last year, and 29.1% last quarter.

Research and development expense was $27 million for the quarter, compared to $26.5 million last year, and $26.5 million last quarter. Expressed as a percentage of total revenue, R&D expense represented 32.9% of sales in the quarter, compared to 24.3% last year.

SG&A expense was $32.6 million for the quarter, compared to $36.5 million last year, and $36.5 million last quarter. Expressed as a percentage of total revenue, SG&A expense represented 39.6% of sales in the quarter, compared to 33.5% last year.

 

Geographic Revenues

Revenue in the Americas region was $40.6 million during Q2 2017, a decrease of 29.6% versus the prior year, and an increase of 7.1% versus the previous quarter. The Americas accounted for 49.3% of total Q2 2017 revenue, down from 53.1% last year, and up from 45.7% last quarter.

Discussing the company’s sharp revenue decline in the Americas, Harshman indicated the industry has reached an inflection point in ongoing structural shift from linear platforms to OTT and direct-to-consumer offerings: “Particularly in the U.S. the strategic emphasis on high-quality over-the-top services is impacting the pace of investment in more traditional broadcast and pay -TV systems… What we’re seeing now is a pullback on investments in those traditional platforms and a real strategic mandate to an all-hands-on-deck on the over-the-top, the streaming strategy. It’s not just down to a delayed decision around specific technology, but it’s more, I think, a derivative of a broader strategic shift that we’re seeing playing out…. There’s a lot happening in the media and pay -TV landscape in the U.S., so there’s a lot of thinking going on, there’s a lot of planning, not the least of which is related to the underlying technology platforms. But there’s a lot that our customers are grappling with and trying to figure out.”

EMEA revenue in Q2 2017 was $24.95 million, down 25.3% versus the prior year, and down 1.9% versus the previous quarter. The EMEA region accounted for 30.3% of total Q2 2017 revenue, compared to 30.7% last year and 30.7% last quarter.

APAC revenue in Q2 2017 was $16.75 million, down 14.5% versus the prior year, and down 4.8% versus the previous quarter. The APAC region accounted for 20.3% of total Q2 2017 revenue, compared to 16.2% last year and 23.6% last quarter.

 

Product Revenues

Video products revenue for the quarter was $44.8 million, down 27.9% versus the previous year, and down 1.5% versus the previous quarter. As a percent of total sales, video products represented 54.5% of revenue in Q2 2017, compared to 56.8% in year-earlier period, and 54.9% in the previous quarter.

Similar to other firms that have embarked on the shift from hardware/CapEx revenues to software/SaaS revenues, company CFO Karla explained: “when a traditional CapEx booking comes in, we typically recognize the vast majority of that booking as revenue immediately or within a quarter or two. But if that booking comes in as a SaaS order, revenue is instead recognized ratably over time, resulting in much less current period revenue, but an expanded backlog. So to be clear, as our Video segment mix shift to SaaS, we expect a near-term revenue and operating profit headwind, offset by a growing backlog that over time will provide greater revenue visibility.”

Harshman took an optimistic tone when asked about the company’s shift to software and SaaS.  “While software-as-a-service is still a relatively small component of this overall over-the-top business, the adoption of our SaaS solutions in the second quarter was greater than expected,” he said. “Cloud and SaaS total contract value grew 90% sequentially to a little over $7.5 million, while our annual recurring revenue grew 87% to nearly $6 million. Had these subscription bookings been traditional CapEx orders recognizes revenue immediately, second quarter Video revenue would have grown year-over-year. I will be surprised if [SaaS isn’t 20% of our video revenue] within a year…. I mean I hesitate a little bit, but only because just a quarter ago, we were sitting here relatively pleased candidly that we were at 5% and to see it surge to 8% in the second quarter was certainly a surprise to us.”

Cable Edge revenue was $5.36 million during the quarter, a decline of 66% versus the previous year, and an increase of 9.8% versus the previous quarter. Cable Edge represented 6.5% of revenue in Q2 2017, a decrease versus the 14.4% contribution in the previous year, and an increase versus the 5.9% in the previous quarter.

Harmonic’s Cable Edge business has been in decline for more than a year due to the transition by cable TV operators from legacy EdgeQAM products, to a new generation of products based on C-CAP (Converged Cable Access Platform) technology.

Once again, Harshman was optimistic when describing the outlook for Cable Edge products.  “The real news here is that we continue to make material progress advancing our CableOS technology leadership and new business pipeline,” he said. “Our confidence is further bolstered by recent advanced purchase orders. Since our May conference call and through July, we received over $15 million of new CableOS orders, bringing our CableOS backlog to approximately $20 million. Relative to our initial expectations, we are seeing a higher percentage of this demand being associated with new distributed access architectures, which make sense given the growing industry focus.”

Services and support revenue were $32.1 million in Q2 2017, an increase of 4.0% versus the previous year, and a decline of 9.8% versus the previous quarter.  As a percentage of overall revenue, service and support accounted for 39.0% in Q2 2017, versus 28.8% last year, and 39.2% last quarter.

 

Segment Revenues

Broadcast and Media sales were $35.85 million, down 18.1% versus last year, and up 2.8% versus the previous quarter. In aggregate, Broadcast and Media accounted for 43.6% of total revenue, compared to 40.3% last year, and 42.1% last quarter.

Service Provider revenues were $46.42 million, down 29.4% versus last year, and down 3.3% versus the previous quarter. In aggregate, Service Providers accounted for 56.4% of total revenue, compared to 60.5% last year, and 57.9% last quarter.

 

Business Outlook

The company provided the following guidance for Q3 and Q4 2017.

For the third-quarter of 2017, the company expects revenue to be within the range of $80 – $90 million, comprised of Video revenue in the range of $72 ­- $81 million; and Cable Edge revenue in the range of $8 – $9 million. Q3 non-GAAP gross margins are expected to be in the range of 51% to 52%, with Video gross margin of 55% to 56% and Cable Edge gross margins of 20% to 21%. Q3 2017 non-GAAP operating expenses are expected to be in a range of $48 million to $50 million. Q3 2017 non-GAAP operating losses are expected to be in the range of $9 million to $1 million, and non-GAAP EPS is expected to be in the range of $0.11 to $0.03 The company expects cash and short-term investments at the end of Q3 to be between $40 million and $50 million.

For the fourth-quarter of 2017, the company expects non-GAAP revenue to be within the range of $90 – $100 million, which includes Video revenue of $80 – $86 million and Cable Edge revenue of $10 – $14 million.  Q4 2017 non-GAAP gross margins are expected to be 52% to 53.5% with Video gross margins of 55% to 57% and Cable Edge gross margins of 27% to 29%. Q4 2017 non-GAAP operating expenses are expected to be in a from $48 million to $50 million. Q4 2017 non-GAAP operating profit is expected to be in the range of a loss of $3.3 million to profit of $5.5 million. Q4 non-GAAP EPS is expected to be in the range of $0.05 loss to $0.04 profit. The company expects cash and short-term investments at the end of Q4 to be between $40 million and $50 million.

Harmonic exited the quarter with total backlog and deferred revenue of $194.4 million, a record for the company.  The company ended the quarter with $52.9 million in cash, down from $56 million last quarter. Employee count at the end of Q2 2017 was 1,338 compared to 1,403 last year, and 1,358 at the end of Q1 2017.

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Related Content:

Press Release: Harmonic Announces Second Quarter 2017 Results

Previous Year: Harmonic Exceeds Revenue Guidance for Q2 2017, Anticipates Double-Digit Operating Margins by Q4

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© Devoncroft Partners 2009 – 2017. All Rights Reserved.

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

Analysis, Broadcast technology vendor financials, Quarterly Results | 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

 

 

© Devoncroft Partners 2009 – 2016. All Rights Reserved.

 

 

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