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HARMONIC INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

The terms "Harmonic," "Company," "we," "us," "its," and "our," as used in this
Quarterly Report on Form 10-Q (this "Form 10-Q"), refer to Harmonic Inc. and its
subsidiaries and its predecessors as a combined entity, except where the context
requires otherwise.

Some of the statements contained in this Form 10-Q are forward-looking
statements that involve risk and uncertainties. The statements contained in this
Form 10-Q that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements regarding our expectations, beliefs, intentions
or strategies regarding the future. In some cases, you can identify
forward-looking statements by terminology such as, "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "intends," "estimates,"
"predicts," "potential," or "continue" or the negative of these terms or other
comparable terminology. These forward-looking statements include, but are not
limited to, statements regarding:

•developing trends and demands in the markets we address, particularly emerging
markets;

•macroeconomic conditions, including inflation, rising interest rates, ongoing
global supply chain disruptions, volatile capital markets and foreign currency
fluctuations, particularly in certain geographies, and in financial markets;

•the impact of geopolitical events, including RussiaUkraine conflict on our
business and the markets in which we operate;

•new and future products and services;

•spending of our customers;

•our strategic direction, future business plans and growth strategy;

•industry and customer consolidation;

•expected demand for and benefits of our products and services;

•concentration of revenue sources;

•expectations regarding our CableOS solutions and SaaS solutions;

•the impact of the COVID-19 pandemic, and related responses of businesses and
governments to the pandemic, on our operations and personnel, on commercial
activity in the markets in which we operate and worldwide and regional
economies, and on our results of operations;

•potential future acquisitions and dispositions;

•anticipated results of potential or actual litigation;

•our competitive environment;

•the impact of our restructuring plans;

•the impact of governmental regulations, including with respect to tariffs and
economic sanctions;

•anticipated revenue and expenses, including the sources of such revenue and
expenses;

•expected impacts of changes in accounting rules;

•expectations regarding the usability of our inventory and the risk that
inventory will exceed forecasted demand;

•expectations and estimates related to goodwill and intangible assets and their
associated carrying value; and

•use of cash, cash needs and ability to raise capital, including repaying our
convertible notes or repurchasing our common stock.

These statements are subject to known and unknown risks, uncertainties and other
factors, any of which may cause our actual results to differ materially from
those implied by the forward-looking statements. Important factors that may
cause actual results to differ from expectations include those discussed in
"Risk Factors" in Item 1A of Part II of this Form 10-Q. All forward-looking
statements included in this Quarterly Report on Form 10-Q are based on
information available to us on the date thereof, and we assume no obligation to
update any such forward-looking statements.

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OVERVIEW

We are a leading global provider of (i) versatile and high performance video
delivery software, products, system solutions and services that enable our
customers to efficiently create, prepare, store, playout and deliver a full
range of high-quality broadcast and streaming video services to consumer
devices, including televisions, personal computers, laptops, tablets and smart
phones and (ii) cable access solutions that enable cable operators to more
efficiently and effectively deploy high-speed internet, for data, voice and
video services to consumers' homes.

We classify our total revenue in two categories, "Appliance and integration" and
"SaaS and service." The "Appliance and integration" revenue category includes
hardware, licenses and professional services and is reflective of non-recurring
revenue, while the "SaaS and service" category includes usage fees for our SaaS
platform and support service revenue from our appliance-based customers and
reflects our recurring revenue stream.

We conduct business in three geographic regions - the Americas, EMEA and APAC -
and operate in two segments, Video and Cable Access. Our Video business sells
video processing, production and playout solutions, and services worldwide to
cable operators and satellite and telecommunications ("telco") Pay-TV service
providers, which we refer to collectively as "service providers," as well as to
broadcast and media companies, including streaming media companies. Our Video
business infrastructure solutions are delivered either through shipment of our
products, software licenses or as SaaS subscriptions. Our Cable Access business
sells cable access solutions and related services, including our CableOS
software-based cable access solution, primarily to cable operators globally.

Historically, our revenue has been dependent upon spending in the cable,
satellite, telco, broadcast and media industries, including streaming media. Our
customers' spending patterns are dependent on a variety of factors, including
but not limited to: economic conditions in the United States and international
markets, including the impacts of the COVID-19 pandemic and the Russia-Ukraine
conflict, such as inflation, rising interest rates, ongoing supply chain
disruptions, volatility in capital markets and foreign currency fluctuations;
access to financing; annual budget cycles of each of the industries we serve;
impact of industry consolidations; and customers suspending or reducing spending
in anticipation of new products or new standards, new industry trends and/or
technology shifts. If our product portfolio and product development plans do not
position us well to capture an increased portion of the spending in the markets
in which we compete, our revenue may decline. As we attempt to further diversify
our customer base in these markets, we may need to continue to build alliances
with other equipment manufacturers, cloud service providers, content providers,
resellers and system integrators, managed services providers and software
developers; adapt our products for new applications; take orders at prices
resulting in lower margins; and build internal expertise to handle the
particular operational, payment, financing and/or contractual demands of our
customers, which could result in higher operating costs for us.

The worldwide spread of COVID-19 has impacted our business, operations and
financial performance. In our Cable Access segment, COVID-19 led to delays in
certain deployments and new engagements with some cable operators, which
generally occurred in the first half of fiscal 2020 when widespread public
health responses were initially implemented, including travel bans and
restrictions, social distancing requirements, and shelter-in-place orders.
Similarly, in our Video segment, sales of video appliances and services fell
during the first several months of the pandemic as transactions or shipments
were delayed and we were unable to complete certain field deployment projects as
customer facilities closed in the first half of 2020. Since the second half of
fiscal 2020, we experienced a rebound and increases in sales activities,
transactions and deployments in both business segments, in part due to the
loosening of certain COVID-19 restrictions, and customer adaptation to such
restrictions. We expect that the COVID-19 pandemic will continue to have an
impact on our results of operations.

More recently, the United States has experienced high levels of inflation, which
may result in decreased demand for our products and services, increases in our
operating costs including our labor costs, constrained credit and liquidity,
reduced customer spending and volatility in financial markets. The Federal
Reserve has raised, and may again raise, interest rates in response to concerns
over inflation risk. There continues to be uncertainty in the changing market
and economic conditions, including the possibility of additional measures that
could be taken by the Federal Reserve and other government agencies, related to
the COVID-19 pandemic and concerns over inflation risk.

The extent to which our operations will be impacted by the COVID-19 pandemic,
the Russia-Ukraine conflict and economic uncertainty will depend largely on
future developments, which are highly uncertain and cannot be accurately
predicted, including ongoing supply chain disruptions and the pricing and
availability of certain materials and components, increased costs relating to
securing timely and sufficient supply of key product components, new waves of
infection in the countries and regions of the world in which we operate or
conduct business, the impact of global vaccination efforts, and actions and
policies of governments and businesses in response to future phases of the
pandemic. As such, given the uncertainty around the duration and severity of the
impact on market conditions and the business environment, we cannot reasonably
estimate the full impacts of COVID-19 or the Russia-Ukraine conflict on our
future results of operations. Refer to "Risk Factors" in Item 1A of Part II of
this Quarterly Report on Form 10-Q for additional information.
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We believe a material and growing portion of the opportunities for our Video
business are linked to the industry and our customers (i) continuing to adopt
streaming technologies to capture, process and deliver video content to
consumers and, increasingly, utilizing public cloud solutions like our VOS SaaS
platform to do so; (ii) transforming existing broadcast infrastructure workflows
into more flexible, efficient and cost-effective operations running in public
clouds; and (iii) for those customers maintaining on-premise video delivery
infrastructure, continuing to upgrade and replace aging equipment with
next-generation software-based appliances that significantly reduce operational
complexity. Our Video business strategy is focused on continuing to develop and
deliver products, solutions and services to enable and support these trends.

Our Cable Access strategy is focused on continuing to develop and deliver
software-based cable access technologies, which we refer to as our CableOS
solutions, to our cable operator customers. We believe our CableOS
software-based cable access solutions are superior to hardware-based systems and
deliver unprecedented scalability, agility and cost savings for our customers.
Our CableOS solutions, which can be deployed based on a centralized, DAA or
hybrid architecture, enable our customers to migrate to multi-gigabit broadband
capacity and the fast deployment of DOCSIS 3.1 and/or FTTH data, video and voice
services. We believe our CableOS solutions resolve space and power constraints
in cable operator facilities, eliminate dependence on hardware upgrade cycles
and significantly reduce total cost of ownership, and are helping us become a
major player in the cable access market. In the meantime, we believe our Cable
Access segment will continue to gain momentum in the marketplace as our
customers adopt and deploy our virtualized DOCSIS 3.1 CMTS and FTHH solutions
and distributed access architectures. We continue to make progress in the
development of our CableOS solutions and in the growth of our CableOS business,
with expanded commercial deployments, field trials, and customer engagements.

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

Our unaudited condensed consolidated financial statements and the related notes
included elsewhere in this report are prepared in accordance with U.S. GAAP. The
preparation of these unaudited condensed consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Our critical accounting policies, judgments and estimates are disclosed in our
2021 Annual Report on Form 10-K, as filed with the SEC. There have been no
significant changes to these policies during the six months ended July 1, 2022.

ACCOUNTING PRONOUNCEMENTS

For a summary of recent accounting pronouncements applicable to our condensed
consolidated financial statements, refer to Note 2 to the Condensed Consolidated
Financial Statements in Item 1, which is incorporated herein by reference.

RESULTS OF OPERATIONS

Net Revenue
                                  Three Months Ended                                                       Six Months Ended
(in thousands, except
percentages)              July 1, 2022          July 2, 2021                Change                July 1, 2022          July 2, 2021                Change
Appliance and
integration              $    121,868          $     78,598          $ 43,270        55  %       $    234,852          $    158,574          $ 76,278       48  %
as % of total net
revenue                            77  %                 69  %                                             77  %                 70  %
SaaS and service               35,578                34,850               728         2  %             70,033                66,450             3,583        5  %
as % of total net
revenue                            23  %                 31  %                                             23  %                 30  %
Total net revenue        $    157,446          $    113,448          $ 43,998        39  %       $    304,885          $    225,024          $ 79,861       35  %


Appliance and integration net revenue increased in the three and six months
ended July 1, 2022, compared to the corresponding periods in 2021, primarily due
to an increase in our Cable Access segment net revenue as a result of increased
penetration of existing CableOS customers and new CableOS customer deployments.

SaaS and service net revenue increased in the three and six months ended July 1,
2022, compared to the corresponding periods in 2021, primarily due to increasing
SaaS usage from existing customers and activation of new SaaS customers.

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Gross Profit
                                  Three Months Ended                                                      Six Months Ended
(in thousands, except
percentages)              July 1, 2022          July 2, 2021                Change               July 1, 2022          July 2, 2021                 Change
Gross profit             $     82,401          $     60,505          $ 21,896       36  %       $    151,583          $    115,650          $ 35,933         31  %
as % of total net                  52  %                 53  %             (1) %                          50  %                 51  %             (2) %
revenue ("gross margin")


Our gross margins are dependent upon, among other factors, the proportion of
software sales, product mix, supply chain impacts, customer mix, product
introduction costs, price reductions granted to customers and achievement of
cost reductions.

Our gross margin decreased in the three and six months ended July 1, 2022,
compared to the corresponding periods in 2021, primarily due to unfavorable
product mix.

Research and Development Expenses

                                      Three Months Ended                                                     Six Months Ended
(in thousands, except
percentages)                  July 1, 2022          July 2, 2021               Change               July 1, 2022          July 2, 2021                 Change
Research and development     $     29,920          $     24,783          $ 5,137       21  %       $     58,753          $     48,311          $ 10,442         22  %
as % of total net revenue              19  %                 22  %                                           19  %                 21  %


Our research and development expenses consist primarily of employee salaries and
related expenses, contractors and outside consultants, supplies and materials,
equipment depreciation and facilities costs, all of which are associated with
the design and development of new products and enhancements of existing
products. The research and development expenses are net of French R&D credits.

Research and development expenses increased in the three and six months ended
July 1, 2022, compared to the corresponding periods in 2021, primarily due to
higher employee compensation costs as a result of headcount increases and annual
compensation adjustments.

Selling, General and Administrative Expenses

                                        Three Months Ended                                                    Six Months Ended
(in thousands, except
percentages)                    July 1, 2022          July 2, 2021               Change              July 1, 2022          July 2, 2021                Change
Selling, general and
administrative                 $     36,768          $     33,586          $ 3,182       9  %       $     73,411          $     68,497          $ 4,914         7  %
as % of total net revenue                23  %                 30  %                                          24  %                 30  %


Selling, general and administrative expenses increased in the three and six
months ended July 1, 2022, compared to the corresponding periods in 2021,
primarily due to higher employee compensation costs as a result of headcount
increases and annual compensation adjustments.

Amortization of Intangibles

                                     Three Months Ended                                                 Six Months Ended
(in thousands, except                                                                            July 1,
percentages)                 July 1, 2022        July 2, 2021               Change                2022             July 2, 2021                Change

Amortization of intangibles $ – $ – $ – n/a $ – $ 507 $ (507) (100) %


The amortization of intangibles expense decreased in the six months ended July
1, 2022, compared to the corresponding period in 2021, as all intangible assets
were fully amortized during the first quarter of fiscal 2021.

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Restructuring and Related Charges

We have implemented several restructuring plans in the past few years. The goal
of these plans is to bring operational expenses to appropriate levels relative
to our net revenues, while simultaneously implementing extensive company-wide
expense control programs. We account for our restructuring plans under the
authoritative guidance for exit or disposal activities. The restructuring and
related charges are included in "Cost of revenue" and "Operating
expenses-restructuring and related charges" in the Condensed Consolidated
Statement of Operations.
                                        Three Months Ended                                                     Six Months Ended
(in thousands, except
percentages)                   July 1, 2022          July 2, 2021               Change                July 1, 2022           July 2, 2021                Change
Cost of revenue                $      114          $         382          $ (268)      (70) %       $      100             $         346          $  (246)       (71) %
Operating expenses -
Restructuring and related
charges                               631                      -             631       100  %            1,801                        43            1,758      4,088  %
Total restructuring and
related charges                $      745          $         382          $  363        95  %       $    1,901             $         389          $ 1,512        389  %


Restructuring and related charges increased in the three and six months ended
July 1, 2022, compared to the corresponding periods in 2021, primarily due to
higher severance and employee benefit costs recorded in conjunction with
restructuring activities in fiscal 2022, including the impact of ceasing
operations in Russia.

Interest Expense, Net
                                  Three Months Ended                                                       Six Months Ended
(in thousands, except
percentages)              July 1, 2022           July 2, 2021               Change                July 1, 2022           July 2, 2021                Change
Interest expense, net   $      (1,394)         $      (2,630)         $ 1,236      (47) %       $      (2,827)         $      (5,233)         $ 2,406       (46) %


Interest expense, net decreased in the three and six months ended July 1, 2022,
compared to the corresponding periods in 2021, primarily due to the adoption of
ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's
Own Equity, on January 1, 2022, which eliminated debt discounts on the 2022
Notes and 2024 Notes resulting in an elimination of debt discount amortization
expense. Refer to Note 2 of the Notes to our Condensed Consolidated Financial
Statements for details of the ASU adoption.

Other Income (Expense), Net

                                        Three Months Ended                                                          Six Months Ended
(in thousands, except
percentages)                    July 1, 2022           July 2, 2021                 Change                 July 1, 2022           July 2, 2021                Change
Other income (expense), net  $     4,274              $       (147)         $ 4,421      (3,007) %       $    4,336             $         872          

$ 3,464 397 %


Other income (expense), net is primarily comprised of gain on sale of
investments in equity securities, foreign exchange gains and losses on cash,
accounts receivable and intercompany balances denominated in currencies other
than the functional currency of the reporting entity. Our other income
(expense), net increased during the fiscal 2022 period presented, relative to
the corresponding prior year periods, primarily due to a gain of $4.2 million
recorded on the sale of our investment in Encoding.com. Refer to Note 3 of the
Notes to our Condensed Consolidated Financial Statements for details on the sale
of investments in Encoding.com.

Income Taxes
                                       Three Months Ended                                                       Six Months Ended
(in thousands, except
percentages)                   July 1, 2022           July 2, 2021               Change                July 1, 2022           July 2, 2021                Change
Provision for income taxes   $    3,122             $       1,368          $ 1,754      128  %       $       5,816          $       2,064          $ 3,752       182  %


The provision for income taxes increased in the three and six months ended July
1, 2022, compared to the corresponding periods in 2021, primarily due to
mandatory capitalization and amortization of research and development expenses
in the United States starting January 1, 2022 as required by the Tax Cuts and
Jobs Act, which will result in additional income tax expense in the United
States. In addition, there was an increase in foreign income in 2022 which
resulted in additional foreign income tax.

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Segment Financial Results

                                     Three Months Ended                                                        Six Months Ended
(in thousands, except
percentages)                 July 1, 2022          July 2, 2021                Change                 July 1, 2022          July 2, 2021                 Change
Video
Revenue                     $     76,215          $     63,355          $ 12,860        20  %        $    142,057          $    133,686          $  8,371          6  %
as % of total revenue                 48  %                 56  %             (8) %                            47  %                 59  %            (12) %
Gross profit                      48,136                37,571            10,565        28  %              86,820                76,345            10,475         14  %
Gross margin %                        63  %                 59  %              4  %                            61  %                 57  %            4.0  %
Operating income                  11,271                 1,559             9,712       623  %              14,410                 5,331             9,079       (170) %
Operating margin %                    15  %                  2  %             13  %                            10  %                  4  %              6  %
Cable Access
Revenue                     $     81,231          $     50,093          $ 31,138        62  %        $    162,828          $     91,338          $ 71,490         78  %
as % of total revenue                 52  %                 44  %              8  %                            53  %                 41  %             12  %
Gross profit                      34,936                23,538            11,398        48  %              65,947                40,946            25,001         61  %
Gross margin %                        43  %                 47  %             (4) %                          40.5  %                 45  %           (4.5) %
Operating income                  10,131                 4,992             5,139       103  %              18,270                 6,288            11,982        191  %
Operating margin %                    12  %                 10  %              2  %                            11  %                  7  %              4  %
Total
Revenue                     $    157,446          $    113,448          $ 43,998        39  %        $    304,885          $    225,024          $ 79,861         35  %


Video

Our Video segment net revenue increased in the three and six months ended July
1, 2022, compared to the corresponding periods in 2021, primarily due to growth
in SaaS and Appliance products, partially offset by the timing of a few
broadcast projects and the impact of ceasing sales activities in Russia. Video
segment operating margin increased in the three and six months ended July 1,
2022, compared to the corresponding periods in 2021, primarily due to higher
revenue and margin expansion in SaaS and Appliance.

Cable Access

Our Cable Access segment net revenue increased in the three and six months ended
July 1, 2022, compared to the corresponding periods in 2021, primarily driven by
increased penetration of our existing CableOS customers and new CableOS customer
deployments. Cable Access segment operating margin increased in the three and
six months ended July 1, 2022, compared to the corresponding periods in 2021,
primarily due to the increase in revenue and changes in product mix, partially
offset by increased costs related to freight and shipping.

Liquidity and Capital Resources

We expect to continue to generate net positive operating cash flow as we have
done in the last three fiscal years. The cash we generate from our operations
enables us to fund ongoing operations, our research and development projects for
new products and technologies, and other business activities. We continually
evaluate our cash needs and may decide it is best to raise additional capital or
seek alternative financing sources to fund our operations, the growth of our
business, to take advantage of unanticipated strategic opportunities, or to
strengthen our financial position, including through drawdowns on existing or
new debt facilities or new financing (debt and equity) funds. In the future, we
may enter into other arrangements for potential investments in, or acquisitions
of, complementary businesses, services or technologies, which could require us
to seek additional equity or debt financing. Additional funds may not be
available on terms favorable to us or at all. Conversely, we may also from time
to time determine that it is in our best interests to voluntarily repay certain
indebtedness early. We believe that our current sources of funds will provide us
with adequate liquidity during the 12-month period following July 1, 2022, as
well as in the long-term.

Material Cash Requirements

Our principal uses of cash will include repayments of debt and related interest,
purchases of inventory, payroll, restructuring expenses, and other operating
expenses related to the development and marketing of our products, purchases of
property and equipment and other contractual obligations for the foreseeable
future.

As of July 1, 2022, we had outstanding $169.0 million in aggregate principal
amount of indebtedness, consisting of our 2022 Notes, 2024 Notes, and other
debts, of which $42.4 million is scheduled to become due in the 12-month period
following July 1, 2022. As of July 1, 2022, our total minimum lease payments are
$40.5 million, of which $3.7 million is due before December 31, 2022.

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On February 3, 2022, the Board of Directors authorized us to repurchase, from
time to time, up to $100 million of our outstanding shares of common stock
through February 2025, at such time and such prices as management may decide.
The program does not obligate us to repurchase any specific number of shares and
may be discontinued at any time.

Sources and Conditions of Liquidity

Our sources to fund our material cash requirements are predominately from our
sales of our products and services and, when applicable, proceeds from debt
facilities and debt and equity offerings.

As of July 1, 2022, our principal sources of liquidity consisted of cash and
cash equivalents of $121.8 million, accounts receivable, net, of $106.4 million,
and our $25.0 million revolving credit facility with JPMorgan Chase Bank, N.A.

On March 27, 2020, the "Coronavirus Aid, Relief, and Economic Security" Act that
was signed into law in the United States. Under provisions of this law, we
deferred remittance of $1.7 million in employer's share of payroll taxes
incurred from March 27, 2020 to December 31, 2020. During 2021, $0.8 million of
the total deferred payroll taxes has been paid, and the remaining deferred
amount will be paid before December 31, 2022.

Our cash and cash equivalents of $121.8 million as of July 1, 2022 consisted of
bank deposits held throughout the world, of which $76.3 million was held outside
of the United States. At present, such foreign funds are considered to be
indefinitely reinvested in foreign countries to the extent of indefinitely
reinvested foreign earnings. In the event funds from foreign operations are
needed to fund cash needs in the United States and if U.S. taxes have not
already been previously accrued, we may be required to accrue and pay additional
U.S. and foreign withholding taxes in order to repatriate these funds.

© Edgar Online, source Glimpses

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