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Vendors: Cable Clouds Are Clearing

Light Reading
News Analysis
Light Reading
10/25/2004

Harmonic Inc. (Nasdaq: HLIT) and C-COR Corp. (Nasdaq: CCBL), two of the largest players in the cable equipment space, say recent disappointing sales numbers, announced late last week, are not a sign of the cable industry’s diminishing demand for their products (see C-COR Cuts Q1 Loss and Harmonic Reports Q3).

Both companies underperformed their own initial forecasts and the expectations of analysts, leaving some to wonder if a troubling trend might be emerging.

C-COR reported quarterly revenues of $62 million for the quarter ended September 24, down from its earlier estimates of between $64 million and $67 million (see Down Day for Cable Guys).

Harmonic announced revenues of $50.6 million for the quarter ended October 1, well off analysts’ consensus expectation of $56.2 million.

On their respective conference calls, questions focused on the specific causes of the poor sales numbers, which appear to differ between the two companies.

C-COR cites install delays due to bad weather in Florida and delayed transfer of contracts from recently acquired companies as causes for the poor numbers. But the main cause of C-COR’s trouble, analysts say, may be its reliance on a struggling Adelphia Communications Corp. (Nasdaq: ADLAC) for 20 percent of its revenue, while Adelphia has ramped down its capital expenditures budget by half to around $50 million per month.

“Adelphia is still a strong percentage, mainly in the services, because we are doing a lot of service work for them, but our product sales did go down somewhat significantly, and that’s really the life cycle of Adelphia,” C-COR CEO David Woodle told analysts.

Woodle believes Adelphia will likely finish rebuilding its networks in preparation for a sale; and should a sale take place, a new owner will invest in more C-COR equipment and services.

If Adelphia doesn’t sell and stays standalone, Woodle said, business from the cable operator will account for “far less than 20 percent of C-COR revenue next year.”

Harmonic also cites delayed orders as the reason for its poor numbers -- and this explanation seems to tally with the company’s latest balance sheet. The company reported $43.3 million in accounts receivable for the quarter, up from $39.1 in the previous quarter and $38.5 in the year ago period.

Harmonic CEO Anthony Ley explained during a conference call that the less-than-expected earnings were in part the result of two large orders that were not completed in time to be reflected in Thursday’s earnings statement. He says the orders are in the company’s Convergent Systems Division, which provides digital headends. Ley would say only that the orders came from “a large cable operator and a large satellite operator.”

Company officials said monies from the two deals now showing up as accounts receivable will appear as revenues next quarter.

Harmonic CFO Robin Dickson said the value of the two orders together was $9 million. The deferred revenue, he said, accounts only in part for the company’s aggressive sales projection for next quarter.

“We feel good about the backlog that was up; we feel good about order intake; we feel good about the expected pipeline of expected orders,” Dickson said, explaining the projection. “It’s a combination of all of these factors and what our customers are telling us about some of their immediate plans.”

Wall Street seems to have been more reassured by Harmonic’s explanation; Harmonic stock fell only 22 cents when it adjusted its quarterly sales estimates downward on October 12. C-COR “readjusted” downward on the same day, and its stock fell 74 cents or 8.6 percent of its value.

However, sales in Harmonic’s fiber optics product division fell to $16 million from $23.7 million the previous quarter. A continuance of this shortfall next quarter could raise red flags for analysts.

Triple-play services are the Holy Grail for the cable space (and all service providers, really). Woodle and Ley commented that video on demand (VOD) has yet to become a major portion of the companies’ revenues and counts for little of the recent sales shortfalls.

However, both vendors say VOD will be a big part of cable’s future. C-COR announced Wednesday its agreement to purchase VOD equipment provider nCube Corp. for $90 million (see C-COR Acquires nCUBE).

Both C-COR and Harmonic are projecting strong sales performances in the next quarter, and the analysts seem to share their confidence. C-COR forecasts sales of between $62 million and $66 million for the quarter ending December 24, while the analysts project sales of $68.74 million. Harmonic expects sales of between $72 million and $78 million, while the analysts’ consensus predicts $72.61 million.

C-COR reported a net loss of $1 million, or 2 cents a share for the quarter ended September 24, compared with profit of $4.8 million, or 13 cents a share during the year-ago period. The 1,400-employee company’s numbers include a $1.9 million charge related to recent acquisitions and a $1.1 million charge related to intangible assets.

Harmonic posted a loss of $4.2 million, or 6 cents a share, for the quarter ended October 1, compared with a loss of $7.5 million, or 12 cents a share in the year earlier period. Harmonic has 575 employees.

As of noon on Monday, the stocks had gone in opposite directions from their positions late last week. Harmonic was up 3 percent over its Thursday close to $8.14. C-COR was down about 3 percent from its Thursday close to $7.03. — Mark Sullivan, special to Light Reading

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