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Harmonic Hits a Bad Note

Light Reading
News Analysis
Light Reading
10/25/2001

Last night, cable equipment maker Harmonic Inc. (Nasdaq: HLIT) reported narrower than expected losses and improved gross margins, but instead of seeing its stock price soar, it sank nearly 40 percent (see Harmonic Reports on Q3).

The company’s stock closed down $3.90 (33.33%) at $7.80, after recovering from a low of 7.01 earlier in the day.

For the third quarter of 2001, Harmonic posted revenues of $58 million with a net loss of $0.20, beating analysts' estimates of around $56 million and net loss of $0.22. Sales rose 17 percent sequentially to $58 million but fell 16 percent from last year. Gross margins also showed strong quarter-over-quarter growth, up to 31.2 percent in the quarter from 9.4 percent in the second quarter. But margins were still down from the fourth quarter last year, which had been at 35.9 percent.

So why was the stock trading down, when the company seemed to have reported good news? The reason is simple: Management said that going forward, they expected little growth. Alan Bezoza, an analyst with CIBC World Markets, says that was enough to send short-term investors, like hedge fund managers, into a selling frenzy.

“The company guided flat, and momentum investors have dropped the stock like rats scrambling off a sinking ship,” he says.

While the stock took a hit today, Bezoza is still optimistic about the long-term outlook. In his research note he sent out to investors today, he reiterated a Buy rating and a $14 price target on the stock. Bezoza says that AT&T Broadband is still expected to generate revenue for the company and that the buildout of its German cable plant will also prove lucrative for Harmonic next year.

“The fundamentals haven’t changed,” says Bezoza. “AT&T and the German upgrade will still happen. And let’s not forget this is a seasonal business. You’re not likely to see networks being built in Minnesota in the winter. That has an impact on the fourth quarter and first part of next year, too.”

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com

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