Harmonic Posts Impressive Q4

Video equipment vendor Harmonic Inc. (Nasdaq: HLIT) reported explosive fourth-quarter revenue numbers on the strength of its digital headend systems business, exceeding Wall Street's revenue and earnings estimates.

The Sunnyvale, Calif.–based company’s stock responded in Friday morning trading by hopping $1.49 (15.28%) to $11.24.

The company reported sales of $85.6 million, up 69 percent from last quarter’s sales of $50.6 million, and up 52 percent from $56.3 million in sales for the year-ago quarter.

Harmonic CFO Robin Dickson says the company enjoyed both higher profit margins (47 percent) and lower operating expenses during the quarter, which ended December 24, 2005. The company earned $10.2 million, or 14 cents per share, compared with earnings of $1.4 million, or 2 cents per diluted share, for the year-ago period.

Wall Street analysts were expecting Harmonic to earn 13 cents a share on revenues of $80.23 million, according to Yahoo Finance.

A portion of the stellar results were due to some accounting maneuvers. Harmonic CEO Anthony Ley said Thursday that at least two major sales came down late in the third quarter but hit the books in the fourth. “Revenue for this quarter really ought to be thought of as 75, not 85 [million],” Ley conceded.

But the main driver of the fourth-quarter numbers is Harmonic’s burgeoning Converged Services division, which manufactures digital headend systems for the compression of video services such as high-definition television (HDTV) and video on demand (VOD). The division, which contributed 69 percent of the quarter's revenue, is now profiting from cable operators, satellite providers, and wireline carriers furiously preparing their networks to offer subscribers the triple play of voice, video, and data services (see MSOs Yawn at Lightspeed and BellSouth Trials Microsoft's IPTV).

Harmonic has for years made a steady business in fiber optic equipment for cable networks; its BAN division contributed $17.9 million to the top line, up modestly from its $16 million during last year's fourth quarter.

Harmonic’s bread and butter has long been cable operator capex, but the vendor has become increasingly focused on diversifying its customer mix. Last quarter, cable operators accounted for 56 percent of Harmonic’s business, compared with 29 percent from satellite operators, and less than 15 percent from telecom carriers.

“Perhaps the biggest story of 2004 was seeing telco operators begin investing in video services,” Ley says. “You know as much as I do about activity in places like SBC, BellSouth, and Verizon. The difficult thing is to judge when that will result in these people building their networks and getting moving.

“It’s definitely going to happen; whether it happens in the middle of the year, late in the year, or the beginning of the year after is still, I think, a very open question.” (See Vendors: Cable Clouds Are Clearing and Video Profits on Pause?)

Analysts seem to agree that, at least in the near term, Harmonic’s momentum in the telecom equipment space will continue.

Chet White of Merriman Curhan Ford & Co. says that Harmonic will get its fair share of the telecom video equipment business "over a 6- to 18-month window." Harmonic’s penetration in the telco space will have a lot to do with how the telcos posture themselves with integrators and incumbents like Alcatel (NYSE: ALA; Paris: CGEP:PA) and Motorola Inc. (NYSE: MOT), he says.

“It is a difference between doing just fine and doing really fine,” notes Lehman Brothers analyst Steve Levy. “There is a market for digital video services, and companies like Harmonic are very well positioned to take advantage of that.”

Harmonic sees its growth continuing in the near term. The company expects to earn 7 to 11 cents a share on revenues of $70 million to $75 million, on a pro forma basis, in its first quarter of 2005. As of Thursday, analysts were only anticipating EPS of 6 cents on revenues of $65.5 million.

“While the timing of customer deployments remains difficult to predict, mainly in the telco market, the overall industry trends remain positive, and we are expecting a strong first quarter of 2005,” Ley told analysts Thursday.

The company has 589 full-time employees, up 14 from the end of September.

— Mark Sullivan, Reporter, Light Reading

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