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Harmonic Announces Third Quarter 2017 Results

SAN JOSE, Calif., Oct. 30, 2017 /PRNewswire/ -- Harmonic Inc. (NASDAQ: HLIT), the worldwide leader in video delivery technology and services, today announced its unaudited results for the third quarter of 2017.

Q3 Financial and Business Highlights

  • GAAP revenue of $92.0 million up 11.8%, and non-GAAP revenue of $91.6 million up 11.3%, sequentially
  • GAAP and non-GAAP Video revenue of $84.2 million up 14.7%, sequentially
  • GAAP gross margin up 10.0% from 41.1% to 51.1%, and non-GAAP gross margin up 5.5% from 47.9% to 53.4%, sequentially
  • GAAP operating expense flat, and non-GAAP operating expense down 14.5%, sequentially
  • GAAP operating margin of (15.4%) and non-GAAP operating margin of 1.4%
  • Record backlog and deferred revenue of $200.9 million, with CableOS backlog greater than $20 million
  • Video SaaS TCV 6% of total bookings, and ARR of $7 million up 37% sequentially
  • Surpassed 20,000 live OTT channels powered globally
  • Further expansion of CableOS deployments and advanced field trials
  • Settled Avid litigation

"We drove high single digit operating margin in our video segment through growth of our premium live OTT solutions and crisp cost control," said Patrick Harshman, president and chief executive officer of Harmonic. "Our CableOS program also made significant progress, including a new tier 1 customer design win, expanded commercial deployments and trial activity, and a growing backlog of orders."

Select Financial Information



GAAP


Non-GAAP

Key Financial Results


Q3 2017


Q2 2017


Q3 2016


Q3 2017


Q2 2017


Q3 2016



(in millions, except per share data)

Net revenue


$

92.0



$

82.3



$

101.4



$

91.6



$

82.3



$

101.7


Net loss


$

(15.6)



$

(31.5)



$

(16.0)



$

(0.5)



$

(15.7)



$

(1.1)


Diluted EPS


$

(0.19)



$

(0.39)



$

(0.21)



$

(0.01)



$

(0.20)



$

(0.01)















Other Financial Information

Q3 2017


Q2 2017


Q3 2016


(in millions)

Bookings for the quarter

$

96.0



$

91.1



$

97.3


Backlog and deferred revenue as of quarter end

$

200.9



$

194.4



$

181.1


Cash and short-term investments as of quarter end

$

50.0



$

52.9



$

52.7


Explanations regarding our use of non-GAAP financial measures and related definitions, and reconciliations of our GAAP and non-GAAP measures, are provided in the sections below entitled "Use of Non-GAAP Financial Measures" and "GAAP to Non-GAAP Reconciliations".

Outlook and Financial Guidance

GAAP Financial Guidance


Q4 2017


2017


Low


High


Low


High




(in millions, except percentages and per share data)

Net Revenue


$

90.0



$

100.0



$

347.9



$

357.9



Video


$

80.0



$

86.0



$

311.9



$

317.9



Cable Edge


$

10.0



$

14.0



$

36.0



$

40.0


Gross Margin %


50.0

%


51.0

%


48.0

%


49.0

%


Video


52.0

%


54.0

%


52.0

%


53.0

%


Cable Edge


26.0

%


28.0

%


12.0

%


14.0

%

Operating Expenses


$

54.4



$

56.4



$

238.0



$

240.0


Operating Loss


$

(11.5)



$

(3.0)



$

(73.2)



$

(64.7)


Tax benefit (expense)


$

(0.8)



$

(0.8)



$

0.8



$

0.8


EPS


$

(0.19)



$

(0.08)



$

(1.06)



$

(0.96)


Shares


82.0



82.0



81.0



81.0


Cash and short-term investments


$

40.0



$

50.0



$

40.0



$

50.0



Non-GAAP Financial Guidance


Q4 2017


2017


Low


High


Low


High




(in millions, except percentages and per share data)

Net Revenue


$

90.0



$

100.0



$

348.0



$

358.0



Video


$

80.0



$

86.0



$

312.0



$

318.0



Cable Edge


$

10.0



$

14.0



$

36.0



$

40.0


Gross Margin %


52.0

%


53.5

%


51.5

%


52.0

%


Video


55.0

%


57.0

%


55.0

%


55.5

%


Cable Edge


27.0

%


29.0

%


22.0

%


23.0

%

Operating Expenses


$

48.0



$

50.0



$

206.0



$

208.0


Operating Income (Loss)


$

(3.0)



$

5.5



$

(28.5)



$

(20.0)


Tax rate


15

%


15

%


15

%


15

%

EPS


$

(0.05)



$

0.04



$

(0.38)



$

(0.29)


Shares


82.0



82.5



81.0



81.0


Cash and short-term investments


$

40.0



$

50.0



$

40.0



$

50.0


See "Use of Non-GAAP Financial Measures" and "GAAP to Non-GAAP Reconciliations" below.

Conference Call Information

Harmonic will host a conference call to discuss its financial results at 2:00 p.m. Pacific (5:00 p.m. Eastern) on Monday, October 30, 2017. A listen-only broadcast of the conference call can be accessed either from the Company's website at www.harmonicinc.com or by calling +1.800.240.9147 or +1.574.990.1032 (passcode 99911839). A replay of the conference call will be available after 4:30 p.m. Pacific at the same website address or by calling +1.855.859.2056 or +1.404.537.3406 (passcode 99911839).

About Harmonic Inc.

Harmonic (NASDAQ: HLIT), the worldwide leader in video delivery technology and services, enables media companies and service providers to deliver ultra-high-quality broadcast and OTT video services to consumers globally. Harmonic has also revolutionized cable access networking via the industry's first virtualized CCAP solution, enabling cable operators to more flexibly deploy gigabit internet service to consumers' homes and mobile devices. Whether simplifying OTT video delivery via innovative cloud and software-as-a-service (SaaS) technologies, or powering the delivery of gigabit internet cable services, Harmonic is changing the way media companies and service providers monetize live and VOD content on every screen. More information is available at www.harmonicinc.com.

Legal Notice Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements related to our expectations regarding: GAAP net revenue, GAAP gross margins, GAAP operating expenses, GAAP operating loss, GAAP tax expense, GAAP EPS, non-GAAP revenue, non-GAAP gross margins, non-GAAP operating expenses, non-GAAP operating income (loss), non-GAAP tax rate and non-GAAP EPS for the fourth quarter of 2017 and for the fiscal year ended December 31, 2017, share count, and cash and short-term investments at December 31, 2017. Our expectations regarding these matters may not materialize, and actual results in future periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks include, in no particular order, the following: the trends toward more high-definition, on-demand and anytime, anywhere video will not continue to develop at its current pace or will expire; the possibility that our products will not generate sales that are commensurate with our expectations or that our cost of revenue or operating expenses may exceed our expectations; the mix of products and services sold in various geographies and the effect it has on gross margins; delays or decreases in capital spending in the cable, satellite, telco, broadcast and media industries; customer concentration and consolidation; the impact of general economic conditions on our sales and operations; our ability to develop new and enhanced products in a timely manner and market acceptance of our new or existing products; losses of one or more key customers; risks associated with our international operations; exchange rate fluctuations of the currencies in which we conduct business; risks associated with our CableOS™ and VOS™ product solutions; dependence on market acceptance of various types of broadband services, on the adoption of new broadband technologies and on broadband industry trends; inventory management; the lack of timely availability of parts or raw materials necessary to produce our products; the impact of increases in the prices of raw materials and oil; the effect of competition, on both revenue and gross margins; difficulties associated with rapid technological changes in our markets; risks associated with unpredictable sales cycles; our dependence on contract manufacturers and sole or limited source suppliers; and the effect on our business of natural disasters. The forward-looking statements contained in this press release are also subject to other risks and uncertainties, including those more fully described in Harmonic's filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the year ended December 31, 2016, our most recent Quarterly Report on Form 10-Q and our Current Reports on Form 8-K. The forward-looking statements in this press release are based on information available to the Company as of the date hereof, and Harmonic disclaims any obligation to update any forward-looking statements.

Use of Non-GAAP Financial Measures

The Company reports its financial results in accordance with accounting principles generally accepted in the United States ("GAAP" or referred to herein as "reported"). However, management believes that certain non-GAAP financial measures provide management and other users with additional meaningful financial information that should be considered when assessing our ongoing performance. Our management regularly uses our supplemental non-GAAP financial measures internally to understand, manage and evaluate our business, establish operating budgets, set internal measurement targets and make operating decisions.

These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. The Company believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Harmonic's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate Harmonic's results of operations in conjunction with the corresponding GAAP measures.

The Company believes that the presentation of non-GAAP measures when shown in conjunction with the corresponding GAAP measures, provides useful information to investors and management regarding financial and business trends relating to its financial condition and its historical and projected results of operations. Non-GAAP financial measures should be viewed in addition to, and not as an alternative to, the Company's reported results prepared in accordance with GAAP.

The non-GAAP measures presented here are: revenue, gross profit, operating expenses, income (loss) from operations, non-operating expenses and net income (loss) (including those amounts as a percentage of revenue), and net income (loss) per diluted share. The presentation of non-GAAP information is not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP, and is not necessarily comparable to non-GAAP results published by other companies. A reconciliation of the historical non-GAAP financial measures discussed in this press release to the most directly comparable historical GAAP financial measures is included with the financial statements provided with this press release. The non-GAAP adjustments described below have historically been excluded from our GAAP financial measures.

Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:

Cable Edge inventory charge - Harmonic from time to time incurs inventory impairment charges associated with material business shifts, such as the repositioning of our Cable Edge segment. We exclude these items, because we do not believe they are reflective of our ongoing long-term business and operating results.

Stock-based compensation - Although stock-based compensation is a key incentive offered to our employees, we continue to evaluate our business performance excluding stock-based compensation expenses. We believe that management is limited in its ability to project the impact of stock-based compensation would have on our operating results. In addition, for comparability purposes, we believe it is useful to provide a non-GAAP financial measure that excludes stock-based compensation in order to better understand the long-term performance of our core business and to facilitate the comparison of our results to the results of our peer companies.

Amortization of intangibles - A portion of the purchase price of our acquisitions is generally allocated to intangible assets, and is subject to amortization. However, Harmonic does not acquire businesses on a predictable cycle. Additionally, the amount of an acquisition's purchase price allocated to intangible assets and the term of its related amortization can vary significantly and are unique to each acquisition. Therefore, we believe that the presentation of non-GAAP financial measures that adjust for the amortization of intangible assets provides investors and others with a consistent basis for comparison across accounting periods.

Restructuring and related charges - Harmonic from time to time incurs restructuring charges which primarily consist of employee severance, one-time termination benefits related to the reduction of its workforce, lease exit costs, and other costs. These charges are associated with material business shifts. We exclude these items, because we do not believe they are reflective of our ongoing long-term business and operating results.

TVN acquisition- and integration- related costs - As a result of the Company's acquisition of Thomson Video Networks (TVN) in February 2016, the Company incurred acquisition-and integration-related expenses, including legal, accounting and other professional services as well as integration-related costs that are not expected to generate future benefits once the integration is fully consummated. We exclude these transaction and integration expenses because we believe these expenses have no direct correlation to the operation of our business, and because we believe that the non-GAAP financial measures excluding these costs provide meaningful supplemental information regarding our operational performance and liquidity. In addition, excluding these costs from the non-GAAP measures facilitates comparisons to our historical operating results and comparisons to peer company operating results.

Inventory fair value adjustment - Purchase accounting requires us to measure acquired inventory at fair value. The fair value of inventory reflects the acquired company's cost of manufacturing plus a portion of the expected profit margin. The non-GAAP adjustments to our cost of revenues exclude the expected profit margin component that is recorded under purchase accounting associated with our acquisitions. We believe the adjustments are useful to investors as an additional means to reflect cost of revenues and gross margin trends of our business.

Deferred revenue fair value adjustment - We define non-GAAP net revenues as net revenues excluding the impact of purchase accounting. In connection with our acquisitions, the acquired deferred revenue balances were required to be written down due to purchase accounting in accordance with GAAP. The impact on revenues related to purchase accounting as a result of these transactions, limits the comparability of revenues between periods. We do not expect revenues generated from new contracts to be similarly impacted by purchase accounting adjustments. Accordingly, we believe presenting non-GAAP net revenues to exclude the impact of purchase accounting adjustments aids in the comparability between periods and in assessing our overall operating performance.

Non-cash interest expense related to convertible notes - We record the accretion of the debt discount related to the equity component and amortization of issuance costs as non-cash interest expense. We believe that excluding these costs provides meaningful supplemental information regarding operational performance and liquidity, along with enhancing investors' ability to view the Company's results from management's perspective. In addition, we believe excluding these costs from the non-GAAP measures facilitates comparisons to our historical operating results and comparisons to peer company operating results.

Accounting impact related to warrant amortization - We issued a warrant to a customer, Comcast Corporation, in September 2016 pursuant to which Comcast may purchase up to 7.8 million shares of Harmonic common stock. Vesting of the warrant shares is subject to Comcast achieving certain milestones and purchase volume commitments, and therefore the accounting guidance requires that the value of the warrant be recorded as a reduction in the Company's net revenues. Until final vesting, changes in the fair value of the warrant share will be marked to market and any adjustment as such will also be recorded in revenue. The change in fair value together with vested warrant shares are amortized to revenue using a ratio of revenue recognized from the customer in the period compared to total revenue expected from the customer. We have excluded the effect of warrant amortization in our non-GAAP financial measures. Management believes it is useful to exclude the charge for the fair value of the warrant shares in order to better understand the effects of these items on our total revenues and gross margin.

Loss on impairment of long-term investments - We exclude the effect of any other-than-temporary impairment of a cost method investment in calculating our non-GAAP financial measures. We exclude these items because we do not believe they are reflective of our ongoing long-term business and operating results.

Avid litigation settlement and associated legal fees - In the third quarter of fiscal 2017, we settled the patent litigation with Avid Technology, Inc. by entering into a settlement and patent portfolio cross-license agreement with Avid. Under the agreement, we agreed to pay Avid a one-time non-recurring amount of $6 million in installments. $2.5 million was paid upfront in October 2017 and $1.5 million and $2.0 million will be paid in 2019 and 2020, respectively. Also, the Avid litigation costs of approximately $1.4 million in this quarter were significantly higher compared to prior periods. We excluded these expenses from our non-GAAP results because we do not believe they are reflective of our ongoing long-term business and operating results.

Discrete tax items and tax effect of non-GAAP adjustments - The income tax effect of non-GAAP adjustments relates to the tax effect of the adjustments that we incorporate into non-GAAP financial measures in order to provide a more meaningful measure of non-GAAP net income.

The Company has also provided in this release the following non-GAAP financial measures:

Total contract value (TCV) - TCV bookings for OTT SaaS are comprised of the total value of new customer contracts closed during a specified period, including license, maintenance and services contracts, that we believe to be firm commitments to provide our software solutions and related services. Bookings by their nature are significantly based on estimates and judgments that we make regarding total contract values, and bookings are not meant as a substitute measure for revenue in accordance with GAAP.

Annual recurring revenue (ARR) - ARR is used to assess the trajectory of our OTT SaaS business. ARR means, as of a specified date, the contracted recurring revenue which includes both subscription and maintenance contracts (and excludes perpetual license, term license and service agreements) that are current and booked with a future start date. ARR should be viewed independently of revenue and any other GAAP measure.

Harmonic Inc.

Preliminary Condensed Consolidated Balance Sheets

(Unaudited, in thousands, except per share data)



September 29, 2017


December 31, 2016

ASSETS




Current assets:




Cash and cash equivalents

$

50,039



$

55,635


Short-term investments



6,923


Accounts receivable, net

71,582



86,765


Inventories

31,754



41,193


Prepaid expenses and other current assets

22,682



26,319


Total current assets

176,057



216,835


Property and equipment, net

30,731



32,164


Goodwill

241,932



237,279


Intangibles, net

23,316



29,231


Other long-term assets

39,926



38,560


Total assets

$

511,962



$

554,069






LIABILITIES AND STOCKHOLDERS' EQUITY




Current liabilities:




Other debts and capital lease obligations, current

$

7,434



$

7,275


Accounts payable

31,839



28,892


Income taxes payable

1,411



1,166


Deferred revenue

52,811



52,414


Accrued and other current liabilities

52,828



55,150


Total current liabilities

146,323



144,897


Convertible notes, long-term

107,318



103,259


Other debts and capital lease obligations, long-term

15,439



13,915


Income taxes payable, long-term

591



2,926


Deferred tax liabilities, long-term

327




Other non-current liabilities

21,366



18,431


Total liabilities

291,364



283,428






Stockholders' equity:




Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued or outstanding




Common stock, $0.001 par value, 150,000 shares authorized; 81,606 and 78,456 shares issued and outstanding at September 29, 2017 and December 31, 2016, respectively

82



78


Additional paid-in capital

2,267,213



2,254,055


Accumulated deficit

(2,045,967)



(1,976,222)


Accumulated other comprehensive loss

(730)



(7,270)


Total stockholders' equity

220,598



270,641


Total liabilities and stockholders' equity

$

511,962



$

554,069



Harmonic Inc.

Preliminary Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)



Three months ended


Nine months ended


September 29,
2017


September 30,
2016


September 29,
2017


September 30,
2016

Revenue:








Product

$

58,161



$

70,285



$

158,657



$

205,342


Services

33,853



31,121



98,615



87,467


Total net revenue

92,014



101,406



257,272



292,809


Cost of revenue:








Product

27,736



34,460



85,843



105,698


Services

17,253



15,583



50,181



44,054


Total cost of revenue

44,989



50,043



136,024



149,752


Gross profit

47,025



51,363



121,248



143,057


Operating expenses:








Research and development

21,289



24,202



73,226



74,272


Selling, general and administrative

37,121



36,112



104,377



105,498


Amortization of intangibles

793



3,009



2,347



9,606


Restructuring and related charges

2,028



(27)



4,084



4,488


Total operating expenses

61,231



63,296



184,034



193,864


Loss from operations

(14,206)



(11,933)



(62,786)



(50,807)


Interest expense, net

(2,794)



(2,734)



(8,064)



(7,806)


Other expense, net

(498)



(328)



(1,828)



(5)


Loss on impairment of long-term investment



(1,259)





(2,735)


Loss before income taxes

(17,498)



(16,254)



(72,678)



(61,353)


(Benefit from) provision for income taxes

(1,915)



(242)



(1,568)



518


Net loss

$

(15,583)



$

(16,012)



$

(71,110)



$

(61,871)


Net loss per share:








Basic and diluted

$

(0.19)



$

(0.21)



$

(0.88)



$

(0.80)


Shares used in per share calculation:








Basic and diluted

81,445



78,092



80,618



77,475



Harmonic Inc.

Preliminary Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)



Nine months ended


September 29,
2017


September 30,
2016

Cash flows from operating activities:




Net loss

$

(71,110)



$

(61,871)


Adjustments to reconcile net loss to net cash used in operating activities:




Amortization of intangibles

6,232



12,711


Depreciation

11,045



13,198


Stock-based compensation

11,107



8,542


Amortization of discount on convertible debt

4,060



3,669


Amortization of non-cash warrant

38




Restructuring, asset impairment and loss on retirement of fixed assets

565



1,476


Loss on impairment of long-term investment



2,735


Foreign currency adjustments

1,795



(911)


Provision for excess and obsolete inventories

5,578



6,246


Allowance for doubtful accounts, returns and discounts

4,309



1,222


Other non-cash adjustments, net

298



251


Changes in operating assets and liabilities, net of effects of acquisition:




Accounts receivable

11,367



(12,869)


Inventories

6,188



2,225


Prepaid expenses and other assets

6,702



(5,938)


Accounts payable

2,129



2,505


Deferred revenue

(1,098)



20,038


Income taxes payable

(2,122)



(827)


Accrued and other liabilities

(3,053)



(5,040)


Net cash used in operating activities

(5,970)



(12,638)


Cash flows from investing activities:




Acquisition of business, net of cash acquired



(75,669)


Proceeds from maturities and sale of investments

6,898



18,692


Purchases of property and equipment

(9,075)



(11,423)


Net cash used in investing activities

(2,177)



(68,400)


Cash flows from financing activities:




Payment of convertible debt issuance costs



(582)


Proceeds from other debts and capital leases

6,344



5,968


Repayment of other debts and capital leases

(7,008)



(8,038)


Proceeds from common stock issued to employees

4,697



3,736


Payment of tax withholding obligations related to net share settlements of restricted stock units

(2,757)



(1,313)


Net cash provided by (used in) financing activities

1,276



(229)


Effect of exchange rate changes on cash and cash equivalents

1,275



(182)


Net decrease in cash and cash equivalents

(5,596)



(81,449)


Cash and cash equivalents at beginning of period

55,635



126,190


Cash and cash equivalents at end of period

$

50,039



$

44,741



Harmonic Inc.

Preliminary Revenue Information

(Unaudited, in thousands, except percentages)



Three months ended


September 29, 2017


June 30, 2017


September 30, 2016


GAAP

Adjust-
ments(1)

Non-GAAP


GAAP

Adjust-
ments(1)

Non-GAAP


GAAP

Adjust-
ments(1)

Non-GAAP

Product















Video Products

$

54,175


$


$

54,175


59%


$

44,726


$


$

44,726


54%


$

63,288


$


$

63,288


62%

Cable Edge

3,986


(163)


3,823


4%


5,366



5,366


7%


6,997


$


6,997


7%

Services and Support

33,853


(215)


33,638


37%


32,223



32,223


39%


31,121


325


31,446


31%

Total

$

92,014


$

(378)


$

91,636


100%


$

82,315


$


$

82,315


100%


$

101,406


$

325


$

101,731


100%
















Geography















Americas

$

48,656


$

(378)


$

48,278


53%


$

40,611


$


$

40,611


50%


$

47,856


$

166


$

48,022


47%

EMEA

27,528



27,528


30%


24,953



24,953


30%


32,405


106


32,511


32%

APAC

15,830



15,830


17%


16,751



16,751


20%


21,145


53


21,198


21%

Total

$

92,014


$

(378)


$

91,636


100%


$

82,315


$


$

82,315


100%


$

101,406


$

325


$

101,731


100%
















Market















Service Provider

$

50,410


$

(378)


$

50,032


55%


$

46,420


$


$

46,420


56%


$

53,459


$

97


$

53,556


53%

Broadcast and Media

41,604



41,604


45%


35,895



35,895


44%


47,947


228


48,175


47%

Total

$

92,014


$

(378)


$

91,636


100%


$

82,315


$


$

82,315


100%


$

101,406


$

325


$

101,731


100%









Nine months ended



September 29, 2017


September 30, 2016



GAAP

Adjust-
ments(1)

Non-GAAP


GAAP(2)

Adjust-
ments(1)

Non-GAAP(2)

Product











Video Products


$

144,419


$


$

144,419


56%


$

169,162


$

560


$

169,722


58%

Cable Edge


14,238


28


14,266


6%


36,180



36,180


12%

Services and Support


98,615


121


98,736


38%


87,467


1,168


88,635


30%

Total


$

257,272


$

149


$

257,421


100%


$

292,809


$

1,728


$

294,537


100%












Geography











Americas


$

127,173


$

38


$

127,211


49%


$

154,513


$

390


$

154,903


53%

EMEA


77,920


111


78,031


30%


85,716


974


86,690


29%

APAC


52,179



52,179


21%


52,580


364


52,944


18%

Total


$

257,272


$

149


$

257,421


100%


$

292,809


$

1,728


$

294,537


100%












Market











Service Provider


$

144,858


$

38


$

144,896


56%


$

170,462


$

575


$

171,037


58%

Broadcast and Media


112,414


111


112,525


44%


122,347


1,153


123,500


42%

Total


$

257,272


$

149


$

257,421


100%


$

292,809


$

1,728


$

294,537


100%




(1)

See "Use of Non-GAAP Financial Measures" above and "GAAP to Non-GAAP Reconciliations" below.

(2)

Exclude TVN revenue prior to March 1, 2016.


Harmonic Inc.

Preliminary Segment Information

(Unaudited, in thousands, except percentages)



Three months ended September, 29 2017


Video


Cable Edge


Total Segment
Measures

(non-GAAP)


Adjustments (1)


Consolidated GAAP
Measures

Net revenue

$

84,155



$

7,481



$

91,636



$

378



$

92,014


Gross profit

48,283



686



48,969



(1,944)



47,025


Gross margin%

57.4

%


9.2

%


53.4

%




51.1

%

Operating income (loss)

7,009



(5,735)



1,274



(15,480)



(14,206)


Operating margin%

8.3

%


(76.7)

%


1.4

%




(15.4)

%


Three months ended June 30, 2017


Video


Cable Edge


Total Segment
Measures

(non-GAAP)


Adjustments (1)


Consolidated GAAP
Measures

Net revenue

$

73,379



$

8,936



$

82,315



$



$

82,315


Gross profit

37,720



1,699



39,419



(5,604)



33,815


Gross margin%

51.4

%


19.0

%


47.9

%




41.1

%

Operating loss

(8,947)



(7,411)



(16,358)



(11,064)



(27,422)


Operating margin%

(12.2)

%


(82.9)

%


(19.9)

%




(33.3)

%


Three months ended September 30, 2016


Video


Cable Edge


Total Segment
Measures

(non-GAAP)


Adjustments (1)


Consolidated GAAP
Measures

Net revenue

$

91,678



$

10,053



$

101,731



$

(325)



$

101,406


Gross profit

49,633



3,754



53,387



(2,024)



51,363


Gross margin%

54.1

%


37.3

%


52.5

%




50.7

%

Operating income (loss)

5,211



(4,767)



444



(12,377)



(11,933)


Operating margin%

5.7

%


(47.4)

%


0.4

%




(11.8)

%


Nine months ended September 29, 2017


Video


Cable Edge


Total Segment
Measures

(non-GAAP)


Adjustments (1)


Consolidated GAAP
Measures

Net revenue

$

231,987



$

25,434



$

257,421



$

(149)



$

257,272


Gross profit

126,887



5,011



131,898



(10,650)



121,248


Gross margin%

54.7

%


19.7

%


51.2

%




47.1

%

Operating loss

(7,663)



(18,810)



(26,473)



(36,313)



(62,786)


Operating margin%

(3.3)

%


(74.0)

%


(10.3)

%




(24.4)

%


Nine months ended September 30, 2016 (2)


Video


Cable Edge


Total Segment
Measures

(non-GAAP)


Adjustments (1)


Consolidated GAAP
Measures

Net revenue

$

248,677



$

45,860



$

294,537



$

(1,728)



$

292,809


Gross profit

135,758



18,278



154,036



(10,979)



143,057


Gross margin%

54.6

%


39.9

%


52.3

%




48.9

%

Operating loss

(27)



(7,117)



(7,144)



(43,663)



(50,807)


Operating margin%

%


(15.5)

%


(2.4)

%




(17.4)

%



(1)

See "Use of Non-GAAP Financial Measures" above and "GAAP to Non-GAAP Reconciliations" below.

(2)

Excludes TVN results prior to March 1, 2016.

Harmonic Inc.

GAAP to Non-GAAP Reconciliations (Unaudited)

(In thousands, except percentages and per share data)



Three months ended September 29, 2017


Revenue

Gross
Profit

Total
Operating
Expense

Income
(loss) from
Operations

Total Non-
operating
Expense, net

Net Loss

GAAP

$

92,014


$

47,025


$

61,231


$

(14,206)


$

(3,292)


$

(15,583)


Accounting impact related to warrant amortization

(378)


(378)



(378)



(378)


Stock-based compensation in cost of revenue


478



478



478


Stock-based compensation in research and development



(1,183)


1,183



1,183


Stock-based compensation in selling, general and administrative



(2,059)


2,059



2,059


Amortization of intangibles


1,295


(793)


2,088



2,088


Restructuring and related charges


549


(2,028)


2,577



2,577


TVN acquisition- and integration-related costs



(117)


117



117


Avid litigation settlement fees and associated legal fees



(7,356)


7,356



7,356


Non-cash interest expenses related to convertible notes





1,384


1,384


Discrete tax items and tax effect of non-GAAP adjustments






(1,820)


Total adjustments

(378)


1,944


(13,536)


15,480


1,384


15,044









Non-GAAP

$

91,636


$

48,969


$

47,695


$

1,274


$

(1,908)


$

(539)


As a % of revenue (GAAP)


51.1

%

66.5

%

(15.4)

%

(3.6)

%

(16.9)

%

As a % of revenue (Non-GAAP)


53.4

%

52.0

%

1.4

%

(2.1)

%

(0.6)

%

Diluted net loss per share:







Diluted net loss per share-GAAP






$

(0.19)


Diluted net loss per share-Non-GAAP






$

(0.01)


Shares used to compute diluted net loss per share:







GAAP and Non-GAAP






81,445










Three months ended June 30, 2017


Revenue

Gross
Profit

Total
Operating
Expense

Loss from
Operations

Total Non-
operating
Expense

Net Loss

GAAP

$

82,315


$

33,815


$

61,237


$

(27,422)


$

(3,499)


$

(31,500)


Cable Edge inventory charge


3,331



3,331



3,331


Stock-based compensation in cost of revenue


700



700



700


Stock-based compensation in research and development



(1,337)


1,337



1,337


Stock-based compensation in selling, general and administrative



(2,099)


2,099



2,099


Amortization of intangibles


1,295


(780)


2,075



2,075


Restructuring and related charges


278


(777)


1,055



1,055


TVN acquisition-and integration-related costs



(467)


467



467


Non-cash interest expenses related to convertible notes





1,360


1,360


Discrete tax items and tax effect of non-GAAP adjustments






3,354


Total adjustments


5,604


(5,460)


11,064


1,360


15,778









Non-GAAP

$

82,315


$

39,419


$

55,777


$

(16,358)


$

(2,139)


$

(15,722)


As a % of revenue (GAAP)


41.1

%

74.4

%

(33.3)

%

(4.3)

%

(38.3)

%

As a % of revenue (Non-GAAP)


47.9

%

67.8

%

(19.9)

%

(2.6)

%

(19.1)

%








Diluted net loss per share:







Diluted net loss per share-GAAP






$

(0.39)


Diluted net loss per share-Non-GAAP






$

(0.20)


Shares used to compute diluted net loss per share:







GAAP and Non-GAAP






80,590










Three months ended September 30, 2016


Revenue

Gross
Profit

Total
Operating
Expense

Income
(loss) from
Operations

Total Non-
operating
Expense

Net Loss

GAAP

$

101,406


$

51,363


$

63,296


$

(11,933)


$

(4,321)


$

(16,012)


Cable Edge inventory charge


(159)



(159)



(159)


Acquisition accounting impacts related to TVN deferred revenue

325


325



325



325


Stock-based compensation in cost of revenue


360



360



360


Stock-based compensation in research and development



(771)


771



771


Stock-based compensation in selling, general and administrative



(1,549)


1,549



1,549


Amortization of intangibles


1,380


(3,009)


4,389



4,389


Restructuring and related charges


(1)


27


(28)



(28)


TVN acquisition-and integration-related costs


119


(5,051)


5,170


98


5,268


Loss on impairment of long-term investment





1,259


1,259


Non-cash interest expenses related to convertible notes





1,252


1,252


Discrete tax items and tax effect of non-GAAP adjustments






(52)


Total adjustments

325


2,024


(10,353)


12,377


2,609


14,934









Non-GAAP

$

101,731


$

53,387


$

52,943


$

444


$

(1,712)


$

(1,078)


As a % of revenue (GAAP)


50.7

%

62.4

%

(11.8)

%

(4.3)

%

(15.8)

%

As a % of revenue (Non-GAAP)


52.5

%

52.0

%

0.4

%

(1.7)

%

(1.1)

%








Diluted net loss per share:







Diluted net loss per share-GAAP






$

(0.21)


Diluted net loss per share-Non-GAAP






$

(0.01)


Shares used to compute diluted net loss per share:







GAAP and Non-GAAP






78,092










Nine months ended September 29, 2017


Revenue

Gross
Profit

Total
Operating
Expense

Loss from
Operations

Total Non-
operating
Expense

Net Loss

GAAP

$

257,272


$

121,248


$

184,034


$

(62,786)


$

(9,892)


$

(71,110)


Cable Edge inventory charge


3,316



3,316



3,316


Acquisition accounting impacts related to TVN deferred revenue

111


111



111



111


Accounting impact related to warrant amortization

38


38



38



38


Stock-based compensation in cost of revenue


1,623



1,623



1,623


Stock-based compensation in research and development



(3,497)


3,497



3,497


Stock-based compensation in selling, general and administrative



(5,987)


5,987



5,987


Amortization of intangibles


3,885


(2,347)


6,232



6,232


Restructuring and related charges


1,335


(4,084)


5,419



5,419


TVN acquisition-and integration-related costs


342


(2,392)


2,734



2,734


Avid litigation settlement and associated legal fees



(7,356)


7,356



7,356


Non-cash interest expenses related to convertible notes





4,060


4,060


Discrete tax items and tax effect of non-GAAP adjustments






3,278


Total adjustments

149


10,650


(25,663)


36,313


4,060


43,651









Non-GAAP

$

257,421


$

131,898


$

158,371


$

(26,473)


$

(5,832)


$

(27,459)


As a % of revenue (GAAP)


47.1

%

71.5

%

(24.4)

%

(3.8)

%

(27.6)

%

As a % of revenue (Non-GAAP)


51.2

%

61.5

%

(10.3)

%

(2.3)

%

(10.7)

%








Diluted net loss per share:







Diluted net loss per share-GAAP






$

(0.88)


Diluted net loss per share-Non-GAAP






(0.34)


Shares used to compute diluted net loss per share:







GAAP and Non-GAAP






80,618










Nine months ended September 30, 2016


Revenue

Gross
Profit

Total
Operating
Expense

Loss from
Operations

Total Non-
operating
Expense

Net Loss

GAAP

$

292,809


$

143,057


$

193,864


$

(50,807)


$

(10,546)


$

(61,871)


Cable Edge inventory charge


4,360



4,360



4,360


Acquisition accounting impacts related to TVN deferred revenue

1,728


1,728



1,728



1,728


Acquisition accounting impacts related to TVN fair value of inventory


189



189



189


Stock-based compensation in cost of revenue


1,011



1,011



1,011


Stock-based compensation in research and development



(2,581)


2,581



2,581


Stock-based compensation in selling, general and administrative



(4,950)


4,950



4,950


Amortization of intangibles


3,105


(9,606)


12,711



12,711


Restructuring and related charges


(24)


(4,488)


4,464



4,464


TVN acquisition-and integration-related costs


610


(11,059)


11,669


98


11,767


Loss on impairment of long-term investment





2,735


2,735


Non-cash interest expenses related to convertible notes





3,672


3,672


Discrete tax items and tax effect of non-GAAP adjustments






2,197



1,728


10,979


(32,684)


43,663


6,505


52,365









Non-GAAP

$

294,537


$

154,036


$

161,180


$

(7,144)


$

(4,041)


$

(9,506)


As a % of revenue (GAAP)


48.9

%

66.2

%

(17.4)

%

(3.6)

%

(21.1)

%

As a % of revenue (Non-GAAP)


52.3

%

54.7

%

(2.4)

%

(1.4)

%

(3.2)

%








Diluted net loss per share:







Diluted net loss per share-GAAP






$

(0.80)


Diluted net loss per share-Non-GAAP






$

(0.12)


Shares used to compute diluted net loss per share:







GAAP and Non-GAAP






77,475



Harmonic Inc.

GAAP to Non-GAAP Reconciliations on Business Outlook

(In millions, except percentages and per share data)



Q4 2017 Financial Guidance


Revenue

Gross
Profit

Total
Operating
Expense

Income
(Loss) from
Operations

Total Non-
operating
Expense,
net

Net Income
(Loss)

GAAP

$90.0 to

$100.0

$44.9 to

$51.4

$54.4 to

$56.4

$(11.5) to

$(3.0)

$(3.1)

$(15.9) to

$(6.9)

Stock-based compensation expense

0.8

(4.7)

5.5

5.5

Amortization of intangibles

1.3

(0.8)

2.1

2.1

Avid litigation legal fees

(0.3)

0.3

0.3

Restructuring and related charges and TVN integration costs

(0.6)

0.6

0.6

Non-cash interest expense related to convertible notes

1.4

1.4

Discrete tax items and tax effect of non-GAAP adjustments

2.0

Total adjustments

2.1

(6.4)

8.5

1.4

$11.9 to
$9.9








Non-GAAP

$90.0 to
$100.0

$47.0 to
$53.5

$48.0 to

$50.0

$(3.0) to

$5.5

$(1.7)

$(4.0) to
$3.0

As a % of revenue (GAAP)


50% to
51%

57% to
60%

(13)% to
(3)%

(3)%

(18)% to
(7)%

As a % of revenue (Non-GAAP)


52.0% to
53.5%

50% to
53%

(3)% to

5.5%

(2)%

(4)% to 3%

Diluted net income (loss) per share:







Diluted net loss per share-GAAP





$(0.19) to $(0.08)

Diluted net (loss) income per share-Non-GAAP





$(0.05) to $0.04

Shares used to compute diluted net loss per share:







GAAP and Non-GAAP





82.0

Shares used to compute diluted net income per share:







Non-GAAP





82.5


2017 Financial Guidance


Revenue

Gross
Profit

Total
Operating
Expense

Loss from
Operations

Total Non-
operating
Expense,
net

Net Loss

GAAP

$347.9 to

$357.9

$166.8 to

$173.3

$238.0 to

$240.0

$(73.2) to

$(64.7)

$(13.0)

$(85.7) to

$(77.7)

Acquisition accounting impact related to TVN deferred revenue

0.1

0.1

0.1

0.1

Cable Edge inventory charge

3.3

3.3

3.3

Stock-based compensation expense

2.4

(14.2)

16.6

16.6

Amortization of intangibles

5.2

(3.1)

8.3

8.3

Avid litigation settlement and associated legal fees

(7.7)

7.7

7.7

Restructuring and related charges and TVN integration costs

1.7

(7)

8.7

8.7

Non-cash interest expense related to convertible notes

5.5

5.5

Discrete tax items and tax effect of non-GAAP adjustments

$4.0 to $5.0

Total adjustments

0.1

12.7

(32.0)

44.7

5.5

$54.2 to
$55.2








Non-GAAP

$348.0 to
$358.0

$179.5 to
$186.0

$206.0 to

$208.0

$(28.5) to

$(20.0)

$(7.5)

$(30.5) to
$(23.5)

As a % of revenue (GAAP)


48% to
49%

67%

to 68%

(21)% to
(18)%

(4%)

(24)% to
(22)%

As a % of revenue (Non-GAAP)


51.5% to
52.0%

58%

to 59%

(8)% to

(6)%

(2%)

(9)% to
(7)%

Diluted loss per share:







Diluted net loss per share-GAAP





$(1.06) to $(0.96)

Diluted net loss per share-Non-GAAP





$(0.38) to $(0.29)

Shares used to compute diluted net loss per share:







GAAP and Non-GAAP





81.0

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SOURCE Harmonic Inc.