Harmonic Sinks on Soft Guidance

Harmonic Inc. (Nasdaq: HLIT) shares dove almost 19 percent Tuesday in the wake of a conservative forecast for the second half of the year.

Harmonic, a maker of edge QAMs, encoders, transcoders, and other digital video gear and software, said yesterday that its combined third- and fourth-quarter sales will be $175 million to $186 million, missing Wall Street's projection of $187 million. (See Harmonic Reports Q2.)

Investors proceeded to pound Harmonic on Tuesday, despite its second-quarter revenues of $89.3 million, which beat analyst estimates of $87.4 million.

Despite investor concerns Tuesday, Jefferies & Company Inc. analyst George Notter reiterated a Buy rating on Harmonic.

"We continue to like Harmonic's fundamentals," he wrote, adding that continued competition among cable, satellite, and telco operators will drive video infrastructure spending through 2009.

The weak forecast was "borderline sand-bagging by management," Notter wrote, citing an expected acceleration of edge QAM sales linked to deployments of modular cable modem termination systems (CMTSs), cable's high-definition expansion, and incremental revenue growth tied to Harmonic's acquisitions of Rhozet Corp. and the video-on-demand assets of Entone Inc. (See Harmonic's Mobile Video Marriage and Harmonic Spends $45M on Entone VOD-Ware.)

Based on Harmonic's new numbers, Notter reduced his revenue forecast for the year to $361.8 million from $365.0 million, but kept his earnings per share forecast at $0.60 and his price target on Harmonic stock at $11.50. Harmonic shares closed Tuesday at $7.81, down $1.83.

Although Harmonic's cable and telco business remained solid in the quarter, sales into Dish Network LLC (Nasdaq: DISH) caused the vendor's video processing revenues to drop 2 percent, quarter-over-quarter, to $34.1 million. Notter expects spending at the satellite company to rise again in the second half as Dish brings high-definition television to more markets. (See Dish Adds Local HD Markets.)

— Jeff Baumgartner, Site Editor, Cable Digital News

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