Shares of Harmonic (HLIT -2.44%) are down 5.8% at 10:06 a.m. ET on Tuesday, following the video-streaming technology specialist's release of its fourth-quarter 2022 report the prior afternoon.
The culprit for investors' displeasure is guidance. Guidance for both the first quarter and the full year of 2023 was lighter than Wall Street was projecting for both revenue and earnings. The fourth-quarter results, on the other hand, probably pleased most investors as both the top and bottom lines exceeded the analyst consensus estimate.
As background, Harmonic's solutions -- which include equipment and services -- for media companies and streaming services are largely aimed at the area where "the edges of traditional media overlap with the streaming market," as my colleague Anders Bylund says in an October article about fast-growing stocks.
Harmonic's key quarterly numbers
| Metric | Q4 2021 | Q4 2022 | Change |
|---|---|---|---|
| Revenue | $155.8 million | $164.3 million | 5.5% |
| GAAP operating income | $15.1 million | $16.5 million | 9.3% |
| Adjusted operating income | $20.6 million | $23.7 million | 15% |
| GAAP net income | $19.9 million | $6.1 million | (69%) |
| Adjusted net income | $17.6 million | $19.9 million | 13% |
| GAAP earnings per share (EPS) | $0.18 | $0.05 | (72%) |
| Adjusted EPS | $0.16 | $0.17 | 6.3% |
Data source: Harmonic. GAAP = generally accepted accounting principles.
Investors should focus on the adjusted numbers, as they exclude one-time items.
Wall Street was looking for adjusted EPS of $0.14 on revenue of $159.3 million, so the company surpassed both expectations.
GAAP and adjusted gross margins were 52.1% and 52.7%, respectively, up from 50% and 50.5% in the fourth quarter of 2021.
For full-year 2022, Harmonic generated cash of $5.5 million running its operations, down from $41.0 million in 2021. It ended the year with cash of $89.6 million and long-term debt of $39.3 million.
The $35.5 million decline in the company's operating cash flow from 2021 to 2022 warranted a review of the cash flow statements -- which I did, and I found no reason for concern. The entire differential in this metric between the two years can be explained by just one line item: accounts payable (AP). In 2022, the AP entry on the cash flow statement was $36.5 million less than in 2021. In other words, the company owed its vendors more cash at the end of 2021 than it did at the end of 2022.
Segment results
| Segment | Q4 2022 Revenue | Change (YOY) | Q4 2022 GAAP Gross Margin | Change (YOY) |
|---|---|---|---|---|
| Broadband | $96.0 million | 38% | 47.6% | Up 7.3 percentage points from 40.3% |
| Video | $68.3 million | (21%) | 59.9% | Up 1.1 percentage points from 58.8% |
| Total | $164.3 million | 5.5% | 52.1% | Up 2.1 percentage points from 50% |
Data source: Harmonic. YOY = year over year.
Within the video segment, video software-as-a-service (SaaS) revenue surged 51% year over year, indicating the company's strategy aimed at growing this business is on track.
What happened with Harmonic in the quarter?
- Its CableOS solution deployed with 91 customers, up 25% year over year.
- Its CableOS deployments served 15.2 million cable modems, up 218% year over year.
- Its Tier 1 live sports streaming SaaS expansions with existing customers and new customer wins drove video SaaS revenue growth of 51% year over year.
- It ended 2022 with backlog and deferred revenue of $457.1 million, up from $441 million in the year-ago period.
Lighter-than-expected guidance
| Metric | Guidance | Growth Implied by Guidance (YOY) |
|---|---|---|
| Q1 2023 revenue | $152 million to $162 million | 3% to 10% |
| Q1 2023 adjusted EPS | $0.07 to $0.10 | (13%) to 25% |
| Full-year 2023 revenue | $695 million to $735 million |
11% to 18% |
| Full-year 2023 adjusted EPS | $0.56 to $0.72 |
2% to 31% |
Data source: Harmonic.
Going into the report, Wall Street was looking for Q1 2023 adjusted EPS of $0.10 on revenue of $161.1 million. Both these numbers fall within Harmonic's guidance range, but both are at the top end of the range. In other words, the company's quarterly outlook at the midpoint was somewhat lighter than analysts had been expecting.
A similar dynamic holds true for full-year 2023. The Street had been modeling for adjusted EPS of $0.74 on revenue of $734.2 million for the year. For the bottom line, the company's entire guidance range is lower than the analyst consensus estimate.
Investors will usually punish a company's stock if its guidance, especially for an entire year, falls short of Wall Street's expectations. Investors shouldn't be overly concerned. Harmonic's recent performance suggests management's outlook could be quite conservative. The company surpassed the analyst consensus earnings estimate in each of the four quarters prior to Q4 2022, with the average beat a substantial 58%.
A stock worth putting on your watchlist
Harmonic is worth a spot on growth investors' watchlist. Revenue growth is strong in the broadband segment and the video SaaS business, gross margin is moving in the right direction, and the substantial backlog and deferred revenue suggest demand for the company's solutions is robust.
